Orchid Island Capital, Inc. - Quarter Report: 2021 September (Form 10-Q)

orc10q20210930

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

September 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number

001-35236

Orchid Island Capital, Inc.

(Exact name of registrant as specified in its charter)

Maryland

27-3269228

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3305 Flamingo Drive

Vero Beach

Florida

32963

(Address of principal executive offices) (Zip Code)

(

772

)

231-1400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol:

Name of Each Exchange on Which

Registered

Common Stock, $0.01 par value

ORC

New York Stock Exchange

Indicate by

check mark

whether the

registrant (1) has

filed all

reports required

to be

filed by

Section 13 or

15(d) of

the Securities

Exchange Act

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

☒

☐

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

☒

☐

Indicate by check mark whether the registrant is

a large accelerated filer,

an accelerated filer, a non-accelerated filer,

a smaller reporting company,

an emerging growth company. See the definitions of "large accelerated filer,"

"accelerated filer", "smaller reporting company", and "emerging growth

company" in Rule 12b-2 of the Exchange Act. Check one:

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company,

indicate by check mark if the registrant has

elected not to use the extended transition period

for complying with any

new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

☒

Number of shares outstanding at October 28, 2021:

161,157,349

ORCHID ISLAND

CAPITAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL

INFORMATION

ITEM 1. Financial

Statements

Condensed

Balance Sheets

(unaudited)

Condensed

Statements

of Operations

(unaudited)

Condensed

Statements

of Stockholders’

Equity (unaudited)

Condensed

Statements

of Cash Flows

(unaudited)

Notes to

Condensed

Financial

Statements

(unaudited)

ITEM 2. Management’s

Discussion

and Analysis

of Financial

Condition

and Results

of Operations

ITEM 3. Quantitative

and Qualitative

Disclosures

about Market

Risk

ITEM 4. Controls

and Procedures

PART II. OTHER INFORMATION

ITEM 1. Legal

Proceedings

ITEM 1A.

Risk Factors

ITEM 2. Unregistered

Sales of Equity

Securities

and Use of

Proceeds

ITEM 3. Defaults

upon Senior

Securities

ITEM 4. Mine

Safety Disclosures

ITEM 5. Other

Information

ITEM 6. Exhibits

SIGNATURES

PART I. FINANCIAL

INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.

CONDENSED BALANCE SHEETS

($ in thousands, except per share data)

(Unaudited)

September 30,

December 31,

2021

2020

ASSETS:

Mortgage-backed securities, at fair value (includes pledged assets

of $

5,415,198

and $

3,719,906

, respectively)

5,601,423

3,726,895

U.S. Treasury Notes, at fair value (includes pledged assets of $

29,927

and $0, respectively)

37,409

Cash and cash equivalents

424,133

220,143

Restricted cash

51,111

79,363

Accrued interest receivable

15,241

9,721

Derivative assets

47,383

20,999

Receivable for securities sold, pledged to counterparties

414

Other assets

442

516

Total Assets

6,177,142

4,058,051

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

Repurchase agreements

5,213,869

3,595,586

Payable for unsettled securities purchased

180,619

Dividends payable

9,991

4,970

Derivative liabilities

10,288

33,227

Accrued interest payable

753

1,157

Due to affiliates

935

632

Other liabilities

30,058

7,188

Total Liabilities

5,446,513

3,642,760

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

Preferred stock, $

0.01

par value;

100,000,000

shares authorized; no shares issued

and outstanding as of September 30, 2021 and December 31, 2020

Common Stock, $

0.01

par value;

500,000,000

shares authorized,

153,318,351

shares issued and outstanding as of September 30, 2021 and

76,073,317

shares issued

and outstanding as of December 31, 2020

1,533

761

Additional paid-in capital

767,286

432,524

Accumulated deficit

(38,190)

(17,994)

Total Stockholders' Equity

730,629

415,291

Total Liabilities

and Stockholders' Equity

6,177,142

4,058,051

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF OPERATIONS

(Unaudited)

For the Three and Nine Months Ended September 30, 2021 and 2020

($ in thousands, except per share data)

Nine Months Ended September 30,

Three Months Ended September 30,

2021

2020

2021

2020

Interest income

90,279

90,152

34,169

27,223

Interest expense

(5,067)

(23,045)

(1,570)

(2,043)

Net interest income

85,212

67,107

32,599

25,180

Realized (losses) gains on mortgage-backed securities

(3,068)

(24,522)

2,977

498

Unrealized (losses) gains on mortgage-backed securities

(107,386)

38,440

(11,239)

1,168

Gains (losses) on derivative and other hedging instruments

15,932

(87,630)

5,375

4,079

Net portfolio (loss) income

(9,310)

(6,605)

29,712

30,925

Expenses:

Management fees

5,569

3,897

2,156

1,252

Allocated overhead

1,189

1,072

390

377

Accrued incentive compensation

884

(117)

259

158

Directors' fees and liability insurance

874

750

279

242

Audit, legal and other professional fees

832

841

212

240

Direct REIT operating expenses

1,024

852

309

406

Other administrative

514

451

174

Total expenses

10,886

7,746

3,674

2,849

Net (loss) income

(20,196)

(14,351)

26,038

28,076

Basic net (loss) income per share

(0.19)

(0.22)

0.20

0.42

Diluted net (loss) income per share

(0.19)

(0.22)

0.20

0.42

Weighted Average Shares Outstanding

105,305,772

66,014,379

128,587,347

67,301,901

Dividends declared per common share

0.585

0.595

0.195

0.190

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Three and Nine Months Ended September 30, 2021 and 2020

(in thousands)

Additional

Retained

Common Stock

Paid-in

Earnings

Par Value

Capital

(Deficit)

Total

Balances, January 1, 2020

63,062

631

414,998

(20,122)

395,507

Net loss

(91,199)

Cash dividends declared

(15,670)

Issuance of common stock pursuant to public offerings, net

3,171

19,416

19,447

Stock based awards and amortization

Balances, March 31, 2020

66,237

662

418,803

(111,321)

308,144

Net income

48,772

Cash dividends declared

(10,935)

Stock based awards and amortization

Shares repurchased and retired

(20)

(68)

Balances, June 30, 2020

66,221

662

407,855

(62,549)

345,968

Net income

28,076

Cash dividends declared

(12,920)

Issuance of common stock pursuant to public offerings, net

3,073

15,535

15,566

Stock based awards and amortization

Balances, September 30, 2020

69,296

693

410,521

(34,473)

376,741

Balances, January 1, 2021

76,073

761

432,524

(17,994)

415,291

Net loss

(29,369)

Cash dividends declared

(17,226)

Issuance of common stock pursuant to public offerings, net

18,248

182

96,726

96,908

Stock based awards and amortization

571

572

Balances, March 31, 2021

94,411

944

512,595

(47,363)

466,176

Net loss

(16,865)

Cash dividends declared

(20,416)

Issuance of common stock pursuant to public offerings, net

23,087

231

124,515

124,746

Stock based awards and amortization

180

Balances, June 30, 2021

117,500

1,175

616,874

(64,228)

553,821

Net income

26,038

Cash dividends declared

(26,420)

Issuance of common stock pursuant to public offerings, net

35,818

358

176,649

177,007

Stock based awards and amortization

183

Balances, September 30, 2021

153,318

1,533

767,286

(38,190)

730,629

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF CASH FLOWS

(Unaudited)

For the Nine Months Ended September 30, 2021 and 2020

($ in thousands)

2021

2020

CASH FLOWS FROM OPERATING

ACTIVITIES:

Net loss

(20,196)

(14,351)

Adjustments to reconcile net loss to net cash provided by operating activities:

Stock based compensation

612

167

Realized and unrealized losses (gains) on mortgage-backed securities

110,423

(13,918)

Unrealized losses on U.S. Treasury Notes

Realized and unrealized (gains) losses on derivative instruments

(22,180)

67,744

Changes in operating assets and liabilities:

Accrued interest receivable

(5,449)

2,137

Other assets

(533)

Accrued interest payable

(404)

(10,349)

Other liabilities

(2,031)

Due to (from) affiliates

303

(32)

NET CASH PROVIDED BY OPERATING

ACTIVITIES

61,183

30,881

CASH FLOWS FROM INVESTING ACTIVITIES:

From mortgage-backed securities investments:

Purchases

(4,816,301)

(2,898,616)

Sales

2,598,893

2,692,230

Principal repayments

413,005

384,314

Purchases of U.S. Treasury Notes

(37,440)

Net payments on reverse repurchase agreements

Net proceeds from (payments on) derivative instruments

(1,228)

(68,223)

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

(1,843,071)

109,735

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from repurchase agreements

22,995,280

27,995,556

Principal payments on repurchase agreements

(21,376,997)

(28,162,359)

Cash dividends

(59,019)

(40,065)

Proceeds from issuance of common stock, net of issuance costs

398,661

35,013

Shares withheld from employee stock awards for payment of taxes

(299)

(70)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

1,957,626

(171,925)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS

AND RESTRICTED CASH

175,738

(31,309)

CASH, CASH EQUIVALENTS

AND RESTRICTED CASH, beginning of the period

299,506

278,655

CASH, CASH EQUIVALENTS

AND RESTRICTED CASH, end of the period

475,244

247,346

SUPPLEMENTAL DISCLOSURE OF

CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

5,471

33,395

SUPPLEMENTAL DISCLOSURE OF

NONCASH INVESTING ACTIVITIES:

Securities acquired settled in later period

180,619

113,653

See Notes to Financial Statements

ORCHID ISLAND

CAPITAL, INC.

NOTES TO CONDENSED

FINANCIAL

STATEMENTS

(Unaudited)

SEPTEMBER

30, 2021

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

February

20, 2013,

Orchid was

a wholly

owned subsidiary

of Bimini

Capital Management,

Inc. (“Bimini”).

Orchid began

operations

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

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

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

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, 2021, the Company issued a total of

41,568,338

shares under the June 2021 Equity Distribution

Agreement for aggregate gross proceeds of approximately $

211.0

million, and net proceeds of approximately $

207.5

million, after

commissions and fees. Subsequent to September 30, 2021 and through October

28, 2021, the Company issued a total of

7,838,998

shares under the June 2021 Equity Distribution Agreement for aggregate

gross proceeds of approximately $

39.0

million, and net

proceeds of approximately $

38.4

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

U.S. Federal

Reserve (the

“Fed”) 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, 2021,

have timely

satisfied

all margin

calls. The

RMBS market

continues

to react

to the pandemic

and the

various measures

put in place

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.

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

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, 2021

are not necessarily

indicative

of the results

that may

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 September

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

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, 2021

December 31, 2020

Cash and cash equivalents

424,133

220,143

Restricted cash

51,111

79,363

Total cash, cash equivalents

and restricted cash

475,244

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

and U.S.

Treasury Notes

The Company

invests primarily

in mortgage

pass-through

(“PT”) residential

mortgage

backed (“RMBS”)

and collateralized

mortgage

obligations

(“CMOs”)

certificates

issued by

Freddie Mac,

Fannie Mae

or Ginnie

Mae,

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 also invests

in U.S. Treasury Notes, primarily to satisfy collateral

requirements of derivative counterparties. The Company has elected to account

for its investment in RMBS and U.S. Treasury Notes

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 securities

transactions

on the trade

date. Security

purchases

that have

not settled

as of the

balance sheet

date

are included

in the portfolio

balance with

an offsetting

liability

recorded,

whereas securities

sold that

have not

settled as

of the balance

sheet date

are

removed from

the portfolio

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.

Estimated

fair values

for U.S.

Treasury Notes

are based

on quoted

prices for

identical

assets in

active

markets.

Income on

PT RMBS

securities

and U.S.

Treasury Notes

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

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

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 September

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

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.

NOTE 2.

MORTGAGE-BACKED SECURITIES

The following

table presents

the Company’s

RMBS portfolio

as of September

30, 2021

and December

31, 2020:

(in thousands)

September 30, 2021

December 31, 2020

Pass-Through RMBS Certificates:

Fixed-rate Mortgages

5,458,562

3,560,746

Fixed-rate CMOs

137,453

Total Pass-Through

Certificates

5,458,562

3,698,199

Structured RMBS Certificates:

Interest-Only Securities

140,078

28,696

Inverse Interest-Only Securities

2,783

Total Structured

RMBS Certificates

142,861

28,696

Total

5,601,423

3,726,895

NOTE 3.

REPURCHASE AGREEMENTS

The Company

pledges certain

of its RMBS

as collateral

under repurchase

agreements

with financial

institutions.

Interest

rates are

generally

fixed based

on prevailing

rates corresponding

to the terms

of the borrowings,

and interest

is generally

paid at the

termination

of a

borrowing.

If the fair

value of the

pledged securities

declines,

lenders

will typically

require the

Company to

post additional

collateral

or pay

down borrowings

to re-establish

agreed upon

collateral

requirements,

referred

to as "margin

calls." Similarly,

if the fair

value of

the pledged

securities

increases,

lenders

may release

collateral

back to the

Company. As of

September

30, 2021,

the Company

had met all

margin call

requirements.

As of September

30, 2021

and December

31, 2020,

the Company’s

repurchase

agreements

had remaining

maturities

as summarized

below:

($ in thousands)

OVERNIGHT

BETWEEN 2

BETWEEN 31

GREATER

(1 DAY OR

AND

THAN

LESS)

30 DAYS

90 DAYS

TOTAL

September 30, 2021

Fair market value of securities pledged, including

accrued interest receivable

3,501

3,393,762

1,979,011

54,045

5,430,319

Repurchase agreement liabilities associated with

these securities

2,500

3,250,133

1,909,639

51,597

5,213,869

Net weighted average borrowing rate

0.63%

0.13%

0.12%

0.15%

0.13%

December 31, 2020

Fair market value of securities pledged, including

accrued interest receivable

2,112,969

1,560,798

55,776

3,729,543

Repurchase agreement liabilities associated with

these securities

2,047,897

1,494,500

53,189

3,595,586

Net weighted average borrowing rate

0.23%

0.22%

0.30%

0.23%

In addition, cash pledged to counterparties for repurchase agreements was approximately

47.5

million and $

58.8

million as of

September 30, 2021 and December 31, 2020, respectively.

If, during

the term

of a repurchase

agreement,

a lender

files for

bankruptcy, the

Company might

experience

difficulty recovering

its

pledged assets,

which could

result in

an unsecured

claim against

the lender

for the difference

between the

amount loaned

to the Company

plus interest

due to the

counterparty

and the fair

value of the

collateral

pledged to

such lender, including the accrued

interest receivable

and cash posted by the Company as collateral. At September

30, 2021,

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

263.2

million.

The Company

did not

have an amount

at risk with

any individual

counterparty

that was

greater than

10% of the

Company’s equity

at September

30, 2021

and December

31, 2020.

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

The table

below summarizes

fair value

information

about our

derivative

and other

hedging instruments

assets and

liabilities

as of

September

30, 2021

and December

31, 2020.

(in thousands)

Derivative and Other Hedging Instruments

Balance Sheet Location

September 30, 2021

December 31, 2020

Assets

Interest rate swaps

Derivative assets, at fair value

16,972

Payer swaptions (long positions)

Derivative assets, at fair value

28,051

17,433

Interest rate floors

Derivative assets, at fair value

2,360

TBA securities

Derivative assets, at fair value

3,559

Total derivative

assets, at fair value

47,383

20,999

Liabilities

Interest rate swaps

Derivative liabilities, at fair value

2,225

24,711

Payer swaptions (short positions)

Derivative liabilities, at fair value

8,063

7,730

TBA securities

Derivative liabilities, at fair value

786

Total derivative

liabilities, at fair value

10,288

33,227

Margin Balances Posted to (from) Counterparties

Futures contracts

Restricted cash

2,475

489

TBA securities

Restricted cash

284

TBA securities

Other liabilities

(2,520)

Interest rate swaption contracts

Restricted cash

1,099

Interest rate swaption contracts

Other liabilities

(13,765)

(3,563)

Interest rate swap contracts

Restricted cash

19,761

Interest rate swap contracts

U.S. Treasury Notes

29,927

Total margin

balances on derivative contracts

19,736

14,451

Eurodollar, Fed

Funds and

T-Note futures

are cash

settled futures

contracts

on an interest

rate, with

gains and

losses credited

charged to

the Company’s

cash accounts

on a daily

basis. A

minimum balance,

or “margin”,

is required

to be maintained

in the account

a daily basis.

The tables

below present

information

related to

the Company’s

Eurodollar

and T-Note futures

positions

at September

30,

2021 and

December

31, 2020.

($ in thousands)

September 30, 2021

Average

Weighted

Contract

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Equity

(1)

Eurodollar Futures Contracts (Short Positions)

2021

50,000

1.01%

0.17%

(104)

Treasury Note Futures Contracts (Short

Positions)

(2)

December 2021 5-year T-Note futures

(Dec 2021 - Dec 2026 Hedge Period)

269,000

1.14%

1.29%

1,631

December 2021 10-year Ultra futures

(Dec 2021 - Dec 2031 Hedge Period)

23,500

0.97%

1.19%

518

($ in thousands)

December 31, 2020

Average

Weighted

Contract

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Equity

(1)

Eurodollar Futures Contracts (Short Positions)

2021

50,000

1.03%

0.18%

(424)

Treasury Note Futures Contracts (Short

Position)

(2)

March 2021 5 year T-Note futures

(Mar 2021 - Mar 2026 Hedge Period)

69,000

0.72%

0.67%

(186)

(1)

Open equity represents the cumulative gains (losses) recorded on open

futures positions from inception.

(2)

5-Year T-Note

futures contracts were valued at a price of $

122.74

at September 30, 2021 and $

126.16

at December 31, 2020.

The contract

values of the short positions were $

330.2

million and $

87.1

million at September 30, 2021 and December 31, 2020, respectively.

10-Year Ultra

futures contracts were valued at a price of $

145.25

at September 30, 2021. The contract value of the short position was $

34.1

million at

September 30, 2021.

Under our

interest

rate swap

agreements,

we typically

pay a fixed

rate and

receive a

floating rate

based on

LIBOR ("payer

swaps").

The floating

rate we

receive under

our swap

agreements

has the effect

of offsetting

the repricing

characteristics

of our repurchase

agreements

and cash flows

on such liabilities.

We are typically

required

to post collateral

on our interest

rate swap

agreements.

The table

below presents

information

related to

the Company’s

interest

rate swap

positions

at September

30, 2021 and

December

31, 2020.

($ in thousands)

Average

Net

Fixed

Average

Estimated

Average

Notional

Pay

Receive

Fair

Maturity

Amount

Rate

Value

(Years)

September 30, 2021

Expiration > 3 to ≤ 5 years

955,000

0.64%

0.13%

11,566

4.3

Expiration > 5 years

400,000

1.16%

0.12%

3,181

7.5

1,355,000

0.79%

0.13%

14,747

5.2

December 31, 2020

Expiration > 3 to ≤ 5 years

620,000

1.29%

0.22%

(23,760)

3.6

Expiration > 5 years

200,000

0.67%

0.23%

(944)

6.4

820,000

1.14%

0.23%

(24,704)

4.3

The table

below presents

information

related to

the Company’s

interest

rate floor

positions

at September

30, 2021.

($ in thousands)

Net

Strike

Estimated

Notional

Swap

Curve

Fair

Expiration

Amount

Cost

Rate

Spread

Value

February 3, 2023

70,000

511

0.76%

30Y5Y

1,257

February 3, 2023

80,000

504

1.10%

10Y2Y

1,103

150,000

1,015

0.94%

2,360

The table

below presents

information

related to

the Company’s

interest

rate swaption

positions

at September

30, 2021

and

December

31, 2020.

($ in thousands)

Option

Underlying Swap

Weighted

Average

Weighted

Average

Adjustable

Average

Fair

Months to

Notional

Fixed

Rate

Term

Expiration

Cost

Value

Expiration

Amount

Rate

(LIBOR)

(Years)

September 30, 2021

Payer Swaptions - long

≤ 1 year

4,000

1,421

6.2

400,000

1.66%

3 Month

5.0

>1 year ≤ 2 years

25,390

26,630

16.1

1,027,200

2.20%

3 Month

15.0

29,390

28,051

13.3

1,427,200

2.05%

3 Month

12.2

Payer Swaptions - short

≤ 1 year

(13,400)

(8,063)

4.8

(1,182,850)

2.10%

3 Month

11.6

December 31, 2020

Payer Swaptions - long

≤ 1 year

3,450

2.5

500,000

0.95%

3 Month

4.0

>1 year ≤ 2 years

13,410

17,428

17.4

675,000

1.49%

3 Month

12.8

16,860

17,433

11.0

1,175,000

1.26%

3 Month

9.0

Payer Swaptions - short

≤ 1 year

(4,660)

(7,730)

5.4

(507,700)

1.49%

3 Month

12.8

The

following

table

summarizes

our

contracts

purchase

and

sell

TBA

securities

December

31,

2020

There

were

outstanding TBA contracts as of September 30, 2021.

($ in thousands)

Notional

Net

Amount

Cost

Market

Carrying

Long (Short)

(1)

Basis

(2)

Value

(3)

Value

(4)

December 31, 2020

30-Year TBA securities:

2.0%

465,000

479,531

483,090

3,559

3.0%

(328,000)

(342,896)

(343,682)

(786)

Total

137,000

136,635

139,408

2,773

(1)

Notional amount represents the par value (or principal balance) of the underlying

Agency RMBS.

(2)

Cost basis represents the forward price to be paid (received) for the underlying

Agency RMBS.

(3)

Market value represents the current market value of the TBA securities

(or of the underlying Agency RMBS) as of period-end.

(4)

Net carrying value represents the difference between the market value

and the cost basis of the TBA securities as of period-end and is reported

in derivative assets (liabilities) at fair value in our balance sheets.

Gain (Loss) From Derivative and Other Hedging Instruments, Net

The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of

operations for the nine and three months ended September 30, 2021 and 2020.

(in thousands)

Nine Months Ended September 30,

Three Months Ended September 30,

2021

2020

2021

2020

Eurodollar futures contracts (short positions)

(14)

(8,324)

(7)

(6)

T-Note futures contracts (short position)

866

(4,837)

581

(113)

Interest rate swaps

12,446

(67,713)

3,000

489

Payer swaptions (short positions)

3,507

(1,561)

2,295

(672)

Payer swaptions (long positions)

5,477

(3,287)

1,767

914

Interest rate floors

1,345

TBA securities (short positions)

864

(6,282)

(2,306)

TBA securities (long positions)

(8,559)

4,469

3,336

U.S. Treasury securities (short positions)

(95)

Total

15,932

(87,630)

5,375

4,079

Credit Risk-Related Contingent Features

The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that

could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the

contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered

exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties.

In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on

the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty,

we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining

our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative

instruments are included in restricted cash on our balance sheets.

It is the Company's policy not to offset assets and

liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize

variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets

and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are

presented as if these derivatives had been settled as of the reporting date.

NOTE 5. PLEDGED ASSETS

Assets Pledged

to Counterparties

The table

below summarizes

our assets

pledged as

collateral

under our

repurchase

agreements

and derivative

agreements

by type,

including

securities

pledged related

to securities

sold but not

yet settled,

as of September

30, 2021

and December

31, 2020.

(in thousands)

September 30, 2021

December 31, 2020

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Counterparties

Agreements

Total

Agreements

Total

PT RMBS - fair value

5,273,199

3,692,811

Structured RMBS - fair value

141,999

27,095

U.S. Treasury Notes

29,927

Accrued interest on pledged securities

15,121

15,124

9,636

Restricted cash

47,537

3,574

51,111

58,829

20,534

79,363

Total

5,477,856

33,504

5,511,360

3,788,371

20,534

3,808,905

Assets Pledged

from Counterparties

The table

below summarizes

assets pledged

to us from

counterparties

under our

repurchase

agreements,

reverse repurchase

agreements

and derivative

agreements

as of September

30, 2021

and December

31, 2020.

(in thousands)

September 30, 2021

December 31, 2020

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Orchid

Agreements

Total

Agreements

Total

Cash

4,998

13,765

18,763

120

6,083

6,203

U.S. Treasury securities - fair value

253

Total

4,998

13,765

18,763

373

6,083

6,456

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.

U.S. Treasury

securities

received

from counterparties

as collateral

under our

reverse repurchase

agreements

are recognized

as obligations

to return

securities

borrowed

under reverse

repurchase

agreements

in the

balance sheet.

Cash received

as margin

is recognized

as cash

and cash equivalents

with a corresponding

amount recognized

as an

increase in

repurchase

agreements

or other

liabilities

in the balance

sheets.

NOTE 6. OFFSETTING ASSETS AND LIABILITIES

The Company’s

derivative

agreements

and repurchase

agreements

and reverse

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 September

30, 2021

and December

31, 2020.

(in thousands)

Offsetting of Assets

Gross Amount Not

Net Amount

Offset in the Balance Sheet

of Assets

Financial

Gross Amount

Presented

Instruments

Cash

of Recognized

Offset in the

in the

Received as

Net

Assets

Balance Sheet

Collateral

Amount

September 30, 2021

Interest rate swaps

16,972

Interest rate swaptions

28,051

(13,765)

14,286

Interest rate floors

2,360

47,383

(13,765)

33,618

December 31, 2020

Interest rate swaps

Interest rate swaptions

17,433

(3,563)

13,870

TBA securities

3,559

(2,520)

1,039

20,999

(6,083)

14,916

(in thousands)

Offsetting of Liabilities

Gross Amount Not

Net Amount

Offset in the Balance Sheet

of Liabilities

Financial

Gross Amount

Presented

Instruments

of Recognized

Offset in the

in the

Posted as

Cash Posted

Net

Liabilities

Balance Sheet

Collateral

as Collateral

Amount

September 30, 2021

Repurchase Agreements

5,213,869

(5,166,332)

(47,537)

Interest rate swaps

2,225

(2,225)

Interest rate swaptions

8,063

(1,099)

6,964

5,224,157

(5,168,557)

(48,636)

6,964

December 31, 2020

Repurchase Agreements

3,595,586

(3,536,757)

(58,829)

Interest rate swaps

24,711

(19,761)

4,950

Interest rate swaptions

7,730

TBA securities

786

(284)

502

3,628,813

(3,536,757)

(78,874)

13,182

The amounts

disclosed

for collateral

received by

or posted

to the same

counterparty

up to and

not exceeding

the net amount

of the

asset or

liability

presented

in the balance

sheets.

The fair

value of

the actual

collateral

received

by or posted

to the same

counterparty

typically

exceeds the

amounts

presented.

See Note

5 for a discussion

of collateral

posted or

received

against or

for repurchase

obligations

and derivative

and other

hedging

instruments.

NOTE 7.

CAPITAL STOCK

Common Stock

Issuances

During the

nine months

ended September

30, 2021

and the year

ended December

31, 2020,

the Company

completed

the following

public offerings

of shares

of its common

stock.

($ in thousands, except per share amounts)

Weighted

Average

Price

Received

Net

Type of Offering

Period

Per Share

(1)

Proceeds

(2)

2021

At the Market Offering Program

(3)

First Quarter

5.10

308,048

1,572

Follow-on Offerings

First Quarter

5.31

17,940,000

95,336

At the Market Offering Programs

(3)

Second Quarter

5.40

23,087,089

124,746

At the Market Offering Program

(3)

Third Quarter

4.94

35,818,338

177,007

Total

77,153,475

398,661

2020

At the Market Offering Program

(3)

First Quarter

6.13

3,170,727

19,447

At the Market Offering Program

(3)

Second Quarter

At the Market Offering Program

(3)

Third Quarter

5.06

3,073,326

15,566

At the Market Offering Program

(3)

Fourth Quarter

5.32

6,775,187

36,037

13,019,240

71,050

(1)

Weighted average price received per share is after 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 nine equity distribution agreements,

eight of which have either been terminated because all shares were sold or

were replaced with a subsequent agreement.

Stock Repurchase Program

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to

2,000,000

shares of the Company’s

common stock. On February 8, 2018, the Board of Directors approved an increase

in the stock repurchase program for up to an

additional

4,522,822

shares of the Company's common stock. Coupled with the

783,757

shares remaining from the original

2,000,000

share authorization, the increased authorization brought the total authorization

5,306,579

shares, representing 10% of the

Company’s then outstanding share count. As part of the stock repurchase program,

shares may be purchased in open market

transactions, block purchases, through privately negotiated transactions, or pursuant

to any trading plan that may be adopted in

accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended

(the “Exchange Act”).

Open market repurchases

will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions

on the method, timing, price and volume of

open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined

by the Company in its

discretion and will be subject to economic and market conditions, stock price, applicable

legal requirements and other factors.

The

authorization does not obligate the Company to acquire any particular amount

of common stock and the program may be suspended or

discontinued at the Company’s discretion without prior notice.

From the inception of the stock repurchase program through September 30, 2021, the

Company repurchased a total of

5,685,511

shares at an aggregate cost of approximately $

40.4

million, including commissions and fees, for a weighted average price

of $

7.10

per

share. No shares were repurchased during the nine months ended September

30, 2021. During the nine months ended September 30,

2020, the Company repurchased a total of

19,891

shares at an aggregate cost of approximately $

0.1

million, including commissions

and fees, for a weighted average price of $

3.42

per share. The remaining authorization under the repurchase program as of September

30, 2021 was

837,311

shares.

Cash Dividends

The table below presents the cash dividends declared on the Company’s common

stock.

(in thousands, except per share amounts)

Year

Per Share

Amount

Total

2013

1.395

4,662

2014

2.160

22,643

2015

1.920

38,748

2016

1.680

41,388

2017

1.680

70,717

2018

1.070

55,814

2019

0.960

54,421

2020

0.790

53,570

2021 - YTD

(1)

0.650

74,045

Totals

12.305

416,008

(1)

October 12, 2021

, the Company declared a dividend of $

0.065

per share to be paid on

November 26, 2021

The effect of this dividend is

included in the table above but is not reflected in the Company’s financial

statements as of September 30, 2021.

NOTE 8.

STOCK INCENTIVE PLAN

In April 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc.

2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan

(the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 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 2021 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 2021 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

7,366,623

shares of the Company’s common stock that may be issued under the 2021 Incentive Plan. The 2021

Incentive Plan replaces the 2012 Incentive Plan, and no further grants will be made under the 2012 Incentive Plan.

However, any outstanding awards under the 2012 Incentive Plan will continue in accordance with the terms of the 2012

Incentive Plan and any award agreement executed in connection with such outstanding awards.

Performance Units

The Company has issued, and may in the future issue additional, performance units under the Incentive Plans to certain

executive officers and employees of its Manager.

“Performance Units” vest after the end of a defined performance period,

based on satisfaction of the performance conditions set forth in the performance unit agreement.

When earned, each

Performance Unit will be settled by the issuance of one share of the Company’s common stock, at which time the

Performance Unit will be cancelled.

The Performance Units contain dividend equivalent rights, which entitle the Participants

to receive distributions declared by the Company on common stock, but do not include the right to vote the underlying

shares of common stock.

Performance Units are subject to forfeiture should the participant no longer serve as an executive

officer or employee of the Company or the Manager.

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 nine months ended

September 30, 2021 and 2020.

($ in thousands, except per share data)

Nine Months Ended September 30,

2021

2020

Weighted

Average

Grant Date

Fair Value

Unvested, beginning of period

4,554

7.45

19,021

7.78

Granted

137,897

5.88

Forfeited

(1,607)

7.45

Vested and issued

(4,554)

7.45

(10,583)

8.03

Unvested, end of period

137,897

5.88

6,831

7.45

Compensation expense during period

222

Unrecognized compensation expense, end of period

592

Intrinsic value, end of period

674

Weighted-average remaining vesting term (in years)

1.6

0.5

The number of shares of common stock issuable upon the vesting of the remaining outstanding Performance Units was

reduced in the third quarter of 2020 as a result of the book value impairment event that occurred pursuant to the Company's

Long Term

Incentive Compensation Plans (the "Plans"). The book value impairment event occurred when the Company's

book value per share declined by more than 15% during the quarter ended March 31, 2020 and the Company's book value

per share decline from January 1, 2020 to June 30, 2020 was more than 10%. The Plans provide that if such a book value

impairment event occurs, then the number of outstanding Performance Units that are outstanding as of the last day of such

two-quarter period shall be reduced by 15%.

Stock Awards

The Company has issued, and may in the future issue additional, immediately vested common stock under the

Incentive Plans to certain executive officers and employees of its Manager. The following table presents information related

to fully vested common stock issued during the nine months ended September 30, 2021 and 2020. All of the fully vested

shares of common stock issued during the three months ended September 30, 2021, and the related compensation

expense, were granted with respect to service performed during the previous fiscal year.

($ in thousands, except per share data)

Nine Months Ended September 30,

2021

2020

Fully vested shares granted

137,897

Weighted average grant date price per share

5.88

Compensation expense related to fully vested shares of common stock awards

(1)

811

(1)

The awards issued during the nine months ended September 30, 2021

were granted with respect to service performed in 2020. Approximately

$600,000 of compensation expense related to the 2021 awards was accrued

and recognized in 2020.

Deferred Stock Units

Non-employee directors receive a portion of their compensation in the form of deferred stock unit awards (“DSUs”)

pursuant to the Incentive Plans.

Each DSU represents a right to receive one share of the Company’s common stock. The

DSUs are immediately vested and are settled at a future date based on the election of the individual participant.

The DSUs

contain dividend equivalent rights, which entitle the participant to receive distributions declared by the Company on common

stock.

These dividend equivalent rights are settled in cash or additional DSUs at the participant’s election. The DSUs do not

include the right to vote the underlying shares of common stock.

The following table presents information related to the DSUs outstanding during the nine months ended September 30,

2021 and 2020.

($ in thousands, except per share data)

Nine Months Ended September 30,

2021

2020

Weighted

Average

Grant Date

Fair Value

Outstanding, beginning of period

90,946

5.44

43,570

6.56

Granted and vested

36,684

5.46

36,682

4.22

Issued

Outstanding, end of period

127,630

5.44

80,252

5.49

Compensation expense during period

180

135

Intrinsic value, end of period

624

402

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 September 30, 2021.

NOTE 10. INCOME TAXES

The Company will generally not be subject to federal income tax on its REIT taxable

income to the extent it distributes its REIT

taxable income to its stockholders and satisfies the ongoing REIT requirements,

including meeting certain asset, income and stock

ownership tests. A REIT must generally distribute at least 90% of its REIT taxable

income to its stockholders, of which 85% generally

must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining

balance may be distributed

up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution

and meets certain

other requirements.

NOTE 11.

EARNINGS PER SHARE (EPS)

The Company

had dividend

eligible

Performance

Units and

Deferred

Stock Units

that were

outstanding

during the

nine and

three

months ended

September

30, 2021

and 2020.

The basic

and diluted

per share

computations

include these

unvested Performance

Units

and Deferred

Stock Units

if there is

income available

to common

stock, as

they have

dividend

participation

rights. The

unvested

Performance

Units and

Deferred

Stock Units

have no contractual

obligation

to share

in losses.

Because there

is no such

obligation,

the

unvested Performance

Units and

Deferred

Stock Units

are not included

in the basic

and diluted

EPS computations

when no income

available

to common

stock even

though they

are considered

participating

securities.

The table

below reconciles

the numerator

and denominator

of EPS for

the nine

and three

months ended

September

30, 2021

and

2020.

(in thousands, except per share information)

Nine Months Ended September 30,

Three Months Ended September

2021

2020

2021

2020

Basic and diluted EPS per common share:

Numerator for basic and diluted EPS per share of common stock:

Net (loss) income - Basic and diluted

(20,196)

(14,351)

26,038

28,076

Weighted average shares of common stock:

Shares of common stock outstanding at the balance sheet date

153,318

69,296

153,318

69,296

Unvested dividend eligible share based compensation

outstanding at the balance sheet date

266

Effect of weighting

(48,012)

(3,282)

(24,997)

(2,081)

Weighted average shares-basic and diluted

105,306

66,014

128,587

67,302

Net (loss) income per common share:

Basic and diluted

(0.19)

(0.22)

0.20

0.42

Anti-dilutive incentive shares not included in calculation.

266

NOTE 12.

FAIR VALUE

The framework

for using

fair value

to measure

assets and

liabilities

defines fair

value as the

price that

would be

received to

sell an

asset or

paid to transfer

a liability

(an exit

price). A

fair value

measure should

reflect the

assumptions

that market

participants

would use

pricing the

asset or

liability, including

the assumptions

about the

risk inherent

in a particular

valuation

technique,

the effect

of a restriction

on the sale

or use of

an asset and

the risk of

non-performance.

Required

disclosures

include stratification

of balance

sheet amounts

measured at

fair value

based on

inputs the

Company uses

to derive

fair value

measurements.

These stratifications

are:

●

Level 1 valuations,

where the

valuation

is based on

quoted market

prices for

identical

assets or

liabilities

traded in

active markets

(which include

exchanges

and over-the-counter

markets with

sufficient

volume),

●

Level 2 valuations,

where the

valuation

is based on

quoted market

prices for

similar instruments

traded in

active markets,

quoted

prices for

identical

or similar

instruments

in markets

that are not

active and

model-based

valuation

techniques

for which

all

significant

assumptions

are observable

in the market,

and

●

Level 3 valuations,

where the

valuation

is generated

from model-based

techniques

that use

significant

assumptions

not

observable

in the market,

but observable

based on

Company-specific

data. These

unobservable

assumptions

reflect the

Company’s own

estimates

for assumptions

that market

participants

would use

in pricing

the asset

or liability. Valuation

techniques

typically

include option

pricing models,

discounted

cash flow

models and

similar techniques,

but may also

include

the

use of market

prices of

assets or

liabilities

that are

not directly

comparable

to the subject

asset or

liability.

The Company's

RMBS and

TBA securities

are 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 (including

security

coupon,

maturity, yield,

and prepayment

speeds),

spread pricing

techniques

to determine

market credit

spreads (option

adjusted spread,

zero volatility

spread, spread

to the U.S.

Treasury

curve or

spread to

a benchmark

such as a

TBA), and

model driven

approaches

(the discounted

cash flow

method, Black

Scholes and

SABR models

which rely

upon observable

market rates

such as the

term structure

of interest

rates and

volatility).

The appropriate

spread

pricing method

used is based

on market

convention.

The pricing

source determines

the spread

of recently

observed

trade activity

observable

markets for

assets similar

to those

being priced.

The spread

is then adjusted

based on

variances

in certain

characteristics

between the

market observation

and the asset

being priced.

Those characteristics

include:

type of

asset, the

expected life

of the asset,

the

stability

and predictability

of the expected

future cash

flows of

the asset,

whether

the coupon

of the asset

is fixed or

adjustable,

the

guarantor

of the security

if applicable,

the coupon,

the maturity,

the issuer, size

of the underlying

loans, year

in which

the underlying

loans

were originated,

loan to value

ratio, state

in which

the underlying

loans reside,

credit score

of the underlying

borrowers

and other

variables

if appropriate.

The fair

value of the

security is

determined

by using

the adjusted

spread.

The Company’s

U.S. Treasury

Notes are

based on

quoted prices

for identical

instruments

in active

markets and

are classified

Level 1 assets.

The Company’s

futures contracts

are Level

1 valuations,

as they are

exchange-traded

instruments

and quoted

market prices

are

readily available.

Futures contracts

are settled

daily. The Company’s

interest

rate swaps

and interest

rate swaptions

are Level

valuations.

The fair

value of interest

rate swaps

is determined

using a discounted

cash flow

approach

using forward

market interest

rates

and discount

rates, which

are observable

inputs. The

fair value

of interest

rate swaptions

is determined

using an option

pricing model.

RMBS (based

on the fair

value option),

derivatives

and TBA securities

were recorded

at fair value

on a recurring

basis during

the nine

and three

months ended

September

30, 2021

and 2020.

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

September

30, 2021 and

December

31, 2020.

Derivative

contracts

are reported

as a net

position by

contract

type, and

not based

on master

netting arrangements.

(in thousands)

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

September 30, 2021

Mortgage-backed securities

5,601,423

U.S. Treasury Notes

37,409

Interest rate swaps

14,747

Interest rate swaptions

19,988

Interest rate floors

2,360

December 31, 2020

Mortgage-backed securities

3,726,895

Interest rate swaps

(24,704)

Interest rate swaptions

9,703

TBA securities

2,773

During the nine and three months ended September 30, 2021 and 2020, there were

no transfers of financial assets or liabilities

between levels 1, 2 or 3.

NOTE 13. RELATED PARTY

TRANSACTIONS

Management Agreement

The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a

management agreement. The management agreement has been renewed through February 20, 2022 and provides for

automatic one-year extension options thereafter and is subject to certain termination rights.

Under the terms of the

management agreement, the Manager is responsible for administering the business activities and day-to-day operations of

the Company.

The Manager receives a monthly management fee in the amount of:

●

One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity, as defined in the management

agreement,

●

One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250 million and less than or

equal to $500 million, and

●

One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500 million.

The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the

Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement.

Should the

Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three

times the average annual management fee, as defined in the management agreement, before or on the last day of the term

of the agreement.

Total

expenses recorded for the management fee and costs incurred were approximately $

6.8

million and $

2.5

million

for the nine and three months ended September 30, 2021, respectively, and $

5.0

million and $

1.6

million for the nine and

three months ended September 30, 2020, respectively. At September 30, 2021 and December 31, 2020, the net amount

due to affiliates was approximately $

0.9

million and $

0.6

million, respectively.

Other Relationships with Bimini

Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and

Chairman of the Board of Directors of Bimini and owns shares of common stock

of Bimini. George H. Haas, IV, our Chief Financial

Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief

Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of September

30, 2021, Bimini

owned

2,595,357

shares, or

1.7

%, of the Company’s common stock.

ITEM 2. MANAGEMENT’S

DISCUSSION

AND ANALYSIS OF FINANCIAL

CONDITION

AND RESULTS OF

OPERATIONS

The following discussion of our financial condition and results of operations should

be read in conjunction with the financial

statements and notes to those statements included in Item 1 of this Form 10-Q.

The discussion may contain certain forward-looking

statements that involve risks and uncertainties. Forward-looking statements

are those that are not historical in nature. As a result of

many factors, such as those set forth under “Risk Factors” in our most recent

Annual Report on Form 10-K, our actual results may

differ materially from those anticipated in such forward-looking statements.

Overview

We are a specialty finance company that invests in residential mortgage-backed securities

(“RMBS”) which are issued and

guaranteed by a federally chartered corporation or agency (“Agency RMBS”).

Our investment strategy focuses on, and our portfolio

consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,

such as mortgage pass-through certificates

issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized

mortgage obligations (“CMOs”) issued by the GSEs

(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),

inverse interest-only securities (“IIOs”) and

principal only securities (“POs”), among other types of structured Agency RMBS.

We were formed by Bimini in August 2010,

commenced operations on November 24, 2010 and completed our initial public

offering (“IPO”) on February 20, 2013.

We are

externally managed by Bimini Advisors, an investment adviser registered with

the Securities and Exchange Commission (the “SEC”).

Our business objective is to provide attractive risk-adjusted total returns over the

long term through a combination of capital

appreciation and the payment of regular monthly distributions. We intend to achieve this

objective by investing in and strategically

allocating capital between the two categories of Agency RMBS described above.

We seek to generate income from (i) the net interest

margin on our leveraged PT RMBS portfolio and the leveraged portion

of our structured Agency RMBS portfolio, and (ii) the interest

income we generate from the unleveraged portion of our structured Agency RMBS

portfolio. We intend to fund our PT RMBS and

certain of our structured Agency RMBS through short-term borrowings

structured as repurchase agreements. PT RMBS and structured

Agency RMBS typically exhibit materially different sensitivities to movements in interest

rates. Declines in the value of one portfolio

may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will

vary and will be actively managed in an effort to maintain the level of income generated by

the combined portfolios, the stability of that

income stream and the stability of the value of the combined portfolios. We believe that this

strategy will enhance our liquidity,

earnings, book value stability and asset selection opportunities in various interest

rate environments.

We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the

Internal Revenue Code of 1986, as

amended (the “Code”).

We generally will not be subject to U.S. federal income tax to the extent that we

currently distribute all of our

REIT taxable income (as defined in the Code) to our stockholders and maintain

our REIT qualification.

The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.

Capital Raising Activities

On January 23, 2020, we entered into an equity distribution agreement (the “January

2020 Equity Distribution Agreement”) with

three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount

of $200,000,000 of shares

of our common stock in transactions that were deemed to be “at the market”

offerings and privately negotiated transactions.

We issued

a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate

gross proceeds of $19.8 million, and

net proceeds of approximately $19.4 million, after commissions and fees,

prior to its termination in August 2020.

On August 4, 2020, we entered into an equity distribution agreement (the “August

2020 Equity Distribution Agreement”) with four

sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate

amount of $150,000,000 of shares of our

common stock in transactions that were deemed to be “at the market” offerings and privately

negotiated transactions. We issued a total

of 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, we 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 our common stock. J.P.

Morgan purchased the

shares of our common stock from the Company pursuant to the January 2021

Underwriting Agreement at $5.20 per share. In addition,

we granted J.P.

Morgan a 30-day option to purchase up to an additional 1,140,000 shares

of our 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 our common

stock occurred on January 25, 2021, with proceeds to us of approximately $45.2

million, net of offering expenses.

On March 2, 2021, we 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 our common stock. J.P. Morgan purchased the shares of our common stock from

the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.

In addition, we granted J.P. Morgan a 30-day

option to purchase up to an additional 1,200,000 shares of our 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 our common

stock occurred on March 5, 2021,

with proceeds to us of approximately $50.0 million, net of offering expenses.

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

Equity Distribution Agreement”) with four

sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate

amount of $250,000,000 of shares of our

common stock in transactions that are deemed to be “at the market” offerings and privately

negotiated transactions. Through

September 30, 2021, we issued a total of 41,568,338 shares under the June 2021 Equity Distribution

Agreement for aggregate gross

proceeds of approximately $211.0 million, and net proceeds of approximately $207.5 million, after commissions and fees.

Subsequent

to September 30, 2021 and through October 28, 2021, we issued a total of 7,838,998

shares under the June 2021 Equity Distribution

Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds

of approximately $38.4 million, after

commissions and fees.

Stock Repurchase Agreement

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000

shares of our common stock.

The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject

to economic

and market conditions, stock price, applicable legal requirements and other factors.

The authorization does not obligate the Company

to acquire any particular amount of common stock and the program may be

suspended or discontinued at the Company’s discretion

without prior notice. On February 8, 2018, the Board of Directors approved

an increase in the stock repurchase program for up to an

additional 4,522,822 shares of the Company’s common stock. Coupled with the 783,757

shares remaining from the original 2,000,000

share authorization, the increased authorization brought the total authorization

to 5,306,579 shares, representing 10% of the

Company’s then outstanding share count. This stock repurchase program has no termination

date.

From the inception of the stock repurchase program through September 30, 2021, the

Company repurchased a total of 5,685,511

shares at an aggregate cost of approximately $40.4

million, including commissions and fees, for a weighted average price

of $7.10 per

share. The Company did not repurchase any shares of its common stock during the

nine and three months ended September 30, 2021.

The remaining authorization under the repurchase program as of September 30, 2021 was

837,311 shares.

Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors may impact our results of operations and

financial condition. These factors include:

●

interest rate trends;

●

the difference between Agency RMBS yields and our funding and hedging costs;

●

competition for, and supply of, investments in Agency RMBS;

●

actions taken by the U.S. government, including the presidential administration,

the Fed, the Federal Housing Financing

Agency (the “FHFA”), Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the “FOMC”)

and the

U.S. Treasury;

●

prepayment rates on mortgages underlying our Agency RMBS and credit

trends insofar as they affect prepayment rates; and

●

other market developments.

In addition, a variety of factors relating to our business may also impact our results

of operations and financial condition. These

factors include:

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our borrowing costs;

●

our hedging activities;

●

the market value of our investments; and

●

the requirements to qualify as a REIT and the requirements to qualify for

a registration exemption under the Investment

Company Act.

Results

of Operations

Described

below are

the Company’s

results of

operations

for the

nine and

three months

ended September

30, 2021,

as compared

the Company’s

results of

operations

for the nine

and three

months ended

September

30, 2020.

Net (Loss)

Income Summary

Net loss for

the nine

months ended

September

30, 2021

was $20.2

million, or

$0.19 per

share. Net

loss for the

nine months

ended

September

30, 2020

was $14.4

million, or

$0.22 per

share.

Net income

for the three

months ended

September

30, 2021

was $26.0

million, or

$0.20 per

share. Net

income for

the three

months ended

September

30, 2020

was $28.1

million, or

$0.42 per

share.

The

components

of net (loss)

income for

the nine and

three months

ended September

30, 2021

and 2020,

along with

the changes

in those

components

are presented

in the table

below:

(in thousands)

Nine Months Ended September 30,

Three Months Ended, September 30,

2021

2020

Change

2021

2020

Change

Interest income

90,279

90,152

127

34,169

27,223

6,946

Interest expense

(5,067)

(23,045)

17,978

(1,570)

(2,043)

473

Net interest income

85,212

67,107

18,105

32,599

25,180

7,419

(Losses) gains on RMBS and derivative contracts

(94,522)

(73,712)

(20,810)

(2,887)

5,745

(8,632)

Net portfolio (loss) income

(9,310)

(6,605)

(2,705)

29,712

30,925

(1,213)

Expenses

(10,886)

(7,746)

(3,140)

(3,674)

(2,849)

(825)

Net (loss) income

(20,196)

(14,351)

(5,845)

26,038

28,076

(2,038)

GAAP and Non-GAAP Reconciliations

In addition to the results presented in accordance with GAAP,

our results of operations discussed below include certain

non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic

Interest Expense” and “Economic Net Interest Income.”

Net Earnings Excluding Realized and Unrealized Gains and Losses

We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value

option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through

the statements of operations.

In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for

accounting purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are

presented in a separate line item in the Company’s statements of operations and are not included in interest expense.

such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the

derivative instruments.

Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net

interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the

effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance.

Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and

therefore critical to the management of our portfolio.

We believe that the presentation of our net earnings excluding realized

and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of

our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and

unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different

calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a

substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under

GAAP.

The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net

earnings excluding realized and unrealized gains and losses.

Net Earnings Excluding Realized and Unrealized Gains and Losses

(in thousands, except per share data)

Per Share

Net Earnings

Excluding

Realized and

Net

Unrealized

Net

Unrealized

Income

Gains and

Income

Gains and

(GAAP)

Losses

(1)

Losses

(GAAP)

Losses

Three Months Ended

September 30, 2021

26,038

(2,887)

28,925

0.20

(0.02)

0.22

June 30, 2021

(16,865)

(40,844)

23,979

(0.17)

(0.41)

0.24

March 31, 2021

(29,369)

(50,791)

21,422

(0.34)

(0.60)

0.26

December 31, 2020

16,479

(4,605)

21,084

0.23

(0.07)

0.30

September 30, 2020

28,076

5,745

22,331

0.42

0.09

0.33

June 30, 2020

48,772

28,749

20,023

0.74

0.43

0.31

March 31, 2020

(91,199)

(108,206)

17,007

(1.41)

(1.68)

0.27

Nine Months Ended

September 30, 2021

(20,196)

(94,522)

74,326

(0.19)

(0.90)

0.71

September 30, 2020

(14,351)

(73,712)

59,361

(0.22)

(1.12)

0.90

(1)

Includes realized and unrealized gains (losses) on RMBS and derivative financial

instruments, including net interest income or expense on

interest rate swaps

Economic Interest Expense and Economic Net Interest Income

We use derivative and other hedging instruments, specifically Eurodollar,

Fed Funds and Treasury Note (“T-Note”)

futures contracts, short positions in U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the

interest rate risk on repurchase agreements in a rising rate environment.

We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these

instruments are presented in a separate line item in our statements of operations and not included in interest expense. As

such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the

derivative instruments.

For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP

interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments

the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury futures, and interest rate swaps and swaptions,

that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains

or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The

reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any

realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by

changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each

period presented, we have combined the effects of the derivative financial instruments in place for the respective period with

the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period.

Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense.

Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic

net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering

the current period as well as periods in the future.

The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a

predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency

RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to

settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The

Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities

settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a

form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income

statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in

interest income for purposes of the discussions below.

We believe that economic interest expense and economic net interest income provide meaningful information to

consider, in addition to the respective amounts prepared in accordance with GAAP.

The non-GAAP measures help

management to evaluate its financial position and performance without the effects of certain transactions and GAAP

adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or

losses on derivative instruments presented in our statements of operations are not necessarily representative of the total

interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the

gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from

the unrealized gains or losses recognized as of the reporting date.

Our presentation of the economic value of our hedging strategy has important limitations. First, other market

participants may calculate economic interest expense and economic net interest income differently than the way we

calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described

above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool.

Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for

interest expense and net interest income computed in accordance with GAAP.

The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our

derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in

accordance with GAAP for each quarter of 2021 to date and 2020.

Gains (Losses) on Derivative Instruments

(in thousands)

Funding Hedges

Recognized in

Attributed to

Income

U.S. Treasury and TBA

Current

Future

Statement

Securities Gain (Loss)

Period

Periods

(GAAP)

(Short Positions)

(Long Positions)

(Non-GAAP)

Three Months Ended

September 30, 2021

5,375

(2,306)

(1,248)

8,929

June 30, 2021

(34,915)

(5,963)

(5,104)

(23,848)

March 31, 2021

45,472

9,133

(8,559)

(4,044)

48,942

December 31, 2020

8,538

(436)

5,480

(5,790)

9,284

September 30, 2020

4,079

131

3,336

(6,900)

7,512

June 30, 2020

(8,851)

582

1,133

(5,751)

(4,815)

March 31, 2020

(82,858)

(7,090)

(4,900)

(70,868)

Nine Months Ended

September 30, 2021

15,932

864

(8,559)

(10,396)

34,023

September 30, 2020

(87,630)

(6,377)

4,469

(17,551)

(68,171)

Economic Interest Expense and Economic Net Interest Income

(in thousands)

Interest Expense on Borrowings

Gains

(Losses) on

Derivative

Instruments

Net Interest Income

GAAP

Attributed

Economic

GAAP

Economic

Interest

to Current

Interest

Net Interest

Income

Expense

Period

(1)

Expense

(2)

Income

(3)

Three Months Ended

September 30, 2021

34,169

1,570

(1,248)

2,818

32,599

31,351

June 30, 2021

29,254

1,556

(5,104)

6,660

27,698

22,594

March 31, 2021

26,856

1,941

(4,044)

5,985

24,915

20,871

December 31, 2020

25,893

2,011

(5,790)

7,801

23,882

18,092

September 30, 2020

27,223

2,043

(6,900)

8,943

25,180

18,280

June 30, 2020

27,258

4,479

(5,751)

10,230

22,779

17,028

March 31, 2020

35,671

16,523

(4,900)

21,423

19,148

14,248

Nine Months Ended

September 30, 2021

90,279

5,067

(10,396)

15,463

85,212

74,816

September 30, 2020

90,152

23,045

(17,551)

40,596

67,107

49,556

(1)

Reflects the effect of derivative instrument hedges for only the period

presented.

(2)

Calculated by adding the effect of derivative instrument hedges attributed

to the period presented to GAAP interest expense.

(3)

Calculated by adding the effect of derivative instrument hedges attributed

to the period presented to GAAP net interest income.

Net Interest Income

During the

nine months

ended September

30, 2021,

we generated

$85.2 million

of net interest

income, consisting

of $90.3

million of

interest

income from

RMBS assets

offset by $5.1

million of

interest

expense on

borrowings.

For the comparable

period ended

September

30, 2020,

we generated

$67.1 million

of net interest

income, consisting

of $90.2

million of

interest

income from

RMBS assets

offset by

$23.0 million

of interest

expense on

borrowings.

The $0.1

million increase

in interest

income was

due to a

$1,284.9

million increase

average RMBS,

partially

offset by a

103 basis point

("bps") decrease

in the yield

on average

RMBS. The

$18.0 million

decrease

in interest

expense was

due to a

84 bps decrease

in the average

cost of funds,

partially

offset by a

$1,250.5

million increase

in average

outstanding

borrowings.

On an economic

basis, our

interest

expense on

borrowings

for the nine

months ended

September

30, 2021

and 2020

was $15.5

million and

$40.6 million,

respectively, resulting

in $74.8

million

and $49.6

million of

economic

net interest

income, respectively.

During the

three months

ended September

30, 2021,

we generated

$32.6 million

of net interest

income, consisting

of $34.2

million of

interest

income from

RMBS assets

offset by $1.6

million of

interest

expense on

borrowings.

For the three

months ended

September

30,

2020, we

generated

$25.2 million

of net interest

income, consisting

of $27.2

million of

interest

income from

RMBS assets

offset by $2.0

million of

interest

expense on

borrowings.

The $6.9

million increase

in interest

income was

due to a

$1,713.8

million increase

in average

RMBS,

partially

offset by a

52 bps decrease

in the yield

on average

RMBS. The

$0.5 million

decrease

in interest

expense was

due to a

bps decrease

in the average

cost of funds,

partially

offset by

a $1,636.3

million increase

in average

outstanding

borrowings.

On an economic

basis, our

interest

expense on

borrowings

for the three

months ended

September

30, 2021

and 2020

was $2.8

million and

$8.9 million,

respectively, resulting

in $31.4 million

and $18.3

million of

economic

net interest

income, respectively.

The tables

below provide

information

on our portfolio

average balances,

interest

income, yield

on assets,

average borrowings,

interest

expense, cost

of funds,

net interest

income and

net interest

spread for

the nine

months ended

September

30, 2021

and 2020 and

each

quarter of

2021 to date

and 2020 on

both a GAAP

and economic

basis.

($ in thousands)

Average

Yield on

Interest Expense

Average Cost of Funds

RMBS

Interest

Average

GAAP

Economic

GAAP

Economic

Held

(1)

Income

RMBS

Borrowings

(1)

Basis

(2)

Basis

(3)

Three Months Ended

September 30, 2021

5,136,331

34,169

2.66%

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,504,887

29,254

2.60%

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

4,032,716

26,856

2.66%

3,888,633

1,941

5,985

0.20%

0.62%

December 31, 2020

3,633,631

25,893

2.85%

3,438,444

2,011

7,801

0.23%

0.91%

September 30, 2020

3,422,564

27,223

3.18%

3,228,021

2,043

8,943

0.25%

1.11%

June 30, 2020

3,126,779

27,258

3.49%

2,992,494

4,479

10,230

0.60%

1.37%

March 31, 2020

3,269,859

35,671

4.36%

3,129,178

16,523

21,423

2.11%

2.74%

Nine Months Ended

September 30, 2021

4,557,978

90,279

2.64%

4,367,037

5,067

15,463

0.15%

0.47%

September 30, 2020

3,273,068

90,152

3.67%

3,116,564

23,045

40,596

0.99%

1.74%

($ in thousands)

Net Interest Income

Net Interest Spread

GAAP

Economic

GAAP

Economic

Basis

(2)

Basis

(4)

Three Months Ended

September 30, 2021

32,599

31,351

2.53%

2.43%

June 30, 2021

27,698

22,594

2.46%

1.99%

March 31, 2021

24,915

20,871

2.46%

2.04%

December 31, 2020

23,882

18,093

2.62%

1.94%

September 30, 2020

25,180

18,280

2.93%

2.07%

June 30, 2020

22,779

17,028

2.89%

2.12%

March 31, 2020

19,148

14,248

2.25%

1.62%

Nine Months Ended

September 30, 2021

85,212

74,816

2.49%

2.17%

September 30, 2020

67,107

49,556

2.68%

1.93%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the

tables on pages 30 and 31 are calculated based on the

average balances of the underlying investment portfolio/borrowings balances

and are annualized for the periods presented. Average

balances for quarterly periods are calculated using two data points, the beginning

and ending balances.

(2)

Economic interest expense and economic net interest income

presented in the table above and the tables on page 31 includes the effect

of our derivative instrument hedges for only the periods presented.

(3)

Represents interest cost of our borrowings and the effect of derivative

instrument hedges attributed to the period divided by average

RMBS.

(4)

Economic net interest spread is calculated by subtracting average economic

cost of funds from realized yield on average RMBS.

Interest Income and Average Asset Yield

Our interest

income for

the nine

months ended

September

30, 2021

and 2020

was $90.3

million and

$90.2 million,

respectively.

had average

RMBS holdings

of $4,558.0

million and

$3,273.1

million for

the nine

months ended

September

30, 2021

and 2020,

respectively.

The yield

on our portfolio

was 2.64%

and 3.67%

for the nine

months ended

September

30, 2021 and

2020, respectively.

For

the nine

months ended

September

30, 2021

as compared

to the nine

months ended

September

30, 2020,

there was

a $0.1 million

increase in

interest

income due

to the $1,284.9

million increase

in average

RMBS,

partially

offset by the

103 bps decrease

in the yield

average RMBS.

Our interest

income for

the three

months ended

September

30, 2021

and 2020

was $34.2

million and

$27.2 million,

respectively.

had average

RMBS holdings

of $5,136.3

million and

$3,422.6

million for

the three

months ended

September

30, 2021

and 2020,

respectively.

The yield

on our portfolio

was 2.66%

and 3.18%

for the three

months ended

September

30, 2021

and 2020,

respectively. For

the three

months ended

September

30, 2021

as compared

to the three

months

ended September

30, 2020,

there was

a $6.9 million

increase in

interest

income due

the $1,713.8

million increase

in average

RMBS,

partially

offset by the

52 bps decrease

in the yield

average RMBS.

The table

below presents

the average

portfolio

size, income

and yields

of our respective

sub-portfolios,

consisting

of structured

RMBS

and PT RMBS,

for the nine

months ended

September

30, 2021

and 2020,

and for each

quarter of

2021 to date

and 2020.

($ in thousands)

Average RMBS Held

Interest Income

Realized Yield on Average RMBS

Structured

RMBS

Total

RMBS

Total

RMBS

Total

Three Months Ended

September 30, 2021

5,016,550

119,781

5,136,331

33,111

1,058

34,169

2.64%

3.53%

2.66%

June 30, 2021

4,436,135

68,752

4,504,887

29,286

(32)

29,254

2.64%

(0.18)%

2.60%

March 31, 2021

3,997,965

34,751

4,032,716

26,869

(13)

26,856

2.69%

(0.15)%

2.66%

December 31, 2020

3,603,885

29,746

3,633,631

25,933

(40)

25,893

2.88%

(0.53)%

2.85%

September 30, 2020

3,389,037

33,527

3,422,564

27,021

202

27,223

3.19%

2.41%

3.18%

June 30, 2020

3,088,603

38,176

3,126,779

27,004

254

27,258

3.50%

2.67%

3.49%

March 31, 2020

3,207,467

62,392

3,269,859

35,286

385

35,671

4.40%

2.47%

4.36%

Nine Months Ended

September 30, 2021

4,483,550

74,428

4,557,978

89,266

1,013

90,279

2.65%

1.81%

2.64%

September 30, 2020

3,228,369

44,699

3,273,068

89,311

841

90,152

3.69%

2.51%

3.67%

Interest Expense and the Cost of Funds

We had average

outstanding

borrowings

of $4,367.0

million and

$3,116.6 million

and total

interest

expense of

$5.1 million

and $23.0

million for

the nine months

ended September

30, 2021

and 2020,

respectively. Our

average cost

of funds

was 0.15%

for the nine

months

ended September

30, 2021,

compared

to 0.99%

for the comparable

period in

2020.

The $18.0

million decrease

in interest

expense was

due to the

84 bps decrease

in the average

cost of funds,

partially

offset by the

$1,250.5

million increase

in average

outstanding

borrowings

during the

nine months

ended September

30, 2021

as compared

to the nine

months ended

September

30, 2020.

Our economic

interest

expense

was $15.5

million and

$40.6 million

for the nine

months ended

September

30, 2021

and 2020,

respectively. There

was a 127

bps decrease

in the average

economic

cost of funds

to 0.47%

for the nine

months ended

September

30,

2021 from

1.74% for

the nine

months ended

September

30, 2020.

We had average

outstanding

borrowings

of $4,864.3

million and

$3,228.0

million and

total interest

expense of

$1.6 million

and $2.0

million for

the three

months ended

September

30, 2021

and 2020,

respectively. Our

average

cost of funds

was 0.13%

and 0.25%

for three

months ended

September

30, 2021

and 2020,

respectively. There

was a 12

bps decrease

in the average

cost of funds

and a $1,636.3

million increase

in average

outstanding

borrowings

during

the three

months ended

September

30, 2021,

compared

to the three

months

ended September

30, 2020.

Our economic

interest

expense

was $2.8

million and

$8.9 million

for the three

months ended

September

30, 2021

and 2020,

respectively. There

was a 88

bps decrease

in the average

economic

cost of funds

to 0.23%

for the

three months

ended September

30,

2021 from

1.11% for the three

months ended

September

30, 2020.

Since all

of our repurchase

agreements

are short-term,

changes in

market rates

directly affect

our interest

expense. Our

average

cost

of funds

calculated

on a GAAP

basis was

4 bps above

the average

one-month

LIBOR and

3 bps below

the average

six-month

LIBOR for

the quarter

ended September

30, 2021.

Our average

economic

cost of funds

was 14 bps

above the

average one-month

LIBOR and

7 bps

above the

average six-month

LIBOR for

the quarter

ended September

30, 2021.

The average

term to maturity

of the outstanding

repurchase

agreements

decreased

to 30 days

at September

30, 2021

from 31 days

at December

31, 2020.

The tables

below present

the average

balance of

borrowings

outstanding,

interest

expense and

average cost

of funds,

and average

one-month

and six-month

LIBOR rates

for the nine

months ended

September

30, 2021

and 2020,

and for each

quarter in

2021 to date

and

2020 on both

a GAAP and

economic basis.

($ in thousands)

Average

Interest Expense

Average Cost of Funds

Balance of

GAAP

Economic

GAAP

Economic

Borrowings

Basis

Three Months Ended

September 30, 2021

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

3,888,633

1,941

5,985

0.20%

0.62%

December 31, 2020

3,438,444

2,011

7,801

0.23%

0.91%

September 30, 2020

3,228,021

2,043

8,943

0.25%

1.11%

June 30, 2020

2,992,494

4,479

10,230

0.60%

1.37%

March 31, 2020

3,129,178

16,523

21,423

2.11%

2.74%

Nine Months Ended

September 30, 2021

4,367,037

5,067

15,463

0.15%

0.47%

September 30, 2020

3,116,564

23,045

40,596

0.99%

1.74%

Average GAAP Cost of Funds

Average Economic Cost of Funds

Relative to Average

Average LIBOR

One-Month

Six-Month

One-Month

Six-Month

One-Month

Six-Month

LIBOR

Three Months Ended

September 30, 2021

0.09%

0.16%

0.04%

(0.03)%

0.14%

0.07%

June 30, 2021

0.10%

0.18%

0.04%

(0.04)%

0.51%

0.43%

March 31, 2021

0.13%

0.23%

0.07%

(0.03)%

0.49%

0.39%

December 31, 2020

0.15%

0.27%

0.08%

(0.04)%

0.76%

0.64%

September 30, 2020

0.17%

0.35%

0.08%

(0.10)%

0.94%

0.76%

June 30, 2020

0.55%

0.70%

0.05%

(0.10)%

0.82%

0.67%

March 31, 2020

1.34%

1.43%

0.77%

0.68%

1.40%

1.31%

Nine Months Ended

September 30, 2021

0.10%

0.19%

0.05%

(0.04)%

0.37%

0.28%

September 30, 2020

0.68%

0.83%

0.31%

0.16%

1.06%

0.91%

Gains or Losses

The table

below presents

our gains

or losses

for the nine

and three

months ended

September

30, 2021

and 2020.

(in thousands)

Nine Months Ended September 30,

Three Months Ended September 30,

2021

2020

Change

2021

2020

Change

Realized (losses) gains on sales of RMBS

(3,068)

(24,522)

21,454

2,977

498

2,479

Unrealized (losses) gains on RMBS

(107,386)

38,440

(145,826)

(11,239)

1,168

(12,407)

Total (losses)

gains on RMBS

(110,454)

13,918

(124,372)

(8,262)

1,666

(9,928)

Gains (losses) on interest rate futures

852

(13,161)

14,013

574

(119)

693

Gains (losses) on interest rate swaps

12,446

(67,713)

80,159

3,000

489

2,511

Gains (losses) on payer swaptions (short positions)

3,507

(1,561)

5,068

2,295

(672)

2,967

Gains (losses) on payer swaptions (long positions)

5,477

(3,287)

8,764

1,767

914

853

Gains (losses) on interest rate floors

1,345

Gains (losses) on TBA securities (short positions)

864

(6,282)

7,146

(2,306)

(2,401)

(Losses) gains on TBA securities (long positions)

(8,559)

4,469

(13,028)

3,336

(3,336)

(Losses) gains on U.S. Treasury securities (short

(95)

(36)

Total (losses)

gains from derivative instruments

15,932

(87,630)

103,562

5,375

4,079

1,296

We invest in

RMBS with

the intent

to earn net

income from

the realized

yield on those

assets over

their related

funding and

hedging

costs, and

not for the

purpose of

making short

term gains

from sales.

However, we

have sold,

and may continue

to sell,

existing

assets to

acquire new

assets, which

our management

believes might

have higher

risk-adjusted

returns in

light of current

or anticipated

interest

rates,

federal government

programs

or general

economic conditions

or to manage

our balance

sheet as part

of our asset/liability

management

strategy. During

the nine

months ended

September

30, 2021

and 2020,

we received

proceeds

of $2,598.9

million and

$2,692.2

million,

respectively, from

the sales

of RMBS.

Most of these

sales during

the nine

months ended

September

30, 2020

occurred

during the

second

half of March

2020 as we

sold assets

in order

to maintain

sufficient

cash and liquidity

and reduce

risk associated

with the

market turmoil

brought about

by COVID-19.

During the

three months

ended September

30, 2021

and 2020,

we received

proceeds

of $918.0

million and

$668.9 million,

respectively, from

the sales

of RMBS.

Realized and

unrealized

gains and

losses on

RMBS are

driven in

part by changes

in yields

and interest

rates, which

affect the

pricing

of the securities

in our portfolio.

The unrealized

gains and

losses on

RMBS also

include the

premium lost

as a result

of prepayments

the underlying

mortgages,

decreasing

unrealized

gains or

increasing

unrealized

losses as

speeds or

premiums increase.

Gains and

losses

on interest

rate futures

contracts

are affected

by changes

in implied

forward

rates during

the reporting

period.

The table

below presents

historical

interest

rate data

for each

quarter end

during 2021

to date and

2020.

5 Year

10 Year

15 Year

30 Year

Three

U.S. Treasury

Fixed-Rate

Month

Rate

(1)

Rate

(1)

Mortgage Rate

(2)

Mortgage Rate

(2)

LIBOR

(3)

September 30, 2021

1.00%

1.53%

2.18%

2.90%

0.12%

June 30, 2021

0.87%

1.44%

2.27%

2.98%

0.13%

March 31, 2021

0.94%

1.75%

2.39%

3.08%

0.19%

December 31, 2020

0.36%

0.92%

2.22%

2.68%

0.23%

September 30, 2020

0.27%

0.68%

2.39%

2.89%

0.24%

June 30, 2020

0.29%

0.65%

2.60%

3.16%

0.31%

March 31, 2020

0.38%

0.70%

2.89%

3.45%

1.10%

(1)

Historical 5 and 10 Year

U.S. Treasury Rates are obtained from quoted end

of day prices on the Chicago Board Options Exchange.

(2)

Historical 30 Year and

15 Year Fixed

Rate Mortgage Rates are obtained from Freddie Mac’s

Primary Mortgage Market Survey.

(3)

Historical LIBOR is obtained from the Intercontinental Exchange Benchmark

Administration Ltd.

Expenses

For the nine

and three months

ended September

30, 2021,

the Company’s

total operating

expenses were

approximately

$10.9 million

and $3.7 million,

respectively, compared

to approximately

$7.7 million

and $2.8 million,

respectively, for

the nine

and three months

ended September

30, 2020.

The table

below presents

a breakdown

of operating

expenses for

the nine and

three months

ended September

30, 2021 and

2020.

(in thousands)

Nine Months Ended September 30,

Three Months Ended September 30,

2021

2020

Change

2021

2020

Change

Management fees

5,569

3,897

1,672

2,156

1,252

904

Overhead allocation

1,189

1,072

117

390

377

Accrued incentive compensation

884

(117)

1,001

259

158

101

Directors fees and liability insurance

874

750

124

279

242

Audit, legal and other professional fees

832

841

(9)

212

240

(28)

Direct REIT operating expenses

1,024

852

172

309

406

(97)

Other administrative

514

451

174

(105)

Total expenses

10,886

7,746

3,140

3,674

2,849

825

We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant

to the terms of a management

agreement. The management agreement has been renewed through February

20, 2022 and provides for automatic one-year extension

options thereafter and is subject to certain termination rights.

Under the terms of the management agreement, the Manager is

responsible for administering the business activities and day-to-day operations of

the Company.

The Manager receives a monthly

management fee in the amount of:

●

One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,

●

One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million

and less than or equal to $500

million, and

●

One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.

The Company is obligated to reimburse the Manager for any direct expenses incurred

on its behalf and to pay the Manager the

Company’s pro rata portion of certain overhead costs set forth in the management

agreement. Should the Company terminate the

management agreement without cause, it will pay the Manager a termination

fee equal to three times the average annual management

fee, as defined in the management agreement, before or on the last day of the

term of the agreement.

The following table summarizes the management fee and overhead allocation

expenses for each quarter in 2021 to date and

2020.

($ in thousands)

Average

Advisory Services

Orchid

Management

Overhead

Three Months Ended

MBS

Equity

Fee

Allocation

Total

September 30, 2021

5,136,331

672,384

2,156

390

2,546

June 30, 2021

4,504,887

542,679

1,792

395

2,187

March 31, 2021

4,032,716

456,687

1,621

404

2,025

December 31, 2020

3,633,631

387,503

1,384

442

1,826

September 30, 2020

3,422,564

368,588

1,252

377

1,629

June 30, 2020

3,126,779

361,093

1,268

348

1,616

March 31, 2020

3,269,859

376,673

1,377

347

1,724

Nine Months Ended

September 30, 2021

4,557,978

557,250

5,569

1,189

6,758

September 30, 2020

3,273,068

368,785

3,897

1,072

4,969

Financial

Condition:

Mortgage-Backed Securities

As of September

30, 2021,

our RMBS

portfolio

consisted

of $5,601.4

million of

Agency RMBS

at fair value

and had a

weighted

average coupon

on assets

of 3.02%.

During the

nine months

ended September

30, 2021,

we received

principal

repayments

of $413.0

million compared

to $384.3

million

for the nine

months ended

September

30, 2020.

The average

three month

prepayment

speeds for

the

quarters

ended September

30, 2021

and 2020

were 12.4%

and 17.0%,

respectively.

The following

table presents

the 3-month

constant prepayment

rate (“CPR”)

experienced

on our structured

and PT RMBS

sub-portfolios,

on an annualized

basis, for

the quarterly

periods presented.

CPR is a method

of expressing

the prepayment

rate for a

mortgage pool

that assumes

that a constant

fraction

of the remaining

principal is

prepaid each

month or year.

Specifically, the

CPR in the

chart below

represents

the three month

prepayment

rate of the

securities

in the respective

asset

category.

Structured

PT RMBS

RMBS

Total

Three Months Ended

Portfolio (%)

September 30, 2021

9.8

25.1

12.4

June 30, 2021

10.9

29.9

12.9

March 31, 2021

9.9

40.3

12.0

December 31, 2020

16.7

44.3

20.1

September 30, 2020

14.3

40.4

17.0

June 30, 2020

13.9

35.3

16.3

March 31, 2020

9.8

22.9

11.9

The following

tables summarize

certain characteristics

of the Company’s

PT RMBS

and structured

RMBS as of

September

30, 2021

and December

31, 2020:

($ in thousands)

Weighted

Percentage

Average

Weighted

Maturity

Fair

Entire

Average

Longest

Asset Category

Value

Portfolio

Coupon

Months

Maturity

September 30, 2021

Fixed Rate RMBS

5,458,562

97.4%

2.96%

342

1-Oct-51

Total Mortgage-backed Pass-through

5,458,562

97.4%

2.96%

342

1-Oct-51

Interest-Only Securities

140,078

2.5%

3.39%

250

25-Aug-51

Inverse Interest-Only Securities

2,783

0.1%

3.75%

304

15-Jun-42

Total Structured RMBS

142,861

2.6%

3.40%

253

25-Aug-51

Total Mortgage Assets

5,601,423

100.0%

3.02%

326

1-Oct-51

December 31, 2020

Fixed Rate RMBS

3,560,746

95.5%

3.09%

339

1-Jan-51

Fixed Rate CMOs

137,453

3.7%

4.00%

312

15-Dec-42

Total Mortgage-backed Pass-through

3,698,199

99.2%

3.13%

338

1-Jan-51

Interest-Only Securities

28,696

0.8%

3.98%

268

25-May-50

Total Structured RMBS

28,696

0.8%

3.98%

268

25-May-50

Total Mortgage Assets

3,726,895

100.0%

3.19%

333

1-Jan-51

($ in thousands)

September 30, 2021

December 31, 2020

Percentage of

Agency

Fair Value

Entire Portfolio

Fair Value

Entire Portfolio

Fannie Mae

4,315,090

77.0%

2,733,960

73.4%

Freddie Mac

1,286,333

23.0%

992,935

26.6%

Total Portfolio

5,601,423

100.0%

3,726,895

100.0%

September 30, 2021

December 31, 2020

Weighted Average Pass-through Purchase Price

107.61

107.43

Weighted Average Structured Purchase Price

15.53

20.06

Weighted Average Pass-through Current Price

106.88

108.94

Weighted Average Structured Current Price

13.40

10.87

Effective Duration

(1)

3.350

2.360

(1)

Effective duration is the approximate percentage change in price

for a 100 bps change in rates.

An effective duration of 3.350 indicates that an

interest rate increase of 1.0% would be expected to cause a 3.350% decrease in the value

of the RMBS in the Company’s investment portfolio

at September 30, 2021.

An effective duration of 2.360 indicates that an interest rate increase

of 1.0% would be expected to cause a 2.360%

decrease in the value of the RMBS in the Company’s investment portfolio

at December 31, 2020. These figures include the structured securities

in the portfolio, but do not include the effect of the Company’s funding

cost hedges.

Effective duration quotes for individual investments are

obtained from The Yield Book, Inc.

The following

table presents

a summary

of portfolio

assets acquired

during the

nine months

ended September

30, 2021

and 2020,

including

securities

purchased during

the period

that settled

after the

end of the

period, if

any.

($ in thousands)

2021

2020

Total Cost

Average

Price

Weighted

Average

Yield

Total Cost

Average

Price

Weighted

Average

Yield

Pass-through RMBS

4,871,121

106.96

1.56%

3,012,072

107.22

1.67%

Structured RMBS

125,728

13.04

3.80%

Borrowings

As of September

30, 2021,

we had established

borrowing

facilities

in the repurchase

agreement

market with

a number

of commercial

banks and

other financial

institutions

and had borrowings

in place with

23 of these

counterparties.

None of these

lenders are

affiliated

with

the Company. These

borrowings

are secured

by the Company’s

RMBS and

cash, and

bear interest

at prevailing

market rates.

We believe

our established

repurchase

agreement

borrowing

facilities

provide borrowing

capacity in

excess of

our needs.

As of September

30, 2021,

we had obligations

outstanding

under the

repurchase

agreements

of approximately

$5,213.9

million with

net weighted

average borrowing

cost of 0.13%.

The remaining

maturity of

our outstanding

repurchase

agreement

obligations

ranged from

1 to 349

days, with

a weighted

average remaining

maturity of

30 days.

Securing

the repurchase

agreement

obligations

as of September

30, 2021

are RMBS

with an estimated

fair value,

including

accrued

interest,

of approximately

$5,430.3

million and

a weighted

average

maturity

of 344 months,

and cash

pledged to

counterparties

of approximately

$47.5 million.

Through

October 28,

2021, we

have been

able to maintain

our repurchase

facilities

with comparable

terms to

those that

existed at

September

30, 2021

with maturities

through

September

14, 2022.

The table below presents information about our period end,

maximum and average balances of borrowings for each quarter in

2021 to date and 2020.

($ in thousands)

Difference Between Ending

Ending

Maximum

Average

Borrowings and

Balance of

Average Borrowings

Three Months Ended

Borrowings

Amount

Percent

September 30, 2021

5,213,869

5,214,254

4,864,287

349,582

7.19%

June 30, 2021

4,514,704

4,517,953

4,348,192

166,512

3.83%

March 31, 2021

4,181,680

4,204,935

3,888,633

293,047

7.54%

December 31, 2020

3,595,586

3,597,313

3,438,444

157,142

4.57%

September 30, 2020

3,281,303

3,286,454

3,228,021

53,282

1.65%

June 30, 2020

3,174,739

3,235,370

2,992,494

182,245

6.09%

March 31, 2020

2,810,250

4,297,621

3,129,178

(318,928)

(10.19)%

(1)

The lower ending balance relative to the average balance during the quarter

ended March 31, 2020 reflects the disposal of RMBS pledged as

collateral in order to maintain cash and liquidity in response to the dislocations in the financial

and mortgage markets resulting from the

economic impacts of COVID-19.

During the quarter ended March 31, 2020, the Company’s investment

in RMBS decreased $642.1 million.

Liquidity and Capital Resources

Liquidity

is our ability

to turn non-cash

assets into

cash, purchase

additional

investments,

repay principal

and interest

on borrowings,

fund overhead,

fulfill margin

calls and

pay dividends.

Our principal

immediate

sources of

liquidity

include cash

balances,

unencumbered

assets and

borrowings

under repurchase

agreements.

Our borrowing

capacity will

vary over

time as the

market value

of our interest

earning assets

varies.

Our balance

sheet also

generates

liquidity

on an on-going

basis through

payments of

principal

and interest

receive on

our RMBS

portfolio.

Management

believes that

we currently

have sufficient

liquidity

and capital

resources

available

for (a) the

acquisition

of additional

investments

consistent

with the

size and

nature of

our existing

RMBS portfolio,

(b) the repayments

on borrowings

and (c) the

payment of

dividends

to the extent

required

for our continued

qualification

as a REIT.

We may also

generate

liquidity from

time

to time by

selling our

equity or

debt securities

in public

offerings

or private

placements.

Because our

PT RMBS

portfolio

consists entirely

of government

and agency

securities,

we do not

anticipate

having difficulty

converting

our assets

to cash should

our liquidity

needs ever

exceed our

immediately

available

sources of

cash.

Our structured

RMBS

portfolio

also consists

entirely

of governmental

agency securities,

although

they typically

do not trade

with comparable

bid / ask spreads

PT RMBS.

However, we anticipate

that we would

be able to

liquidate such

securities

readily, even

in distressed

markets, although

would likely

do so at

prices below

where such

securities

could be

sold in a

more stable

market.

To enhance our liquidity

even further,

may pledge

a portion

of our structured

RMBS as

part of a

repurchase

agreement

funding,

but retain

the cash in

lieu of acquiring

additional

assets.

In this way

we can, at

a modest

cost, retain

higher levels

of cash on

hand and

decrease

the likelihood

we will have

to sell assets

a distressed

market in

order to

raise cash.

Our strategy

for hedging

our funding

costs typically

involves

taking short

positions

in interest

rate futures,

treasury

futures,

interest

rate

swaps, interest

rate swaptions

or other

instruments.

When the

market causes

these short

positions

to decline

in value we

are required

meet margin

calls with

cash.

This can

reduce our

liquidity

position

to the extent

other securities

in our portfolio

move in price

in such a

way

that we do

not receive

enough cash

via margin

calls to

offset the

derivative

related margin

calls. If

this were

to occur

in sufficient

magnitude,

the loss of

liquidity

might force

us to reduce

the size

of the levered

portfolio,

pledge additional

structured

securities

to raise

funds or

risk operating

the portfolio

with less

liquidity.

Our master

repurchase

agreements

have no stated

expiration,

but can be

terminated

at any time

at our option

or at the

option of

the

counterparty. However,

once a definitive

repurchase

agreement

under a master

repurchase

agreement

has been

entered into,

it generally

may not be

terminated

by either

party.

A negotiated

termination

can occur, but

may involve

a fee to

be paid by

the party

seeking to

terminate

the repurchase

agreement

transaction,

as it did

during the

three months

ended March

31, 2020.

Under our

repurchase

agreement

funding arrangements,

we are required

to post margin

at the initiation

of the borrowing.

The margin

posted represents

the haircut,

which is a

percentage

of the market

value of the

collateral

pledged.

To the extent the

market value

of the

asset collateralizing

the financing

transaction

declines,

the market

value of our

posted margin

will be insufficient

and we will

be required

post additional

collateral.

Conversely, if

the market

value of the

asset pledged

increases

in value,

we would

be over collateralized

and we

would be

entitled to

have excess

margin returned

to us by the

counterparty.

Our lenders

typically

value our

pledged securities

daily to

ensure the

adequacy of

our margin

and make margin

calls as

needed, as

do we.

Typically, but not

always, the

parties agree

to a minimum

threshold

amount for

margin calls

so as to avoid

the need

for nuisance

margin calls

on a daily

basis.

Our master

repurchase

agreements

do not specify

the haircut;

rather haircuts

are determined

on an individual

repurchase

transaction

basis. Throughout

the nine months

ended September

30, 2021,

haircuts on

our pledged

collateral

remained

stable and

as of September

30, 2021,

our weighted

average

haircut was

approximately

5.0% of

the value

of our collateral.

While we

did not have

any TBAs at

September

30, 2021,

we do acquire

TBAs from

time to time.

TBAs represent

a form of

off-balance

sheet financing

and are accounted

for as derivative

instruments.

(See Note

4 to our Financial

Statements

in this Form

10-Q for additional

details on

our TBAs).

Under certain

market conditions,

it may be

uneconomical

for us to

roll our

TBAs into

future months

and we may

need

to take or

make physical

delivery

of the underlying

securities.

If we were

required

to take physical

delivery to

settle a long

TBA, we

would

have to fund

our total

purchase

commitment

with cash

or other

financing

sources and

our liquidity

position could

be negatively

impacted.

Our TBAs

are also

subject to

margin requirements

governed

by the Mortgage-Backed

Securities

Division ("MBSD")

of the FICC

and

by our master

securities

forward

transaction

agreements,

which may

establish

margin levels

in excess

of the MBSD.

Such provisions

require that

we establish

an initial

margin based

on the notional

value of the

TBA, which

is subject

to increase

if the estimated

fair value

our TBAs

or the estimated

fair value

of our pledged

collateral

declines.

The MBSD

has the sole

discretion

to determine

the value

of our

TBAs and

of the pledged

collateral

securing such

contracts.

In the event

of a margin

call, we

must generally

provide additional

collateral

the same

business day.

Settlement

of our TBA

obligations

by taking

delivery of

the underlying

securities

as well as

satisfying

margin requirements

could

negatively

impact our

liquidity

position.

However, since

we do not

use TBA dollar

roll transactions

as our primary

source of

financing,

believe that

we will have

adequate

sources of

liquidity

to meet

such obligations.

As discussed

earlier, we invest

a portion

of our capital

in structured

Agency RMBS.

We generally

do not apply

leverage

to this portion

of our portfolio.

The leverage

inherent

in structured

securities

replaces the

leverage

obtained

by acquiring

PT securities

and funding

them

in the repurchase

market.

This structured

RMBS strategy

has been a

core element

of the Company’s

overall investment

strategy

since

inception.

However, we

have and may

continue to

pledge a

portion

of our structured

RMBS in order

to raise

our cash levels,

but generally

will not

pledge these

securities

in order

to acquire

additional

assets.

The following

table summarizes

the effect

on our liquidity

and cash

flows from

contractual

obligations

for repurchase

agreements

and

interest

expense on

repurchase

agreements.

(in thousands)

Obligations Maturing

Within One

Year

One to Three

Years

Three to Five

Years

More than

Five Years

Total

Repurchase agreements

5,213,869

Interest expense on repurchase agreements

(1)

1,281

Totals

5,215,150

(1)

Interest expense

on repurchase

agreements is

based on current

interest rates

as of September

30, 2021 and

the remaining

term of the liabilities

existing at

that date.

In future

periods,

we expect

to continue

to finance

our activities

in a manner

that is consistent

with our

current operations

through

repurchase

agreements.

As of September

30, 2021,

we had cash

and cash equivalents

of $424.1

million.

We generated

cash flows

$497.8 million

from principal

and interest

payments on

our RMBS

and had average

repurchase

agreements

outstanding

of $4,367.0

million

during the

nine months

ended September

30, 2021.

Stockholders’

Equity

On January 23, 2020, we entered into the January 2020 Equity Distribution Agreement

with three sales agents pursuant to which

we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of

shares of our common stock in transactions

that were deemed to be “at the market” offerings and privately negotiated transactions.

We issued a total of 3,170,727 shares under

the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8

million, and net proceeds of approximately

$19.4 million, after commissions and fees, prior to its termination in August

2020.

On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with

four sales agents pursuant to which we

could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of

shares of our common stock in transactions that

were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total

of 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, we entered into 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 our common stock. J.P. Morgan purchased the shares of our common stock from

the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per

share. In addition, we granted J.P. Morgan a 30-day

option to purchase up to an additional 1,140,000 shares of our 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 our

common stock occurred on January 25,

2021, with proceeds to us of approximately $45.2 million, net of offering expenses.

On March 2, 2021, we entered into the “March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of

8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the

March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted

J.P.

Morgan a 30-day option to purchase up to an

additional 1,200,000 shares of our 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 our common stock occurred on March

5, 2021, with proceeds to us of

approximately $50.0

million, net of offering expenses payable.

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

Equity Distribution Agreement”) with four

sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate

amount of $250,000,000 of shares of our

common stock in transactions that are deemed to be “at the market” offerings and privately

negotiated transactions. Through

September 30, 2021, we issued a total of 41,568,338 shares under the June 2021 Equity Distribution

Agreement for aggregate gross

proceeds of approximately $211.0 million, and net proceeds of approximately $207.5 million, after commissions and fees.

Subsequent

to September 30, 2021 and through October 29, 2021, we issued a total of 7,838,998

shares under the June 2021 Equity Distribution

Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds

of approximately $38.4 million, after

commissions and fees.

Outlook

Economic Summary

The effects of

COVID-19 continued

to dominate

economic

activity during

the third quarter

of 2021, particularly

the Delta

variant that

first emerged

in earnest during

July.

Daily new infections

from the Delta

variant rose

rapidly during

the summer

but

appeared to

peak in early

September and

have been slowly

falling since.

COVID related

deaths have

followed a

similar

pattern.

Progress on

vaccinations

has slowed,

and most of

the new cases

were among

the unvaccinated.

This has led

various measures

by governments

and corporations

to mandate employees

receive vaccinations.

The net effect

of a

spreading virus

and a reluctance

on the part

of many to

get vaccinated

has been subdued

job growth

during the

third quarter

2021.

This is particularly

true among workers

with high

exposure to

customers,

such as those

in the leisure

and hospitality

industries.

The various

forms of pandemic

related supplemental

unemployment

insurance

ended in early

September, so job

growth may

accelerate

in the fourth

quarter.

In the interim,

the combination

of a reluctance

to return to

work on the

part of

many individuals,

coupled with

sufficient income

via unemployment

insurance,

has resulted

in both robust

demand for

goods

and services

and shortages

of labor in

many industries.

Coupled with

a demand/supply

imbalance in

favor of demand

for

many commodities

and parts, the

combination

of the two

forces has

led to severe

supply shortages

across the

economy.

The

supply imbalances

for goods and

services

have in turn

led to price

pressures

for both, driving

inflation to

multi-decade highs.

The Fed chairman,

among other

members of

the Federal

Open Market

Committee

(“FOMC”) have

maintained

these

inflationary

forces are

temporary and

will ease once

the effects

of the COVID

pandemic

fade and workers

can return

to work.

Yet, as implied by

market pricing

of inflation

linked U.S.

Treasury securities

and opinions

expressed by

various market

participants,

inflation

may prove to

be more than

transitory, and

of late even

FOMC members

themselves

have admitted

inflation has

remained high

longer than

they had anticipated.

Over the course

of the third

quarter and

into the fourth,

expectations

for growth

in the U.S.

economy during

the third

quarter continued

to decline.

On October

28, 2021, the

advanced read

on gross

domestic product

growth for

the U.S.

economy was

reported to

be 2.0%.

Expectations

for growth

during the

quarter were

approximately

4% to 7% at

the beginning

of the quarter. As

noted above,

job growth

has decelerated

and supply

constraints

of goods and

services

are keeping

activity

levels suppressed.

Over the course

of the balance

of the year

it should become

apparent whether

or not the

supply

constraints,

especially

with respect

to labor, are transitory

or not now

that essentially

all forms

of pandemic

unemployment

insurance

have ended and

the new cases

of the Delta

variant of

the COVID

virus are

subsiding. This

in turn

should also

answer the

question about

the transitory

nature of inflation.

The housing

market remains

robust as evidenced

by sales

of new and existing

homes, as

well as new

home construction.

However, as home

prices have

risen at 10%

– 20% over

the last year

and supply

shortages

of goods and

materials

are

constraining

new home construction,

this trend

may slow.

If this were

to occur,

it would be

beneficial

for the Company’s

RMBS

portfolio

as prepayments

related to housing

turnover may

decelerate.

Legislative

Response and

the Fed

Congress passed

the CARES Act

quickly in

response to

the pandemic’s

emergence in

the spring

of 2021and followed

with

additional

legislation

over the ensuing

months.

However, as certain

provisions

of the CARES

Act expired,

such as

supplemental

unemployment

insurance in

July of 2021,

there appeared

to be a need

for additional

stimulus

for the economy

deal with the

surge in the

pandemic that

occurred as

cold weather

set in, particularly

over the Christmas

holiday.

mentioned above,

the Federal

government

eventually

passed an additional

stimulus

package in late

December of

2020 and

again in March

of 2021. In

addition,

the Fed has

provided,

and continues

to provide,

as much support

to the markets

and the

economy as

it can within

the constraints

of its mandate.

During the

third quarter

of 2020, the

Fed unveiled

a new monetary

policy framework

focused on average

inflation

rate targeting

that allows

the Fed Funds

rate to remain

quite low, even

if inflation

is expected

to temporarily

surpass the

2% target level.

Further, the Fed

has indicated

that it will

look past the

presence of

very

tight labor

markets, should

they be present

at the time.

This marks

a significant

shift from

their prior

policy framework,

which

was focused

on the unemployment

rate as a key

indicator

of impending

inflation.

Adherence to

this policy

could steepen

the

U.S. Treasury

curve as short-term

rates could

remain low

for a considerable

period but

longer-term

rates could

rise given the

Fed’s intention

to let inflation

potentially

run above 2%

in the future

as the economy

more fully

recovers.

The response

of U.S.

Treasury rates

appeared to

follow this

pattern precisely

during the first

quarter of

2021,

but have since

reversed since

early in

the second quarter

2021.

Interest Rates

Interest rates

across the

U.S. Treasury

curve and U.S.

dollar swap

curve were

little changed

during the

third quarter

2021.

The only

notable development

within the

rates complex

was the slight

flattening of

both curves

between the

five-

and

30-year points

as the market

anticipates

the eventual

tapering of

asset purchases

beginning

in the fourth

quarter of

2021 and

increases

to the Fed funds

rate in either

the second

half of 2022

or early 2023.

As described

above, the Delta

variant of

the COVID virus

has dominated

economic

activity, both during

the third quarter

2021 and generally

since March

of 2020.

However, the FOMC

and the Fed

chairman have

looked through

the effects

of the

pandemic and

see the impact

fading.

At the conclusion

of the September

FOMC meeting,

the Fed chairman

was not

ambiguous in

expressing

his view

that the economy

had made “substantial

further progress”

towards achieving

their dual

mandates of

price stability

and full employment.

As a result,

the Fed appeared

to indicate

that it was

close to commencing

the

tapering of

their asset

purchases.

More specifically,

the Fed chairman

indicated they

are likely

to begin the

tapering of

their

asset purchases

this year

and that they

would likely

complete the

tapering by

mid next year.

The Fed also

released their

summary of

economic projections,

or “Dot Plot”

as it is known,

at the conclusion

of the meeting

and, as was

the case with

the

June FOMC

Dot Plot,

the Dot Plot

indicated FOMC

members anticipated

increasing

the Fed Funds

rate sooner

and by a larger

amount than

the market

anticipated.

Nine of the

eighteen

FOMC members,

as evidenced

by the Dot

Plot released

September, expect

the Fed to

increase the

funds rate

at least once

in 2022.

This surprised

the market,

and the market

pricing

of forward

short-term

rates quickly

adjusted to

reflect these

expectations.

As the fourth

quarter has

unfolded and

inflationary

pressures

have continued

to build,

market pricing

of forward

short-term

rates have

continued to

reflect additional

increases to

the Fed Funds

rate. Further,

as inflation

persists at

higher levels

and

continues to

challenge the

Fed’s assertion

that it will

prove transitory,

longer maturity

rates have moved

higher so far

in the

fourth quarter.

The level

of the 10-year

U.S. Treasury

is close to

matching the

year-to-date

high yield

established

on March 31,

2021.

The Agency RMBS

Market

Performance

for the Agency

RMBS market

for the third

quarter was

a modest 0.01%,

generally in-line

with most

other

asset classes.

The excess

return to comparable

duration U.S.

Treasuries and

swaps for

the Agency RMBS

sub-index was

0.1% for both

for the quarter.

Within the

Agency RMBS

sector, higher coupon

fixed rate

securities

outperformed

lower

coupons, specifically

the coupon currently

in widespread

production.

Total returns for the

third quarter

for 2.0% and

2.5%

securities

were -0.4%

and 0.00%,

respectively.

For 3.0% and

3.5% coupons

the returns

were 0.6% and

0.5%, respectively.

Thirty-year

and fifteen-year

securities

both returned

0.1% for the

quarter. As mentioned

above, at the

conclusion

of the

September FOMC

meeting the

chairman made

it quite clear

the Fed was

likely to

begin to taper

their asset

purchases this

year

and conclude

the $40 billion

per month purchases

of Agency

RMBS assets

by mid-2022.

Given the length

of time the

Fed has

been supporting

the Agency

RMBS market,

coupled with

banks that are

flush with

deposits that

need to be

invested,

price

levels in

the Agency RMBS

market were

quite rich

prior to this

development,

especially

the coupons

the Fed routinely

purchases,

which have

been the 2.0%

and 2.5% coupons

predominantly. These

factors are

what drove

the relative

underperformance

of these two

coupons for

the quarter

and has continued

to do so into

the fourth quarter.

The second driver

of Agency RMBS

performance,

both for the

third quarter

of 2021 and

beyond, is,

as always,

the level

prepayments.

With interest

rates relatively

steady during

the third quarter

and, after

such a prolonged

period of low

interest

rates prepayment

speeds on higher

coupon, premium

priced securities

were expected

to eventually

slow.

This appears

to be

finally happening,

as evidenced

by the August

and September

prepayment

reports, released

in September

and October,

respectively.

As interest

rates

have moved higher

so far in

the fourth quarter,

approaching

levels last

seen at the

conclusion

the first

quarter, market

participants

expect this

trend to continue,

and which

is reflected

in the performance

of these coupons

quarter to

date.

Recent Legislative

and Regulatory

Developments

The Fed conducted

large scale

overnight repo

operations

from late

2019 until

July 2020 to

address disruptions

in the U.S.

Treasury, Agency debt

and Agency

MBS financing

markets. These

operations

ceased in

July 2020 after

the central

bank

successfully

tamed volatile

funding costs

that had threatened

to cause disruption

across the

financial

system.

The Fed has

taken a number

of other actions

to stabilize

markets as

a result of

the impacts

of the COVID-19

pandemic.

March of 2020,

the Fed announced

a $700 billion

asset purchase

program to

provide liquidity

to the U.S.

Treasury and Agency

RMBS markets.

The Fed also

lowered the

Fed Funds rate

to a range of

0.0% – 0.25%,

after having

already lowered

the Fed

Funds rate

by 50 bps earlier

in the month.

Later that

same month

the Fed announced

a program to

acquire U.S.

Treasuries

and Agency

RMBS in the

amounts needed

to support

smooth market

functioning.

With these

purchases,

market conditions

improved substantially.

Currently, the Fed is

committed

to purchasing

$80 billion

of U.S. Treasuries

and $40 billion

of Agency

RMBS each month.

Chairman Powell

and the Fed

have reiterated

their commitment

to this level

of asset purchases

at every

meeting since

their meeting

on June 30,

2020. At the

September

2021 meeting,

the Fed generally

assessed that,

provided that

the economic

recovery remained

broadly on

track, a gradual

tapering process

that concluded

around the

middle of

next year

would likely

be appropriate.

The Fed noted

that if a

decision

to begin tapering

purchases

occurred at

the next meeting,

the

process of

tapering could

commence with

the monthly

purchase calendars

beginning in

either mid-November

or mid-

December. The Fed

has taken various

other steps

to support

certain other

fixed income

markets, to

support mortgage

servicers

and to implement

various portions

of the Coronavirus

Aid, Relief,

and Economic

Security (“CARES”)

Act.

The CARES

Act was passed

by Congress

and signed into

law on March

27, 2020.

This over

$2 trillion

COVID-19 relief

bill, among

other things,

provided for

direct payments

to each American

making up to

$75,000 a year, increased

unemployment

benefits for

up to four

months (on

top of state

benefits),

funding to

hospitals

and health providers,

loans and

investments

to businesses,

states and municipalities

and grants

to the airline

industry. On April

24, 2020, President

Trump

signed an additional

funding bill

into law that

provided an

additional

$484 billion

of funding

to individuals,

small businesses,

hospitals,

health care

providers

and additional

coronavirus

testing efforts.

Various provisions

of the CARES

Act began to

expire in

July 2020,

including

a moratorium

on evictions,

expanded unemployment

benefits,

and a moratorium

on foreclosures.

On August 8,

2020, President

Trump issued

Executive Order

13945, directing

the Department

of Health and

Human Services,

the Centers

for Disease

Control and

Prevention

(“CDC”),

the Department

of Housing

and Urban Development,

and

Department

of the Treasury

to take measures

to temporarily

halt residential

evictions and

foreclosures,

including

through

temporary

financial

assistance.

On December

27, 2020, an

additional

$900 billion

coronavirus

aid package

was signed

into law as

part of the

Consolidated

Appropriations

Act of 2021,

providing for

extensions

of many of

the CARES Act

policies and

programs as

well as additional

relief. The

package provided

for, among other

things, direct

payments to

most Americans

with a gross

income of

less than

$75,000 a year, extension

of unemployment

benefits through

March 14, 2021,

funding for

procurement

of vaccines

and health

providers,

loans to qualified

businesses,

funding for

rental assistance

and funding for

schools. On

January 29,

2021, the CDC

issued guidance

extending

eviction

moratoriums

for covered

persons through

March 31,

2021, which

was extended

to July 31,

2021. On August

26, 2021, the

U.S. Supreme

Court issued

a decision

ending the

CDC eviction

moratorium.

In addition,

February 9,

2021, the FHFA announced

that the foreclosure

moratorium

begun under

the CARES Act

for loans

backed by

Fannie Mae

and Freddie

Mac and the

eviction moratorium

for real estate

owned by Fannie

Mae and Freddie

Mac were

extended until

March 31,

2021, which

was further

extended through

September

30, 2021. On

July 30, 2021,

the FHA

announced an

extension

of the eviction

moratorium

through September

30, 2021 for

foreclosed

borrowers

and other occupants

and noted the

expiration of

the foreclosure

moratorium

on July 31, 2021.

On March 11, 2021,

the $1.9 trillion

American Rescue

Plan Act of

2021 was signed

into law.

This stimulus

program

furthered the

Federal government’s

efforts to stabilize

the economy and

provide assistance

to sectors

of the population

still

suffering from

the various

physical and

economic effects

of the pandemic.

On September

30, 2019, the

FHFA announced that

Fannie Mae

and Freddie

Mac were allowed

to increase

their capital

buffers to $25

billion and

$20 billion,

respectively, from

the prior limit

of $3 billion

each. On June

30, 2020,

the FHFA released

proposed rule

on a new regulatory

framework for

the GSEs which

seeks to implement

both a risk-based

capital framework

and

minimum leverage

capital requirements.

The final

rule on the

new capital

framework

for the GSEs

was published

in the federal

December 2020.

On January

14, 2021, the

U.S. Treasury

and the FHFA executed

letter agreements

allowing the

GSEs to continue

to retain capital

up to their

regulatory

minimums,

including buffers,

as prescribed

in the December

rule.

These letter

agreements

provide, in

part, (i)

there will

be no exit

from conservatorship

until all

material litigation

is settled

and

the GSE has

common equity

Tier 1 capital

of at least

3% of its

assets, (ii)

the GSEs will

comply with

the FHFA’s regulatory

capital framework,

(iii) higher-risk

single-family

mortgage acquisitions

will be restricted

to current

levels, and

(iv) the U.S.

Treasury and the

FHFA will establish

a timeline

and process

for future

GSE reform.

However, no definitive

proposals

legislation

have been released

or enacted with

respect to

ending the

conservatorship,

unwinding the

GSEs, or materially

reducing the

roles of the

GSEs in the

U.S. mortgage

market. On

June 23, 2021,

President Biden

removed the

director of

the

FHFA and appointed

an acting

director. On September

14, 2021, the

FHFA suspended

certain provisions

added to the

letter

agreements

on January

14, 2021, including

limits on

the enterprises'

cash windows,

multifamily

lending, loans

with higher

risk

characteristics,

and second

homes and investment

properties.

The enterprises

will continue

to build capital

under the

continuing

provisions

of the letter

agreements.

Additionally, the

FHFA is reviewing

the enterprise

regulatory

capital framework

and expects

to announce

further action

in the near

future.

In 2017, policymakers

announced that

LIBOR will

be replaced by

December 31,

2021. The directive

was spurred

by the

fact that banks

are uncomfortable

contributing

to the LIBOR

panel given

the shortage

of underlying

transactions

on which to

base levels

and the liability

associated

with submitting

an unfounded

level. The

ICE Benchmark

Administration,

in its capacity

as administrator

of USD LIBOR,

has confirmed

that it will

cease publication

of (i) the

one-week and

two-month USD

LIBOR

settings immediately

following the

LIBOR publication

on December

31, 2021, and

(ii) the overnight

and one, three,

six and 12-

month USD

LIBOR settings

immediately

following the

LIBOR publication

on June 30,

2023. A joint

statement by

key regulatory

authorities

calls on banks

to cease entering

into new contracts

that use USD

LIBOR as a

reference rate

by no later

than

December 31,

2021. The Alternative

Reference Rates

Committee,

a steering

committee comprised

of large U.S.

financial

institutions,

has proposed

replacing USD-LIBOR

with a new SOFR,

a rate based

on U.S. repo

trading. Many

banks believe

that it may

take four to

five years

to complete

the transition

to SOFR, for

certain, despite

the 2021 deadline.

We will monitor

the

emergence of

this new rate

carefully

as it will

potentially

become the new

benchmark

for hedges and

a range of

interest rate

investments.

At this time,

however, no consensus

exists as

to what rate

or rates may

become accepted

alternatives

to LIBOR.

Effective January

1, 2021, Fannie

Mae, in alignment

with Freddie

Mac, will

extend the timeframe

for its delinquent

loan

buyout policy

for Single-Family

Uniform Mortgage-Backed

Securities

(UMBS) and

Mortgage-Backed

Securities

(MBS) from

four consecutively

missed monthly

payments to

twenty-four

consecutively

missed monthly

payments (i.e.,

24 months past

due). This

new timeframe

will apply

to outstanding

single-family

pools and newly

issued single-family

pools and was

first

reflected when

January 2021

factors were

released on

the fourth business

day in February

2021.

For Agency

RMBS investors,

when a delinquent

loan is bought

out of a pool

of mortgage

loans, the removal

of the loan

from the pool

is the same

as a total

prepayment

of the loan.

The respective

GSEs currently

anticipate,

however, that

delinquent loans

will be repurchased

in most cases

before the 24-month

deadline under

one of the following

exceptions

listed

below.

•

a loan that

is paid in

full, or where

the related

lien is released

and/or the

note debt is

satisfied

or forgiven;

•

a loan repurchased

by a seller/servicer

under applicable

selling and

servicing

requirements;

•

a loan entering

a permanent

modification,

which generally

requires it

to be removed

from the MBS.

During any

modification

trial period,

the loan will

remain in the

MBS until

the trial

period ends;

•

a loan subject

to a short

sale or deed-in-lieu

of foreclosure;

•

a loan referred

to foreclosure.

Because of these

exceptions,

the GSEs currently

believe based

on prevailing

assumptions

and market

conditions

this

change will

have only a

marginal impact

on prepayment

speeds, in

aggregate.

Cohort level

impacts may

vary. For example,

more than half

of loans referred

to foreclosure

are historically

referred within

six months of

delinquency. The degree

to which

speeds are

affected depends

on delinquency

levels, borrower

response, and

referral

to foreclosure

timelines.

The scope and

nature of

the actions

the U.S. government

or the Fed

will ultimately

undertake are

unknown and

will

continue to

evolve, especially

in light of

the COVID-19

pandemic, President

Biden’s new

administration

and the new

Congress

in the United

States.

Effect on Us

Regulatory

developments,

movements

in interest

rates and prepayment

rates affect

us in many

ways, including

the

following:

Effects on our

Assets

A change in

or elimination

of the guarantee

structure

of Agency

RMBS may

increase our

costs (if,

for example,

guarantee

fees increase)

or require

us to change our

investment

strategy altogether.

For example,

the elimination

of the guarantee

structure

of Agency RMBS

may cause us

to change our

investment

strategy to

focus on non-Agency

RMBS, which

in turn

would require

us to significantly

increase our

monitoring

of the credit

risks of

our investments

in addition

to interest

rate and

prepayment

risks.

Lower long-term

interest rates

can affect the

value of our

Agency RMBS

in a number

of ways. If

prepayment

rates are

relatively

low (due,

in part, to

the refinancing

problems described

above), lower

long-term interest

rates can increase

the value

of higher-coupon

Agency RMBS.

This is because

investors typically

place a premium

on assets with

yields that

are higher

than

market yields.

Although lower

long-term interest

rates may increase

asset values

in our portfolio,

we may not

be able to invest

new funds in

similarly-yielding

assets.

If prepayment

levels increase,

the value of

our Agency

RMBS affected

by such prepayments

may decline.

This is because

a principal

prepayment

accelerates

the effective

term of an

Agency RMBS,

which would

shorten the

period during

which an

investor would

receive above-market

returns (assuming

the yield on

the prepaid

asset is higher

than

market yields).

Also,

prepayment

proceeds may

not be able

to be reinvested

in similar-yielding

assets. Agency

RMBS backed

by mortgages

with

high interest

rates are

more susceptible

to prepayment

risk because

holders of

those mortgages

are most likely

to refinance

a lower rate.

IOs and IIOs,

however, may be

the types of

Agency RMBS

most sensitive

to increased

prepayment

rates.

Because the

holder of

an IO or IIO

receives no

principal

payments, the

values of IOs

and IIOs are

entirely dependent

on the

existence of

a principal

balance on the

underlying

mortgages.

If the principal

balance is

eliminated due

to prepayment,

IOs and

IIOs essentially

become worthless.

Although increased

prepayment

rates can negatively

affect the value

of our IOs

and IIOs,

they have

the opposite

effect on POs.

Because POs

act like

zero-coupon

bonds, meaning

they are purchased

at a discount

their par

value and have

an effective

interest rate

based on the

discount and

the term

of the underlying

loan, an increase

prepayment

rates would

reduce the effective

term of our

POs and accelerate

the yields

earned on those

assets, which

would

increase our

net income.

Higher long-term

rates can also

affect the value

of our Agency

RMBS.

As long-term

rates rise,

rates available

borrowers

also rise.

This tends to

cause prepayment

activity

to slow and

extend the

expected average

life of mortgage

cash

flows.

As the expected

average life

of the mortgage

cash flows

increases,

coupled with

higher discount

rates, the

value of

Agency RMBS

declines.

Some of the

instruments

the Company

uses to hedge

our Agency

RMBS assets,

such as interest

rate futures,

swaps and swaptions,

are stable

average life

instruments.

This means

that to the

extent we use

such instruments

to hedge our

Agency RMBS

assets, our

hedges may

not adequately

protect us

from price

declines, and

therefore may

negatively

impact our

book value.

It is for

this reason

we use interest

only securities

in our portfolio.

As interest

rates rise,

the

expected average

life of these

securities

increases,

causing generally

positive price

movements

as the number

and size of

the

cash flows

increase the

longer the

underlying

mortgages remain

outstanding.

This makes

interest only

securities

desirable

hedge instruments

for pass-through

Agency RMBS.

As described

above, the Agency

RMBS market

began to experience

severe dislocations

in mid-March

2020 as a result

the economic,

health and

market turmoil

brought about

by COVID-19.

In March of

2020, the Fed

announced that

it would

purchase Agency

RMBS and U.S.

Treasuries in

the amounts needed

to support

smooth market

functioning,

which largely

stabilized

the Agency RMBS

market, a

commitment

it reaffirmed

at all subsequent

Fed meetings.

At the September

2021

meeting, the

Fed generally

assessed that,

provided that

the economic

recovery remained

broadly on

track, a gradual

tapering

process that

concluded around

the middle

of next year

would likely

be appropriate.

The Fed noted

that if a decision

to begin

tapering purchases

occurred at

the next meeting,

the process

of tapering

could commence

with the monthly

purchase

calendars beginning

in either

mid-November

or mid-December. If

the Fed modifies,

reduces or suspends

its purchases

Agency RMBS,

our investment

portfolio could

be negatively

impacted. Further,

the moratoriums

on foreclosures

described

above will

likely delay

potential defaults

on loans that

would otherwise

be bought out

of Agency MBS

pools as described

above.

Depending

on the ultimate

resolution

of the foreclosures,

when and if

it occurs,

these loans

may be removed

from the

pool into which

they were securitized.

If this were

to occur, it would

have the effect

of delaying

a prepayment

on the Company’s

securities

until such

time. As the

majority

of the Company’s

Agency RMBS

assets were

acquired at

a premium

to par, this will

tend to increase

the realized

yield on the

asset in question.

Because we

base our investment

decisions

on risk management

principles

rather than

anticipated

movements

in interest

rates, in

a volatile

interest rate

environment

we may allocate

more capital

to structured

Agency RMBS

with shorter

durations.

We believe these

securities

have a lower

sensitivity

to changes in

long-term

interest rates

than other

asset classes.

We may

attempt to

mitigate our

exposure to

changes in

long-term

interest rates

by investing

in IOs and IIOs,

which typically

have

different sensitivities

to changes in

long-term

interest rates

than PT RMBS,

particularly

PT RMBS backed

by fixed-rate

mortgages.

Effects on our

borrowing

costs

We leverage

our PT RMBS

portfolio and

a portion of

our structured

Agency RMBS

with principal

balances through

the use

of short-term

repurchase

agreement transactions.

The interest

rates on our

debt are determined

by the short

term interest

rate

markets. An

increase in

the Fed Funds

rate or LIBOR

would increase

our borrowing

costs, which

could affect

our interest

rate

spread if there

is no corresponding

increase in

the interest

we earn on

our assets.

This would

be most prevalent

with respect

our Agency

RMBS backed

by fixed rate

mortgage loans

because the

interest rate

on a fixed-rate

mortgage loan

does not

change even

though market

rates may

change.

In order to

protect our

net interest

margin against

increases in

short-term

interest rates,

we may enter

into interest

rate

swaps, which

economically

convert our

floating-rate

repurchase

agreement debt

to fixed-rate

debt, or utilize

other hedging

instruments

such as Eurodollar,

Fed Funds and

T-Note futures

contracts

or interest

rate swaptions.

Summary

Once again COVID-19

dominated economic

activity

this quarter.

However, we may

be at a crossroads

as the effects

the Delta variant

appears to

be waning and

the number

of people with

either a vaccination

and/or prior

infections

of the virus

grow.

Pandemic related

relief measures

such as supplemental

unemployment

insurance payments

and foreclosure

moratoriums

are essentially

over.

Hopefully

the combination

of all of these

factors will

lead to surging

job growth

and act to

quickly lessen

the severe

supply shortage

of goods and

labor.

This in turn

should slow

the stubbornly

high inflation

the

economy has

suffered.

If these events

come to pass,

the economy

appears to

be positioned

to perform

very well,

and the Fed

has stated that

it will

slowly remove

the considerable

accommodation

they have provided

the market

via a tapering

of their

asset purchases

and eventually

increases

to the Fed Funds

rate. If these

events do

not unfold and

the supply

shortages of

goods and labor

remain, the

economy will

likely continue

to suffer from

elevated levels

of inflation.

Under this

scenario the

path of economic

growth is

less certain,

and the path

of monetary

policy could

prove to be

quite challenging

for the Fed.

The performance

of the Agency

RMBS market

was very modest

in absolute

returns, at

0.0% and 0.1%

versus comparable

duration interest

rates and swaps.

Performance

for the sector

was generally

in line with

other sectors

of the fixed

income

markets.

Within the

Agency RMBS

universe,

performance

was skewed

towards higher

coupons and

away from

lower coupons

that comprise

the bulk of

recent production

and Fed purchases.

This has continued

into the fourth

quarter, in large

part

because the Fed

has made it

quite clear

the hurdle

needed for

them to begin

to taper

their asset

purchases has

been met and

they plan to

commence doing

so this year, likely

ending in mid-2022.

Prepayment

speeds, particularly

on high coupon

securities,

have moderated

and are likely

to do so even

more with

rates higher

so far in the

fourth quarter

and the typical

seasonal slow

down as we

approach the

winter months.

Critical Accounting Estimates

Our condensed financial statements are prepared in accordance with GAAP.

GAAP requires our management to make

some complex and subjective decisions and assessments. Our most critical accounting estimates involve decisions and

assessments which could significantly affect reported assets, liabilities, revenues and expenses.

There have been no

changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December

31, 2020.

Capital Expenditures

At September 30, 2021, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At September 30, 2021, we did not have any off-balance sheet arrangements.

Dividends

In addition to other requirements that must be satisfied to qualify as a REIT, we must pay annual dividends to our

stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and

excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater

than or less than our financial statement net income (loss) computed in accordance with GAAP.

These book to tax

differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the

amortization of losses on derivative instruments that are treated as funding hedges for tax purposes.

We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the

completion of our IPO.

(in thousands, except per share amounts)

Year

Per Share

Amount

Total

2013

1.395

4,662

2014

2.160

22,643

2015

1.920

38,748

2016

1.680

41,388

2017

1.680

70,717

2018

1.070

55,814

2019

0.960

54,421

2020

0.790

53,570

2021 - YTD

(1)

0.650

74,045

Totals

12.305

416,008

(1)

On October 12, 2021, the Company declared a dividend of $0.065 per

share to be paid on November 26, 2021.

The effect of this dividend is

included in the table above, but is not reflected in the Company’s financial

statements as of September 30, 2021.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors

influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with

inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our

distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at

least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our

activities and balance sheet are measured with reference to historical cost and/or fair market value without considering

inflation.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET

RISK

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency

exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk,

prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and

international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the

interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing

liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of

interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our

investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow,

and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our

operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These

instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase

agreement borrowings.

Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS.

prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce

the effectiveness of any hedging strategies we may use and may cause losses on such transactions.

Hedging strategies

involving the use of derivative securities are highly complex and may produce volatile returns.

Hedging techniques are also

limited by the rules relating to REIT qualification.

In order to preserve our REIT status, we may be forced to terminate a

hedging transaction at a time when the transaction is most needed.

Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be

adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.

Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”),

fixed-rate RMBS and hybrid

adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage

prepayments provided that they are reasonably priced by the market.

Although the duration of an individual asset can

change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration

of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally

ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting

cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying

mortgages and loan payoffs in connection with home sales,

and borrowers paying more than their scheduled loan

payments, which accelerates the amortization of the loans.

The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities.

While

prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may

cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are

low.

Prepayments affect the durations of IIOs similarly, but the floating rate nature of the coupon of IIOs (which is inversely

related to the level of one month LIBOR) causes their price movements, and model duration, to be affected by changes in

both prepayments and one month LIBOR, both current and anticipated levels.

As a result, the duration of IIO securities will

also vary greatly.

Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us.

As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration

measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in

interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly,

when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective

duration of securities collateralized by such loans can be quite low because of expected prepayments.

We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of

our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by

estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third

party models.

However, empirical results and various third party models may produce different duration numbers for the

same securities.

The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments

and hedge positions as of September 30, 2021 and December 31, 2020, assuming rates instantaneously fall 200 bps, fall

100 bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the

measure of the sensitivity of our hedge positions and Agency RMBS’ effective duration to movements in interest rates.

All changes in value in the table below are measured as percentage changes from the investment portfolio value and

net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment

projections as of September 30, 2021 and December 31, 2020.

Actual results could differ materially from estimates, especially in the current market environment. To

the extent that

these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will

likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover,

different models were employed in the analysis, materially different projections could result. Lastly,

while the table below

reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any

of our agency securities as a part of the overall management of our investment portfolio.

Interest Rate Sensitivity

(1)

Portfolio

Market

Book

Change in Interest Rate

Value

(2)(3)

Value

(2)(4)

As of September 30, 2021

-200 Basis Points

(1.30)%

(9.94)%

-100 Basis Points

(0.07)%

(0.50)%

-50 Basis Points

0.26%

1.99%

+50 Basis Points

(1.40)%

(10.70)%

+100 Basis Points

(2.89)%

(22.14)%

+200 Basis Points

(7.37)%

(56.54)%

As of December 31, 2020

-200 Basis Points

2.43%

21.85%

-100 Basis Points

1.35%

12.08%

-50 Basis Points

0.69%

6.18%

+50 Basis Points

(0.90)%

(8.03)%

+100 Basis Points

(2.39)%

(21.42)%

+200 Basis Points

(6.60)%

(59.22)%

(1)

Interest rate sensitivity is derived from models that are dependent on

inputs and assumptions provided by third parties as well as by our

Manager, and assumes there are no changes

in mortgage spreads and assumes a static portfolio. Actual results could differ

materially from

these estimates.

(2)

Includes the effect of derivatives and other securities used for hedging

purposes.

(3)

Estimated dollar change in investment portfolio value expressed as a percent

of the total fair value of our investment portfolio as of such date.

(4)

Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as

of such date.

In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments,

such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.

Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from

that shown above and such difference might be material and adverse to our stockholders.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that

we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which

mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates,

general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic

conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs

could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency RMBS increase during

periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may

not always be the case.

We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid

investment, thus affecting our net interest income by altering the average yield on our assets.

Spread Risk

When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book

value could decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging

instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk

associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of

changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets,

such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on

different assets. Consequently, while we use futures contracts and interest rate swaps and swaptions to attempt to protect

against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase

agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of September

30, 2021, we had unrestricted cash and cash equivalents of $424.1 million and unpledged securities of approximately $5.4

million (not including unsettled securities purchases or securities pledged to us) available to meet margin calls on our

repurchase agreements and derivative contracts, and for other corporate purposes. However, should the value of our

Agency RMBS pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls relating to

our repurchase and derivative agreements could increase, causing an adverse change in our liquidity position. Further,

there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our

counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase

agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the

repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell

assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

Extension Risk

The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our

Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we

use futures contracts and interest rate swaps and swaptions to help manage our funding cost on our investments in the

event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of

the instrument for a specified period of time.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-

rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on

our results from operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage

of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments.

This situation may also cause the market value of our Agency RMBS and CMOs collateralized by fixed rate mortgages or

hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive

any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which

could cause us to incur realized losses.

Counterparty Credit Risk

We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the

counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such

agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on

the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a

default by a counterparty, we may not receive payments provided for under the terms of our agreements and may have

difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative

transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we

limit our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit

ratings, monitoring positions with individual counterparties and adjusting collateral posted as required. However, there is no

guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if

unsuccessful.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the

supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief

Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as

defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the CEO and CFO concluded our disclosure

controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that

information regarding the Company is accumulated and communicated to our management, including our CEO and CFO,

by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable

assurance that information we must disclose in our periodic reports under the Exchange Act is recorded, processed,

summarized and reported within the time periods prescribed by the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting that occurred during the

Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the

Company’s internal control over financial reporting.

PART II. OTHER

INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not party to any material pending legal proceedings as described in Item 103 of Regulation

S-K.

ITEM 1A. RISK FACTORS

A description

of certain

factors that

may affect our

future results

and risk factors

is set forth

in our Annual

Report on

Form

10-K for the

year ended December

31, 2020. As

of September

30, 2021, there

have been no

material

changes in

our risk

factors from

those set forth

in our Annual

Report on Form

10-K for the

year ended December

31, 2020.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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.

The Company

did not repurchase

any

shares of its

common stock

during the

three months

ended September

30, 2021. As

of September

30, 2021, the

maximum

remaining

number of shares

that may be

repurchased

under this

authorization

is 837,311 shares.

Unless modified

or revoked

by the Board,

the authorization

does not expire.

The Company

did not have

any unregistered

sales of its

equity securities

during the

three months

ended September

30,

2021.

ITEM 3.

DEFAULTS

UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY

DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

3.1

Articles of Amendment and Restatement of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s

Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-184538) filed on November 28, 2012

and incorporated herein by reference).

3.2

Certificate of Correction of Orchid Island Capital, Inc. (filed as Exhibit 3.2 to the Company’s Annual

Report on Form 10-K filed on February 22, 2019 and incorporated herein by reference).

3.3

Amended and Restated Bylaws of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Current

Report on Form 8-K filed on March 19, 2019 and incorporated herein by reference).

4.1

Specimen Certificate of common stock of Orchid Island Capital, Inc. (filed as Exhibit 4.1 to the Company’s

Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-184538) filed on November 28, 2012

and incorporated herein by reference).

31.1

Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section

302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002.*

32.1

Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C.

Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2

Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section

1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Exhibit 101.INS XBRL

Inline XBRL Instance Document – the instance document does not appear

in the

Interactive Data File because its XBRL tags are embedded within the Inline XBRL

document.***

Exhibit 101.SCH XBRL

Taxonomy Extension Schema Document ***

Exhibit 101.CAL XBRL

Taxonomy Extension Calculation Linkbase Document***

Exhibit 101.DEF XBRL

Additional Taxonomy Extension Definition Linkbase Document Created***

Exhibit 101.LAB XBRL

Taxonomy Extension Label Linkbase Document ***

Exhibit 101.PRE XBRL

Taxonomy Extension Presentation Linkbase Document ***

Exhibit 104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

Filed herewith.

Furnished herewith.

***

Submitted electronically herewith.

†

Management contract or compensatory plan.

Signatures

Pursuant to the requirements

of Section 13 or 15(d)

of the Securities Exchange

Act of 1934, as amended,

the registrant has duly

caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Orchid Island Capital, Inc

Registrant

Date:

October 29, 2021

By:

/s/ Robert E. Cauley

Robert E. Cauley

Chief Executive Officer, President and Chairman of the Board

(Principal Executive Officer)

Date:

October 29, 2021

By:

/s/ George H. Haas, IV

George H. Haas,

Secretary, Chief Financial Officer, Chief Investment Officer and

Director (Principal Financial and Accounting Officer)