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

orc10q20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒

QUARTERLY

REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

March 31, 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, or

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

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 April 30, 2021:

94,410,960

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

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)

March 31, 2021

December 31, 2020

ASSETS:

Mortgage-backed securities, at fair value

Pledged to counterparties

4,120,500

3,719,906

Unpledged

218,036

6,989

Total mortgage

-backed securities

4,338,536

3,726,895

Cash and cash equivalents

211,436

220,143

Restricted cash

117,155

79,363

Accrued interest receivable

10,852

9,721

Derivative assets, at fair value

95,752

20,999

Receivable for securities sold, pledged to counterparties

154,977

414

Other assets

2,058

516

Total Assets

4,930,766

4,058,051

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

Repurchase agreements

4,181,680

3,595,586

Payable for unsettled securities purchased

217,758

Dividends payable

6,156

4,970

Derivative liabilities, at fair value

35,057

33,227

Accrued interest payable

921

1,157

Due to affiliates

712

632

Other liabilities

22,306

7,188

Total Liabilities

4,464,590

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 March 31, 2021 and December 31, 2020

Common Stock, $

0.01

par value;

500,000,000

shares authorized,

94,410,960

shares issued and outstanding as of March 31, 2021 and

76,073,317

shares issued

and outstanding as of December 31, 2020

944

761

Additional paid-in capital

512,595

432,524

Accumulated deficit

(47,363)

(17,994)

Total Stockholders' Equity

466,176

415,291

Total Liabilities

and Stockholders' Equity

4,930,766

4,058,051

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF OPERATIONS

(Unaudited)

For the Three Months Ended March 31, 2021 and 2020

($ in thousands, except per share data)

Three Months Ended March 31,

2021

2020

Interest income

26,856

35,671

Interest expense

(1,941)

(16,523)

Net interest income

24,915

19,148

Realized losses on mortgage-backed securities

(7,397)

(28,380)

Unrealized (losses) gains on mortgage-backed securities

(88,866)

3,032

Gains (losses) on derivative and other hedging instruments

45,472

(82,858)

Net portfolio loss

(25,876)

(89,058)

Expenses:

Management fees

1,621

1,377

Allocated overhead

404

347

Accrued incentive compensation

364

(436)

Directors' fees and liability insurance

272

260

Audit, legal and other professional fees

318

255

Direct REIT operating expenses

421

206

Other administrative

132

Total expenses

3,493

2,141

Net loss

(29,369)

(91,199)

Basic net loss per share

(0.34)

(1.41)

Diluted net loss per share

(0.34)

(1.41)

Weighted Average Shares Outstanding

85,344,954

64,590,205

Dividends declared per common share

0.195

0.240

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Three Months Ended March 31, 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

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

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF CASH FLOWS

(Unaudited)

For the Three Months Ended March 31, 2021 and 2020

($ in thousands)

2021

2020

CASH FLOWS FROM OPERATING

ACTIVITIES:

Net loss

(29,369)

(91,199)

Adjustments to reconcile net loss to net cash provided by (used in) operating

activities:

Stock based compensation

259

Realized and unrealized losses on mortgage-backed securities

96,263

25,348

Realized and unrealized (gains) losses on interest rate swaptions

(13,903)

2,589

Realized and unrealized gains on interest rate floors

(1,384)

Realized and unrealized (gains) losses on interest rate swaps

(30,053)

54,934

Realized (gains) losses on forward settling to-be-announced securities

(574)

7,090

Changes in operating assets and liabilities:

Accrued interest receivable

(1,050)

2,350

Other assets

(588)

(655)

Accrued interest payable

(236)

(7,287)

Other liabilities

5,318

(223)

Due to (from) affiliates

(102)

NET CASH PROVIDED BY (USED IN) OPERATING

ACTIVITIES

24,763

(7,096)

CASH FLOWS FROM INVESTING ACTIVITIES:

From mortgage-backed securities investments:

Purchases

(1,764,082)

(1,334,350)

Sales

988,523

1,808,867

Principal repayments

123,880

142,259

Payments on net settlement of to-be-announced securities

(3,289)

(7,602)

Purchase of derivative financial instruments, net of margin cash received

(7,385)

(45,458)

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

(662,353)

563,716

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from repurchase agreements

7,517,156

13,602,710

Principal payments on repurchase agreements

(6,931,062)

(14,240,566)

Cash dividends

(16,030)

(15,416)

Proceeds from issuance of common stock, net of issuance costs

96,908

19,447

Shares withheld from employee stock awards for payment of taxes

(297)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

666,675

(633,825)

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS

AND RESTRICTED CASH

29,085

(77,205)

CASH, CASH EQUIVALENTS AND

RESTRICTED CASH, beginning of the period

299,506

278,655

CASH, CASH EQUIVALENTS AND

RESTRICTED CASH, end of the period

328,591

201,450

SUPPLEMENTAL DISCLOSURE OF

CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

2,176

23,809

SUPPLEMENTAL DISCLOSURE OF

NONCASH INVESTING ACTIVITIES:

Securities acquired settled in later period

217,758

3,450

Securities sold settled in later period

154,977

See Notes to Financial Statements

ORCHID ISLAND

CAPITAL, INC.

NOTES TO CONDENSED

FINANCIAL

STATEMENTS

(Unaudited)

MARCH 31,

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, net of commissions and fees, prior to

its termination in August 2020.

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

Equity Distribution Agreement”) with

four sales agents pursuant to which the Company may offer and sell, from time to time, up to

an aggregate amount of $

150,000,000

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

offerings and privately negotiated

transactions.

Through March 31, 2021, the Company issued a total of

10,156,561

shares under the August 2020 Equity Distribution

Agreement for aggregate gross proceeds of

approximately $

54.1

million, and net proceeds of approximately $

53.2

million, net of

commissions and fees.

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 net

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 net proceeds to the Company

of approximately $

50.1

million, net of

offering expenses.

COVID-19 Impact

Beginning

in mid-March

2020, the

global pandemic

associated

with the novel

coronavirus

(“COVID-19”)

and related

economic

conditions

began to impact

our financial

position and

results of

operations.

As a result

of the economic,

health and

market turmoil

brought

about by COVID-19,

the Agency

RMBS market

experienced

severe dislocations.

This resulted

in falling

prices of our

assets and

increased

margin calls

from our repurchase

agreement

lenders, resulting

in material

adverse effects

on our results

of operations

and to our

financial

condition.

The Agency

RMBS market

largely stabilized

after the

Federal Reserve

announced

on March 23,

2020 that

it would purchase

Agency

RMBS and

U.S. Treasuries

in the amounts

needed to

support smooth

market functioning.

As of March

31, 2021,

we have timely

satisfied

all margin

calls. The

RMBS market

continues to

react to the

pandemic and

the various

measures put

in place to

stabilize the

market.

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,

if the pandemic

continues,

it may continue

to have

materially

adverse effects

on the Company’s

results of

future operations,

financial position,

and liquidity

during 2021.

Basis of

Presentation

and Use of

Estimates

The accompanying

unaudited

financial

statements

have been

prepared in

accordance

with accounting

principles

generally

accepted

in the United

States (“GAAP”)

for interim

financial information

and with the

instructions

to Form 10-Q

and Article

8 of Regulation

S-X.

Accordingly, they

do not include

all of the

information

and footnotes

required by

GAAP for

complete financial

statements.

In the opinion

management,

all adjustments

(consisting

of normal

recurring

accruals)

considered

necessary

for a fair

presentation

have been

included.

Operating

results for

the three

month period

ended March

31, 2021 are

not necessarily

indicative

of the results

that may be

expected for

the year ending

December 31,

2021.

The balance

sheet at December

31, 2020 has

been derived

from the audited

financial statements

at that date

but does not

include all

of the information

and footnotes

required by

GAAP for

complete financial

statements.

For further

information,

refer to the

financial

statements

and footnotes

thereto included

in the Company’s

Annual Report

on Form 10-K

for the year

ended December

31, 2020.

The preparation

of financial

statements

in conformity

with GAAP

requires management

to make estimates

and assumptions

that affect

the reported

amounts of

assets and

liabilities

and disclosure

of contingent

assets and

liabilities

at the date

of the financial

statements

and

the reported

amounts of

revenues and

expenses during

the reporting

period. Actual

results could

differ from

those estimates.

The

significant

estimates

affecting the

accompanying

financial

statements

are the fair

values of RMBS

and derivatives.

Management

believes

the estimates

and assumptions

underlying

the financial

statements

are reasonable

based on the

information

available as

of March 31,

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)

March 31, 2021

December 31, 2020

Cash and cash equivalents

211,436

220,143

Restricted cash

117,155

79,363

Total cash, cash equivalents

and restricted cash

328,591

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

any significant

credit risk

on cash and

cash equivalents

or restricted

cash balances.

Mortgage-Backed

Securities

The Company

invests primarily

in mortgage

pass-through

(“PT”) residential

mortgage backed

certificates

issued by Freddie

Mac,

Fannie Mae

or Ginnie Mae

(“RMBS”),

collateralized

mortgage obligations

(“CMOs”),

interest-only

(“IO”) securities

and inverse

interest-only

(“IIO”) securities

representing interest in or obligations backed by pools of RMBS.

We refer to RMBS and CMOs as PT RMBS. We refer

to IO and IIO securities as structured RMBS. The Company has elected to account for its

investment in RMBS under the fair value

option. Electing the fair value option requires

the Company to record changes in fair value in the statement of operations,

which, in

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

underlying economics and how the portfolio is managed.

The Company

records RMBS

transactions

on the trade

date. Security

purchases that

have not

settled as

of the balance

sheet date

are included

in the RMBS

balance with

an offsetting

liability recorded,

whereas securities

sold that

have not settled

as of the

balance sheet

date are removed

from the RMBS

balance with

an offsetting

receivable recorded.

Fair value

is defined

as the price

that would

be received

to sell the

asset or paid

to transfer

the liability

in an orderly

transaction

between market

participants

at the measurement

date.

The fair value

measurement

assumes that

the transaction

to sell the

asset or

transfer the

liability either

occurs in

the principal

market for

the asset or

liability, or in

the absence

of a principal

market, occurs

in the most

advantageous

market for

the asset or

liability. Estimated

fair values

for RMBS

are based

on independent

pricing sources

and/or third

party

broker quotes,

when available.

Income on PT

RMBS securities

is based on

the stated

interest rate

of the security.

Premiums or

discounts present

at the date

purchase are

not amortized.

Premium lost

and discount

accretion

resulting from

monthly principal

repayments

are reflected

in unrealized

gains (losses)

on RMBS in

the statements

of operations.

For IO securities,

the income

is accrued

based on the

carrying value

and the

effective yield.

The difference

between income

accrued and

the interest

received on

the security

is characterized

as a return

of investment

and serves

to reduce

the asset’s

carrying value.

At each reporting

date, the

effective yield

is adjusted

prospectively

for future

reporting

periods

based on the

new estimate

of prepayments

and the contractual

terms of the

security. For IIO

securities,

effective yield

and income

recognition

calculations

also take

into account

the index value

applicable

to the security.

Changes in

fair value

of RMBS during

each

reporting

period are

recorded in

earnings and

reported as

unrealized

gains or losses

on mortgage-backed

securities

in the accompanying

statements

of operations.

Derivative and Other Hedging Instruments

The Company

uses derivative

and other

hedging instruments

to manage

interest rate

risk, facilitate

asset/liability

strategies

and

manage other

exposures,

and it may

continue to

do so in the

future. The

principal instruments

that the Company

has used to

date are

Treasury Note

(“T-Note”),

Fed Funds and

Eurodollar

futures contracts,

short positions

in U.S. Treasury

securities,

interest rate

swaps,

options to

enter in interest

rate swaps

(“interest

rate swaptions”)

and “to-be-announced”

(“TBA”) securities

transactions,

but the Company

may enter

into other

derivative

and other

hedging instruments

in the future.

The Company

accounts for

TBA securities

as derivative

instruments.

Gains and losses

associated

with TBA

securities

transactions

are reported

in gain (loss)

on derivative

instruments

in the accompanying

statements

of operations.

Derivative

and other

hedging instruments

are carried

at fair value,

and changes

in fair value

are recorded

in earnings

for each period.

The Company’s

derivative

financial

instruments

are not designated

as hedge accounting

relationships,

but rather

are used as

economic

hedges of

its portfolio

assets and

liabilities.

Holding derivatives

creates exposure

to credit

risk related

to the potential

for failure

on the part

of counterparties

and exchanges

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

March 31,

2021 and December

31, 2020 due

to the short-term

nature of

these

financial instruments.

Repurchase

Agreements

The Company

finances the

acquisition

of the majority

of its

RMBS through

the use of

repurchase

agreements

under master

repurchase

agreements.

Repurchase

agreements

are accounted

for as collateralized

financing

transactions,

which are

carried at

their

contractual

amounts, including

accrued interest,

as specified

in the respective

agreements.

Reverse Repurchase

Agreements

and Obligations

to Return Securities

Borrowed under

Reverse Repurchase

Agreements

The Company

borrows

securities

to cover short

sales of U.S.

Treasury securities

through reverse

repurchase

transactions

under our

master repurchase

agreements.

We account for

these as securities

borrowing

transactions

and recognize

an obligation

to return the

borrowed

securities

at fair value

on the balance

sheet based

on the value

of the underlying

borrowed

securities

as of the

reporting

date.

The securities

received as

collateral

in connection

with our reverse

repurchase

agreements

mitigate our

credit risk

exposure to

counterparties.

Our reverse

repurchase

agreements

typically

have maturities

of 30 days

or less.

Manager Compensation

The Company

is externally

managed by

Bimini Advisors,

LLC (the

“Manager”

or “Bimini

Advisors”),

a Maryland

limited liability

company and

wholly-owned

subsidiary

of Bimini.

The Company’s

management

agreement

with the

Manager provides

for payment

to the

Manager of

a management

fee and reimbursement

of certain

operating

expenses, which

are accrued

and expensed

during the

period for

which they

are earned

or incurred.

Refer to

Note 13 for

the terms of

the management

agreement.

Earnings

Per Share

Basic earnings

per share

(“EPS”) is

calculated

as net income

or loss attributable

to common stockholders

divided by

the weighted

average number

of shares

of common stock

outstanding

or subscribed

during the

period. Diluted

EPS is calculated

using the treasury

stock or two-class

method, as

applicable,

for common

stock equivalents,

if any. However, the

common stock

equivalents

are not included

in computing

diluted EPS

if the result

is anti-dilutive.

Income Taxes

Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under

the Internal Revenue Code of 1986,

as amended (the “Code”).

REITs are generally not subject to federal income tax on their REIT taxable income provided that they

distribute to their stockholders at least 90% of their REIT taxable income on an annual

basis. In addition, a REIT must meet other

provisions of the Code to retain its tax status.

Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions

will be sustained upon examination

based on the facts, circumstances and information available at the end of each period.

All of Orchid’s tax positions are categorized as

highly certain.

There is no accrual for any tax, interest or penalties related to Orchid’s tax position

assessment.

The measurement of

uncertain tax positions is adjusted when new information is available, or

when an event occurs that requires a change.

Recent

Accounting

Pronouncements

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

Financial Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments.

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

at amortized cost and certain other instruments to be measured using an expected credit

loss model (referred to as the current

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

statements as its

financial assets were already measured at fair value through earnings.

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

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

Reform on Financial Reporting.

”

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

modifications

on debt instruments, leases, derivatives, and other contracts, related to the expected market

transition from the London Interbank

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

2020-04 generally considers contract modifications related to reference rate reform to

be an event that does not require contract

remeasurement at the modification date nor a reassessment of a previous accounting

determination. The guidance in ASU 2020-04 is

optional and may be elected over time, through December 31, 2022, as reference

rate reform activities occur. The Company does not

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

statements.

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 March

31, 2021 and

December 31,

2020:

(in thousands)

March 31, 2021

December 31, 2020

Pass-Through RMBS Certificates:

Fixed-rate Mortgages

4,297,731

3,560,746

Fixed-rate CMOs

137,453

Total Pass-Through

Certificates

4,297,731

3,698,199

Structured RMBS Certificates:

Interest-Only Securities

35,521

28,696

Inverse Interest-Only Securities

5,284

Total Structured

RMBS Certificates

40,805

28,696

Total

4,338,536

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 March

31, 2021,

the Company

had met all

margin call

requirements.

As of March

31, 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

March 31, 2021

Fair market value of securities pledged, including

accrued interest receivable

58,219

2,288,135

1,316,896

622,666

4,285,916

Repurchase agreement liabilities associated with

these securities

53,526

2,233,561

1,289,617

604,976

4,181,680

Net weighted average borrowing rate

0.24%

0.18%

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

102.6

million and $

58.8

million as of

March 31, 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 March

31, 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

205.9

million.

The Company

did not have

an amount

at risk with

any individual

counterparty

greater than

10% of the

Company’s equity

at March

31, 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

March 31,

2021 and December

31, 2020.

(in thousands)

Derivative and Other Hedging Instruments

Balance Sheet Location

March 31, 2021

December 31, 2020

Assets

Interest rate swaps

Derivative assets, at fair value

25,254

Payer swaptions (long positions)

Derivative assets, at fair value

58,643

17,433

Interest rate floors

Derivative assets, at fair value

2,399

TBA securities

Derivative assets, at fair value

9,456

3,559

Total derivative

assets, at fair value

95,752

20,999

Liabilities

Interest rate swaps

Derivative liabilities, at fair value

24,711

Payer swaptions (short positions)

Derivative liabilities, at fair value

35,057

7,730

TBA securities

Derivative liabilities, at fair value

786

Total derivative

liabilities, at fair value

35,057

33,227

Margin Balances Posted to (from) Counterparties

Futures contracts

Restricted cash

585

489

TBA securities

Restricted cash

1,781

284

TBA securities

Other liabilities

(7,407)

(2,520)

Interest rate swaption contracts

Other liabilities

(13,962)

(3,563)

Interest rate swap contracts

Restricted cash

12,214

19,761

Total margin

balances on derivative contracts

(6,789)

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

March 31,

2021

and December

31, 2020.

($ in thousands)

March 31, 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%

0.21%

(301)

Treasury Note Futures Contracts (Short

Position)

(2)

June 2021 5-year T-Note futures

(Jun 2021 - Jun 2026 Hedge Period)

69,000

0.88%

1.17%

1,036

($ 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)

T-Note futures contracts were valued

at a price of $

123.40

at March 31, 2021 and $

126.16

at December 31, 2020.

The contract values of the

short positions were $

85.1

million and $

87.1

million at March 31, 2021 and December 31, 2020, respectively.

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 March 31,

2021 and December

31, 2020.

($ in thousands)

Average

Net

Fixed

Average

Estimated

Average

Notional

Pay

Receive

Fair

Maturity

Amount

Rate

Value

(Years)

March 31, 2021

Expiration > 3 to ≤ 5 years

955,000

0.64%

0.21%

15,286

4.8

Expiration > 5 years

400,000

1.16%

0.18%

9,968

8.1

1,355,000

0.79%

0.20%

25,254

5.7

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 March 31,

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

1,435

February 3, 2023

80,000

504

1.10%

10Y2Y

964

150,000

1,015

0.94%

2,399

The table

below presents

information

related to

the Company’s

interest rate

swaption positions

at March 31,

2021 and

December 31,

2020.

($ in thousands)

Option

Underlying Swap

Weighted

Average

Weighted

Average

Adjustabl

Average

Fair

Months to

Notional

Fixed

Rate

Term

Expiration

Cost

Value

Expiration

Amount

Rate

(LIBOR)

(Years)

March 31, 2021

Payer Swaptions - long

>1 year ≤ 2 years

25,390

58,643

22.1

1,027,200

2.20%

3 Month

15.0

Payer Swaptions - short

≤ 1 year

(10,720)

(35,057)

10.1

(782,850)

2.20%

3 Month

15.0

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 to purchase and sell TBA

securities as of March 31, 2021 and December 31, 2020

($ in thousands)

Notional

Net

Amount

Cost

Market

Carrying

Long (Short)

(1)

Basis

(2)

Value

(3)

Value

(4)

March 31, 2021

30-Year TBA securities:

2.5%

(250,000)

(257,188)

(256,270)

918

3.0%

(1,062,000)

(1,114,345)

(1,105,807)

8,538

Total

(1,312,000)

(1,371,533)

(1,362,077)

9,456

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 three months ended March 31, 2021 and 2020.

(in thousands)

Three Months Ended March 31,

2021

2020

Eurodollar futures contracts (short positions)

(8,217)

T-Note futures contracts (short position)

2,476

(4,339)

Interest rate swaps

27,123

(60,623)

Payer swaptions (short positions)

(26,167)

Payer swaptions (long positions)

40,070

(2,589)

Interest rate floors

1,384

TBA securities (short positions)

9,133

(7,090)

TBA securities (long positions)

(8,559)

Total

45,472

(82,858)

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 March

31, 2021 and

December 31,

2020.

(in thousands)

March 31, 2021

December 31, 2020

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Counterparties

Agreements

Total

Agreements

Total

PT RMBS - fair value

4,081,596

3,692,811

Structured RMBS - fair value

38,904

27,095

Accrued interest on pledged securities

10,572

9,636

Receivable for securities sold

154,977

Restricted cash

102,575

14,580

117,155

58,829

20,534

79,363

Total

4,388,624

14,580

4,403,204

3,788,371

20,534

3,808,905

Assets Pledged

from Counterparties

The table

below summarizes

our assets

pledged to

us from counterparties

under our

repurchase

agreements,

reverse repurchase

agreements

and derivative

agreements

as of March

31, 2021 and

December 31,

2020.

(in thousands)

March 31, 2021

December 31, 2020

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Orchid

Agreements

Total

Agreements

Total

Cash

21,369

21,468

120

6,083

6,203

U.S. Treasury securities - fair value

737

253

Total

836

21,369

22,205

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

bankruptcy

of either

party to the

transactions.

The Company

reports its

assets and

liabilities

subject to

these arrangements

on a gross

basis.

The following

table presents

information

regarding

those assets

and liabilities

subject to

such arrangements

as if the Company

had

presented

them on a

net basis as

of March 31,

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

March 31, 2021

Interest rate swaps

25,254

Interest rate swaptions

58,643

(13,962)

44,681

Interest rate floors

2,399

TBA securities

9,456

(7,407)

2,049

95,752

(21,369)

74,383

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

March 31, 2021

Repurchase Agreements

4,181,680

(4,079,105)

(102,575)

Interest rate swaptions

35,057

4,216,737

(4,079,105)

(102,575)

35,057

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

three months

ended March

31, 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

Total

18,248,048

96,908

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 eight equity distribution agreements,

seven of which have either been terminated because all shares were sold

or were replaced with a subsequent agreement.

Stock Repurchase Program

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

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 to

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 March 31, 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 three months ended March 31, 2021

and 2020. The remaining authorization under the

repurchase program as of March 31, 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)

0.260

23,374

Totals

11.915

365,337

(1)

April 14, 2021

, the Company declared a dividend of $

0.065

per share to be paid on

May 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 March 31, 2021.

NOTE 8.

STOCK INCENTIVE PLAN

In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder,

approved, the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees,

directors and other service providers, including employees of the Manager and other affiliates. The Incentive Plan provides

for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and

dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards.

The Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except that the

Company’s full Board of Directors will administer awards made to directors who are not employees of the Company or its

affiliates.

The Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of our

common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate

4,000,000

shares of the

Company’s common stock that may be issued under the Incentive Plan.

Performance Units

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

executive officers and employees of its Manager.

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

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

When earned, each

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

Performance Unit will be cancelled.

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

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

shares of common stock.

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

officer or employee of the Company 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 three months ended

March 31, 2021 and 2020.

($ in thousands, except per share data)

Three Months Ended March 31,

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

Vested and issued

(2,277)

7.45

(4,153)

8.20

Unvested, end of period

140,174

5.91

14,868

7.66

Compensation expense during period

Unrecognized compensation expense, end of period

812

Intrinsic value, end of period

842

Weighted-average remaining vesting term (in years)

2.1

0.7

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

to fully vested common stock issued during the three months ended March 31, 2021 and 2020. All of the fully vested shares

of common stock issued during the three months ended March 31, 2021, and the related compensation expense, were

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

($ in thousands, except per share data)

Three Months Ended March 31,

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 three months ended March 31, 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 began to receive a portion of their compensation in the form of deferred stock unit awards

(“DSUs”) pursuant to the Incentive Plan beginning with the awards for the second quarter of 2018.

Each DSU represents a

right to receive one share of the Company’s common stock. The DSUs are immediately vested and are settled at a future

date based on the election of the individual participant.

The DSUs contain dividend equivalent rights, which entitle the

participant to receive distributions declared by the Company on common stock.

These 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 three months ended March 31,

2021 and 2020.

($ in thousands, except per share data)

Three Months Ended March 31,

2021

2020

Weighted

Average

Grant Date

Fair Value

Outstanding, beginning of period

90,946

5.44

43,570

6.56

Granted and vested

10,422

5.31

9,008

5.69

Issued

Outstanding, end of period

101,368

5.43

52,578

6.41

Compensation expense during period

Intrinsic value, end of period

609

155

NOTE 9.

COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and

legal actions arising in the ordinary course of

business. Management is not aware of any reported or unreported contingencies

at March 31, 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

three months

ended March

31, 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

is available

to common

stock

even though

they are considered

participating

securities.

The table

below reconciles

the numerator

and denominator

of EPS for

the three months

ended March

31, 2021 and

2020.

(in thousands, except per share information)

Three Months Ended March 31,

2021

2020

Basic and diluted EPS per common share:

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

Net loss - Basic and diluted

(29,369)

(91,199)

Weighted average shares of common stock:

Shares of common stock outstanding at the balance sheet date

94,411

66,237

Effect of weighting

(9,066)

(1,647)

Weighted average shares-basic and diluted

85,345

64,590

Net loss per common share:

Basic and diluted

(0.34)

(1.41)

Anti-dilutive incentive shares not included in calculation.

242

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 or

observable

markets for

assets similar

to those being

priced. The

spread is then

adjusted based

on variances

in certain

characteristics

between the

market observation

and the asset

being priced.

Those characteristics

include: type

of asset, the

expected life

of the asset,

the

stability and

predictability

of the expected

future cash

flows of the

asset, whether

the coupon

of the asset

is fixed or

adjustable,

the

guarantor

of the security

if applicable,

the coupon,

the maturity, the

issuer, size of

the underlying

loans, year

in which the

underlying

loans

were originated,

loan to value

ratio, state

in which the

underlying

loans reside,

credit score

of the underlying

borrowers

and other variables

if appropriate.

The fair value

of the security

is determined

by using the

adjusted spread.

The Company’s

futures contracts

are Level

1 valuations,

as they are

exchange-traded

instruments

and quoted

market prices

are

readily available.

Futures contracts

are settled

daily. The Company’s

interest rate

swaps and

interest rate

swaptions

are Level

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

three months

ended March

31, 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

active markets,

the Company

looks to market

observable

data for

similar assets.

The following

table presents

financial assets

(liabilities)

measured

at fair value

on a recurring

basis as of

March 31,

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)

March 31, 2021

Mortgage-backed securities

4,338,536

Interest rate swaps

25,254

Interest rate swaptions

23,586

Interest rate floors

2,399

TBA securities

9,456

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 three months ended March 31, 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 $

2.0

million and $

1.7

million

for the three months ended March 31, 2021 and 2020, respectively. At

March 31, 2021 and December 31, 2020, the net

amount due to affiliates was approximately $

0.7

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 March

31, 2021, Bimini

owned

2,595,357

shares, or 2.8%, 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, net of 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 may 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 are deemed to be “at the market” offerings and privately

negotiated transactions. Through March 31,

2021, we issued a total of 10,156,561 shares under the August 2020 Equity Distribution

Agreement for aggregate gross proceeds of

approximately $54.1 million, and net proceeds of approximately $53.2

million, net of commissions and fees.

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 net 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 net proceeds to us of approximately $50.1 million, net of offering expenses.

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 March 31, 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 three months

ended March 31, 2021. The

remaining authorization under the repurchase program as of March 31, 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”), 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 three

months ended

March 31,

2021, as compared

to the

Company’s results

of operations

for the three

months ended

March 31,

2020.

Net (Loss)

Income Summary

Net loss for

the three

months ended

March 31,

2021 was $29.4

million, or

$0.34 per

share. Net

loss for the

three months

ended

March 31, 2020

was $91.2

million, or

$1.41 per

share. The

components

of net loss

for the three

months ended

March 31,

2021 and

2020,

along with

the changes

in those components

are presented

in the table

below:

(in thousands)

2021

2020

Change

Interest income

26,856

35,671

(8,815)

Interest expense

(1,941)

(16,523)

14,582

Net interest income

24,915

19,148

5,767

Losses on RMBS and derivative contracts

(50,791)

(108,206)

57,415

Net portfolio deficiency

(25,876)

(89,058)

63,182

Expenses

(3,493)

(2,141)

(1,352)

Net loss

(29,369)

(91,199)

61,830

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

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

(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

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)

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

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

(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

three months

ended March

31, 2021,

we generated

$24.9 million

of net interest

income, consisting

of $26.9 million

interest income

from RMBS

assets offset

by $1.9 million

of interest

expense on

borrowings.

For the comparable

period ended

March 31,

2020, we generated

$19.1 million

of net interest

income, consisting

of $35.7 million

of interest

income from

RMBS assets

offset by $16.5

million of

interest expense

on borrowings.

The $8.8 million

decrease in

interest income

was due to

a 170 basis

point ("bps")

decrease in

the yield on

average RMBS,

partially offset

by the $762.9

million increase

in average

RMBS. The

$14.6 million

decrease in

interest

expense was

due to a 191

bps decrease

in the average

cost of funds,

partially offset

by a $759.5

million increase

in average

outstanding

borrowings.

We had more

average assets

and borrowings

during the

first quarter

of 2021 compared

to the first

quarter of

2020 as we

deployed the

proceeds of

our capital

raising activity

during the

second half

of 2020 and

the first

quarter of

2021.

On an economic

basis, our

interest

expense on

borrowings

for the three

months ended

March 31,

2021 and 2020

was $6.0 million

and $21.4

million, respectively,

resulting in

$20.9 million

and $14.2

million of

economic net

interest

income, respectively.

The lower

economic interest

expense during

the three

months ended

March 31,

2021 was due

to the 191

bps decrease

in the average

cost of funds

noted above,

partially offset

by the $759.5

million increase

in average

outstanding

borrowings

and the negative

performance

of our

hedging activities

during the

period.

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

each quarter

in 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

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%

($ in thousands)

Net Interest Income

Net Interest Spread

GAAP

Economic

GAAP

Economic

Basis

(2)

Basis

(4)

Three Months Ended

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%

(1)

Portfolio yields and costs of borrowings presented in the tables above

and the tables on pages

29 and 30 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 30 include

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 three

months ended

March 31,

2021 and

2020 was $26.9

million and

$35.7 million,

respectively.

We had

average RMBS

holdings of

$4,032.7 million

and $3,269.9

million for

the three

months ended

March 31,

2021 and 2020,

respectively.

The

yield on our

portfolio

was 2.66%

and 4.36%

for the three

months ended

March 31,

2021 and 2020,

respectively. For

the three

months

ended March

31, 2021 as

compared

to the three

months ended

March 31,

2020, there

was a $8.8

million decrease

in interest

income due

to a 170 bps

decrease in

the yield

on average

RMBS,

partially offset

by a $762.9

million increase

in 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 each quarter

in 2021 to

date and 2020.

($ in thousands)

Average RMBS Held

Interest Income

Realized Yield on Average RMBS

Structured

Three Months Ended

RMBS

Total

RMBS

Total

RMBS

Total

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%

Interest Expense and the Cost of Funds

We had average

outstanding

borrowings

of $3,888.6

million and

$3,129.2 million

and total

interest

expense of

$1.9 million

and $16.5

million for

the three

months ended

March 31,

2021 and 2020,

respectively. Our

average cost

of funds was

0.20% and

2.11% for the three

months ended

March 31,

2021 and

2020, respectively.

Contributing

to the decrease

in interest

expense was

a 191 bps

decrease

in the

average cost

of funds,

partially offset

by a $759.5

million increase

in average

outstanding

borrowings

during the

three months

ended

March 31,

2021 as compared

to the three

months ended

March 31,

2020.

Our economic

interest expense

was $6.0 million

and $21.4

million for

the three

months ended

March 31,

2021 and 2020,

respectively.

There was

a 212 bps

decrease in

the average

economic cost

of funds to

0.62% for

the three

months ended

March 31,

2021 from

2.74%

for the three

months ended

March 31,

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 7

bps above the

average one-month

LIBOR and

3 bps below

the average

six-month

LIBOR for

the quarter

ended March

31, 2021.

Our average

economic cost

of funds was

49 bps above

the average

one-month

LIBOR and

39 bps

above the average

six-month LIBOR

for the quarter

ended March

31, 2021.

The average

term to maturity

of the outstanding

repurchase

agreements

was 43 days

at March

31, 2021 and

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 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

Three Months Ended

Borrowings

Basis

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%

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

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%

Gains or Losses

The table

below presents

our gains

or losses for

the three

months ended

March 31,

2021 and 2020.

(in thousands)

2021

2020

Change

Realized losses on sales of RMBS

(7,397)

(28,380)

20,983

Unrealized (losses) gains on RMBS

(88,866)

3,032

(91,898)

Total losses on

RMBS

(96,263)

(25,348)

(70,915)

Gains (losses) on interest rate futures

2,488

(12,556)

15,044

Gains (losses) on interest rate swaps

27,123

(60,623)

87,746

Losses on payer swaptions (short positions)

(26,167)

Gains (losses) on payer swaptions (long positions)

40,070

(2,589)

42,659

Gains on interest rate floors

1,384

Losses on TBA securities (long positions)

(8,559)

Gains (losses) on TBA securities (short positions)

9,133

(7,090)

16,223

Total

(50,791)

(108,206)

57,415

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

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 three

months ended

March 31,

2021 and 2020,

we received

proceeds of

$988.5 million

and $1,808.9

million,

respectively, from

the sales of

RMBS. Most

of these sales

in the first

quarter of

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.

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.

As rates increased

during the

three months

ended March

31, 2021,

it had a negative

impact on

our RMBS

portfolio.

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)

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

Total

operating expenses were approximately $3.5 million and $2.1 million for the three months ended March 31, 2021

and 2020, respectively.

The table below presents a breakdown of operating expenses for the three months ended March

31, 2021 and 2020.

(in thousands)

2021

2020

Change

Management fees

1,621

1,377

244

Overhead allocation

404

347

Accrued incentive compensation

364

(436)

800

Directors fees and liability insurance

272

260

Audit, legal and other professional fees

318

255

Other direct REIT operating expenses

421

206

215

Other expenses

132

(39)

Total expenses

3,493

2,141

1,352

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

March 31, 2021

4,032,716

453,353

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

Financial

Condition:

Mortgage-Backed Securities

As of March

31, 2021,

our RMBS portfolio

consisted of

$4,338.5 million

of Agency RMBS

at fair value

and had a

weighted average

coupon on

assets of 3.02%.

During the

three months

ended March

31, 2021,

we received

principal repayments

of $123.9

million

compared to

$142.3 million

for the three

months ended

March 31,

2020.

The average

three month

prepayment

speeds for

the quarters

ended March

31, 2021 and

2020 were

12.0% and

11.9%, 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.

Assets that

were not owned

for the entire

quarter have

been excluded

from the calculation.

The exclusion

of certain

assets during

periods of high

trading activity

can create a

very high,

and often volatile,

reliance on

a small sample

of underlying

loans.

Structured

PT RMBS

RMBS

Total

Three Months Ended

Portfolio (%)

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

March 31,

2021 and

December 31,

2020:

($ in thousands)

Weighted

Percentage

Average

Weighted

Maturity

Fair

Entire

Average

Longest

Asset Category

Value

Portfolio

Coupon

Months

Maturity

March 31, 2021

Fixed Rate RMBS

4,297,731

99.1%

2.95%

335

1-Mar-51

Total Mortgage-backed Pass-through

4,297,731

99.1%

2.95%

335

1-Mar-51

Interest-Only Securities

35,521

0.8%

3.98%

264

25-May-50

Inverse Interest-Only Securities

5,284

0.1%

3.77%

311

15-Jun-42

Total Structured RMBS

40,805

0.9%

3.93%

275

25-May-50

Total Mortgage Assets

4,338,536

100.0%

3.02%

331

1-Mar-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)

March 31, 2021

December 31, 2020

Percentage of

Agency

Fair Value

Entire Portfolio

Fair Value

Entire Portfolio

Fannie Mae

3,439,588

79.3%

2,733,960

73.4%

Freddie Mac

898,948

20.7%

992,935

26.6%

Total Portfolio

4,338,536

100.0%

3,726,895

100.0%

March 31, 2021

December 31, 2020

Weighted Average Pass-through Purchase Price

107.56

107.43

Weighted Average Structured Purchase Price

18.69

20.06

Weighted Average Pass-through Current Price

106.14

108.94

Weighted Average Structured Current Price

13.83

10.87

Effective Duration

(1)

4.090

2.360

(1)

Effective duration is the approximate percentage change

in price for a 100 bps change in rates.

An effective duration of 4.090 indicates that an

interest rate increase of 1.0% would be expected to cause a 4.090% decrease in

the value of the RMBS in the Company’s investment

portfolio

at March 31, 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 three

months ended

March 31, 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

1,971,296

107.09

1.38%

1,334,350

107.18

2.28%

Structured RMBS

4,807

6.93

0.14

0.00%

Borrowings

As of March

31, 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

21 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 March

31, 2021,

we had obligations

outstanding

under the

repurchase

agreements

of approximately

$4,181.7 million

with a net

weighted average

borrowing

cost of 0.18%.

The remaining

maturity of

our outstanding

repurchase

agreement

obligations

ranged from

1 to

166 days, with

a weighted

average remaining

maturity of

43 days.

Securing the

repurchase

agreement

obligations

as of March

31, 2021

are RMBS

with an estimated

fair value,

including accrued

interest,

of approximately

$4,285.9 million

and a weighted

average maturity

339 months,

and cash pledged

to counterparties

of approximately

$102.6 million.

Through April

30, 2021,

we have been

able to maintain

our repurchase

facilities

with comparable

terms to those

that existed

at March 31,

2021 with

maturities

through October

8, 2021.

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

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 three

months

ended March

31, 2021,

haircuts on

our pledged

collateral

remained

stable and

as of March

31, 2021,

our weighted

average haircut

was

approximately

5.0% of the

value of our

collateral.

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

4,181,680

Interest expense on repurchase agreements

(1)

1,800

Totals

4,183,480

(1)

Interest expense

on repurchase

agreements is

based on current

interest rates

as of March 31,

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 March

31, 2021,

we had cash

and cash equivalents

of $211.4 million.

We generated

cash flows

of $149.7

million from

principal and

interest

payments on

our RMBS

and had average

repurchase

agreements

outstanding

of $3,888.6

million during

the three

months ended

March 31,

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, net of 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

may 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

are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31,

2021, we issued a total of

10,156,561 shares under the August 2020 Equity Distribution Agreement for aggregate

gross proceeds of approximately $54.1 million,

and net proceeds of approximately $53.2 million, net of commissions and fees.

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 net 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 net proceeds to us of

approximately $50.1 million, net of offering expenses payable.

Outlook

Economic Summary

During the first

quarter of 2021

the economy

made tremendous

strides towards

recovery from

the COVID-19

pandemic.

Evidence of

the recovery

was pervasive.

New cases of

COVID-19, which

peaked around

the turn of

the year, moderated

significantly, as

did hospitalizations

and deaths.

As a result

of the U.S. Senate

run-off elections

in early January,

both of which

were won by

Democrats,

one party was

now in control

of the White

House and both

houses of Congress.

This led the

way to a

new stimulus

package being

passed that was

at the high

end of market

expectations

- $1.9 trillion.

The American

Rescue Plan

Act of 2021 was

signed into

law on March

11, 2021.

This marked

the third legislative

act related

to the nation’s

recovery from

the COVID-19

pandemic, after

the $2.2 trillion

CARES Act (described

below), which

passed on March

27, 2020 and

the $2.3

trillion

Consolidated

Appropriations

Act of 2021,

which contained

$900 billion

of COVID-19

relief and was

signed on December

27, 2020.

Given the momentum

the administration

had after passing

the American

Rescue Plan

Act of 2021,

President

Biden

shortly thereafter

announced plans

for a $2 trillion-plus

infrastructure

bill.

The vaccine

roll-out,

which initially

seemed

haphazard, improved

to the point

where the U.S.

became a world

leader.

The U.S. was

well on its

way to herd

immunity as

over 200 million

inoculations

were administered

by April 21, 2021,

well ahead

of even the

most optimistic

projections at

the

beginning of

the year.

Economic data

released over

the course of

the first quarter

has been consistently

very strong.

Fueled

by two rounds

of stimulus

checks

during the first

quarter, consumers

have been spending.

Retail sales,

home sales, demand

for new cars

and other durable

goods are all

benefitting

from the stimulus

and considerable

pent-up demand.

Job growth

appears to be

accelerating

quickly, and the unemployment

rate has dropped

to 6.0%.

All of the developments

described

above have stoked

inflation fears.

The most obvious

evidence of

potential price

pressures relate

to supply shortages

of a

variety of

consumer goods

and commodities

caused by the

combination

of still constrained

production and

surging demand

that have begun

to surface

across the

economy.

The factors

highlighted

above have led

to a surging

economy, which grew

at an annualized

rate of 6.4%

during the

first

quarter.

They have also

impacted the

financial markets.

The various

broad equity

indices are

making new all-time

highs on a

frequent basis,

and corporate

debt issuance

levels – both

investment

grade and high

yield – are

at or near record

levels

reflecting

the demand for

capital and

investor appetite

for yield.

U.S. Treasury rates,

at least longer-term

rates, have

risen

significantly. The

ten-year U.S.

Treasury note yield

increased from

0.916% to 1.742%

over the course

of the first

quarter, an

increase of

82.6 basis points,

and the U.S.

Treasury curve

has steepened

substantially.

The market

has moved up

expectations

for a recovery

from the pandemic

and return to

normalcy significantly.

The Federal

Reserve (the

“Fed”) gave

green light

to higher rates,

referring to

them as a sign

of economic

strength.

However, when the

market has

attempted to

price

in an acceleration

to the timing

of the rate increases

by the Fed,

the Fed has

pushed back

against such

sentiment.

These

efforts have largely

been successful,

and current

market pricing

only reflects

one interest

rate hike by

the end of 2022.

Legislative

Response and

the Federal

Reserve

Congress passed

the CARES Act

quickly in

response to

the pandemic’s

emergence last

spring and followed

with

additional legislation

over the ensuing

months.

However, as certain

provisions

of the CARES

Act expired,

such as

supplemental

unemployment

insurance last

July, there appeared

to be a need

for additional

stimulus for

the economy

to deal

with the surge

in the pandemic

that occurred

as cold

weather set in,

particularly

over the Christmas

holiday.

As mentioned

above, the Federal

government eventually

passed an additional

stimulus package

in late December

of 2020 and again

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

expected to temporarily

surpass the

2% target level.

Further, the Fed

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.

As mentioned

above, this

appears to

occurring early

in 2021 now that

effective vaccines

have been found

and inoculations

are distributed

at an accelerating

pace.

Interest Rates

Interest rates

steadily increased

throughout the

first quarter

as described

above and levels

of implied

volatility

rose as well.

Mortgage rates

slowly declined

at the end of

2020 as originators

added capacity

and could handle

ever increasing

levels of

production volume.

This trend in

mortgage rates

quickly reversed

during the first

quarter of 2021

as rates began

to increase,

especially

in late February

and March. With

the increase

in interest

rates, prepayment

activity slowed.

The percent

of the

Agency RMBS

universe with

sufficient rate

incentive to

economically

refinance has

declined from

approximately

80% at the

end of 2020 to

approximately

46% at the end

of the first

quarter. However, the

spread between

rates available

to borrowers

and the implied

yield on a current

coupon mortgage,

known as the

primary/secondary

spread, has

continued to

compress.

The spread is

still slightly

above long-term

average levels

so further

compression

is possible,

meaning rates

available to

borrowers could

remain at current

levels even

if U.S. Treasury

rates increased

further. Since the

end of the first

quarter,

interest rates

have declined

by approximately

20 basis points

in the case

of the 10-year

U.S. Treasury

note.

Accordingly,

prepayment levels

on RMBS securities

are likely

to remain high

unless U.S.

Treasury rates

increase above

current levels.

The Agency RMBS

Market

The market

conditions that

prevailed throughout

the first quarter

were not conducive

to mortgage

performance.

In fact,

apart from

high yield

bonds, all fixed

income sectors

had negative returns

for quarter.

Interest rates

rose rapidly, and volatility

was elevated.

Agency RMBS

had negative

absolute and

excess returns

for the first

quarter of -1.2%

and -0.3%, respectively

(both vs U.S

Treasuries

and LIBOR/swaps).

There is a

benefit to higher

interest rates,

and as interest

rates rose

prepayment

levels declined.

The Mortgage

Bankers Association

refinance index

declined from

approximately

4700 in early

January 2021

to approximately

2900 in early

April 2021,

before rebounding

slightly in

mid-April 2021.

The Agency RMBS

market continues

to be essentially

bifurcated with

two separate

and distinct

sub-markets.

Lower coupon fixed

rate mortgages,

coupons

of 1.5%

through 2.5%,

are purchased

by the Fed.

Fed purchase

activity maintains

substantial

price pressure

under these coupons,

and they benefit

from attractive

TBA dollar

roll drops.

Higher coupons

in the TBA market

do not have

the benefit

of Fed

purchases.

Importantly, the Fed

tends to take

the worst

performing

collateral

out of the market.

The absence of

Fed

purchases of

higher coupons

means the market

is left to absorb

still very

high prepayment

speeds on these

securities

as rates

have not risen

enough to eliminate

the economic

incentive to

refinance.

The market

expects prepayments

on higher coupons

will eventually

decline as “burn

out” sets in

– a phenomenon

whereby refinancing

activity declines

as borrowers

are exposed to

refinancing

incentives

for an extended

period.

Through the

March 2021 prepayment

report released

in early April,

this has yet

to occur.

While market

participants

continue to favor

specified

pools that have

favorable

prepayment characteristics

that mute

the refinance

incentive,

the premium

over generic

TBA securities

has declined

significantly

with the reduced

refinance

incentive caused

by the increase

in rates available

to borrowers.

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. Chairman

Powell has

also maintained

that the Fed

expects to

maintain interest

rates at this

level until

the Fed is confident

that the economy

has weathered

the pandemic

and its impact

on economic

activity

and is on track

to achieve its

maximum employment

and price stability

goals. 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 by President

Trump on March

27, 2020.

The CARES

Act

provided many

forms of direct

support to individuals

and small businesses

in order to

stem the steep

decline in

economic

activity.

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

provides an

additional $484

billion of

funding to

individuals,

small businesses,

hospitals, health

care providers

and additional

coronavirus

testing efforts.

Various provisions

the CARES Act

began to expire

in July 2020,

including a

moratorium

on evictions

(July 25, 2020),

expanded unemployment

benefits (July

31, 2020), and

a moratorium

on foreclosures

(August 31, 2020).

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

temporarily

halt residential

evictions and

foreclosures,

including through

temporary financial

assistance.

On December

27, 2020, President

Trump signed into

law an additional

$900 billion

coronavirus

aid package 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

further extended

to June 30,

2021 on March

29, 2021.

In addition,

on February

9, 2021, the

FHFA announced that

the

foreclosure

moratorium

begun under the

CARES Act for

loans backed

by Fannie Mae

and Freddie

Mac and the

eviction

moratorium

for real estate

owned by Fannie

Mae and Freddie

Mac were extended

until March

31, 2021, which

was further

extended to

June 30, 2021

on February

25,

2021. On February

16, 2021, the

U.S. Housing

and Urban Development

Department announced

the extension

of the FHA eviction

and foreclosure

moratorium

to June 30, 2021.

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.

In January 2019,

the Trump administration

made statements

of its plans

to work with

Congress to

overhaul Fannie

Mae

and Freddie

Mac and expectations

to announce a

framework

for the development

of a policy

for comprehensive

housing

finance reform

soon. On September

30, 2019, the

FHFA announced that

Fannie Mae

and Freddie

Mac were allowed

increase their

capital buffers

to $25 billion

and $20 billion,

respectively, from

the prior limit

of $3 billion

each. This

step could

ultimately

lead to Fannie

Mae and Freddie

Mac being privatized

and represents

the first

concrete step

on the road

to GSE

reform.

On June 30, 2020,

the FHFA released

a proposed rule

on a new regulatory

framework

for the GSEs

which seeks

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 or

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.

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,

including its

most recent

meeting in April

of 2021. If the

Fed modifies,

reduces or

suspends its

purchases of

Agency RMBS,

our investment

portfolio

could be negatively

impacted. Further,

the moratoriums

on foreclosures

and evictions

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 foreclosure

or evictions,

when and if it

occurs, these

loans may be

removed from

the pool into

which

they were securitized.

If this were

to occur, it would

have the effect

of delaying

a prepayment

on the Company’s

securities

until

such time.

As the majority

of the Company’s

Agency RMBS

assets were

acquired at

a premium

to par, this will

tend to

increase the

realized yield

on the asset

in question.

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 to

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

COVID-19 continues

to dominate the

performance

of the markets

and economy.

In the case

of the first

quarter of 2021

this meant the

recovery from

the pandemic,

in stark contrast

to the first

quarter of 2020

when the pandemic

first emerged

in the

U.S. The recovery

has been driven

by many factors

– the emergence

and widespread

distribution

of a very effective

vaccine,

substantial

government stimulus

and accommodative

monetary policy. The

economy is recovering

rapidly as

the emergence

an effective vaccine

has allowed

pent-up demand

to lead to

a surge in demand

for goods and

services,

fueled further

multiple rounds

of stimulus

checks and numerous

other means

of financial

support provided

by the government.

Financial

markets are

benefiting from

extremely lose

financial conditions,

abundant liquidity,

high risk

tolerance and

an insatiable

demand for returns.

The surge in

economic activity

during the first

quarter of 2021

and expectations

for activity

to return to

pre-pandemic

levels

much sooner

than anticipated

caused interest

rates to rise

rapidly as

well.

The yield on

the 10-year

U.S. Treasury

note

increased by

over 82 basis

points and closed

the quarter

at approximately

1.75%, not far

below the yield

level that prevailed

last January

before the pandemic

emerged last

March.

In addition,

the U.S. Treasury

curve has steepened

as the market

fears an outbreak

in inflation

caused by the

combination

of abundant liquidity

via government

stimulus,

loose financial

conditions and

very strong

demand for all

types of goods

and services.

Constrained

supply

of needed raw

materials,

various

inputs to consumer

goods, such

as micro chips,

and even labor

have exacerbated

the upward

pressure on

prices. It

remains to

be seen if these

price pressures

prove to be temporary

or lead to more

sustained inflation.

The Fed believes

the effects are

transitory.

Current market

pricing is

roughly in line

with the Fed’s

view as the

Eurodollar

and Fed Funds

futures markets

only

reflect at

most one interest

rate hike by

the end of 2022.

The Agency RMBS

market did

not perform

well during

the first quarter

as market conditions

– rapidly rising

rates and

increased volatility

– led to extension

fears in mortgage

cash flows,

driving convexity

related selling

and spread widening.

Agency RMBS

had negative

absolute and

excess returns

for the first

quarter of 2021

of -1.2% and

-0.3%, respectively

(both vs

U.S. Treasuries

and LIBOR/swaps).

A positive impact

from higher

rates and lowered

prepayment expectations

is slower

premium amortization,

which enhances

net income

all else equal.

The Mortgage

Bankers Association

refinance index

declined

from approximately

4700 in early

January 2021

to approximately

2900 in early

April, before

rebounding slightly

in mid-April.

was the case

for much of

2020, the Agency

RMBS market

continues to

be essentially

bifurcated with

two separate

and distinct

sub-markets.

Lower coupon

fixed rate mortgages,

coupons of 1.5%

through 2.5%,

are purchased

by the Fed and

benefit from

the substantial

price pressure

and attractive

TBA dollar

roll drops.

Higher coupons

in the TBA market

do not have

the benefit

of Fed purchases,

so the market

is left to

absorb still

very high prepayment

speeds on

these securities

as rates have

not risen

enough to eliminate

the economic

incentive to

refinance.

The market

expects prepayments

on higher coupons

will eventually

decline as “burn

out” sets in,

although this

has yet to occur.

One final element

to poor MBS

performance

for the quarter

was

the impact of

higher rates

on the premiums

paid for specified

pools.

The

premium over

generic TBA

securities

has declined

significantly

with the reduced

refinance incentive

caused by the

increase in

rates available

to borrowers.

Now that the

containment

of the COVID-19

pandemic appears

to be within

sight, at least

in the U.S.,

the economy

and life

as we were

accustomed to

should return

to pre-pandemic

norms.

The key questions

the market

must grapple

with going

forward relate

to whether there

have been any

permanent changes

that will result,

including, for

example, inflationary

pressures resulting

from the unprecedented

government stimulus

and monetary

quantitative

easing by the

Fed, the impact

the many technological

advancements

that were born

out of the pandemic,

such as employees’

ability to effectively

work

remotely, the

desire to live

in congested cities

and the implications

for commercial

real estate values

for the cities

that many

may not want

to return to,

and the willingness

to gather in

large numbers

or travel by

air. These factors

will matter

to the

Company to the

extent they

impact the levels

of interest

rates and the

efficacy of refinancing

specifically, and

economic activity

and inflation

generally.

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 March 31, 2021, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At March 31, 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)

0.260

23,374

Totals

11.915

365,337

(1)

On April 14, 2021, the Company declared a dividend of $0.065 per

share to be paid on May 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 March 31, 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 March 31, 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 March 31, 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 March 31, 2021

-200 Basis Points

(0.93)%

(8.66)%

-100 Basis Points

0.03%

0.29%

-50 Basis Points

0.20%

1.87%

+50 Basis Points

(0.60)%

(5.61)%

+100 Basis Points

(1.45)%

(13.50)%

+200 Basis Points

(3.57)%

(33.27)%

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 March 31,

2021, we had unrestricted cash and cash equivalents of $211.4 million and unpledged securities of approximately $218.0

million (not including 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

March 31, 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

The table below

presents the

Company’s share

repurchase activity

for the three

months ended

March 31, 2021.

Shares Purchased

Maximum Number

Total Number

Weighted-Average

as Part of Publicly

of Shares That May Yet

of Shares

Price Paid

Announced

Be Repurchased Under

Repurchased

(1)

Per Share

Programs

(2)

the Authorization

(2)

January 1, 2021 - January 31, 2021

837,311

February 1, 2021 - February 28, 2021

837,311

March 1, 2021 - March 31, 2021

50,577

5.88

837,311

Totals / Weighted Average

50,577

5.88

837,311

(1)

Includes shares

of the Company’s

common stock

acquired by the

Company in connection

with the satisfaction

of tax withholding

obligations on

vested employment-related

awards under

equity incentive

plans. These repurchases

do not reduce

the number of shares

available under

the stock

repurchase program

authorization.

(2)

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. 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

March 31,

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).

10.1

2021 Long-Term Incentive Compensation Plan*†

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:

April 30, 2021

By:

/s/ Robert E. Cauley

Robert E. Cauley

Chief Executive Officer, President and Chairman of the Board

(Principal Executive Officer)

Date:

April 30, 2021

By:

/s/ George H. Haas, IV

George H. Haas,

Secretary, Chief Financial Officer, Chief Investment Officer and

Director (Principal Financial and Accounting Officer)