Orchid Island Capital, Inc. - Quarter Report: 2022 March (Form 10-Q)

orc10q20220331

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, 2022

☐

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number

001-35236

Orchid Island Capital, Inc.

(Exact name of registrant as specified in its charter)

Maryland

27-3269228

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3305 Flamingo Drive

Vero Beach

Florida

32963

(Address of principal executive offices) (Zip Code)

(

772

)

231-1400

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading Symbol:

Name of Each Exchange on Which

Registered

Common Stock, $0.01 par value

ORC

New York Stock Exchange

Indicate by

check mark

whether the

registrant (1) has

filed all

reports required

to be

filed by

Section 13 or

15(d) of

the Securities

Exchange Act

1934 during the preceding 12 months (or for such shorter

period that the registrant was required to file such

reports), and (2) has been subject to such

filing requirements for the past 90 days.

Yes

☒

☐

Indicate by check

mark whether the registrant

has submitted electronically every

Interactive Data File required

to be submitted pursuant

to Rule 405

of Regulation S-T (§232.405 of this chapter) during the preceding 12

months (or for such shorter period that the registrant was

required to submit such

files).

Yes

☒

☐

Indicate by check mark whether the registrant is

a large accelerated filer,

an accelerated filer, a non-accelerated filer,

a smaller reporting company,

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company,

indicate by check mark if the registrant has

elected not to use the extended transition period

for complying with any

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

☐

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

Yes

☐

☒

Number of shares outstanding at April 28, 2022:

177,117,186

ORCHID ISLAND

CAPITAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL

INFORMATION

ITEM 1. Financial

Statements

Condensed

Balance Sheets

(unaudited)

Condensed

Statements

of Operations

(unaudited)

Condensed

Statements

of Stockholders’

Equity (unaudited)

Condensed

Statements

of Cash Flows

(unaudited)

Notes to

Condensed

Financial

Statements

(unaudited)

ITEM 2. Management’s

Discussion

and Analysis

of Financial

Condition

and Results

of Operations

ITEM 3. Quantitative

and Qualitative

Disclosures

about Market

Risk

ITEM 4. Controls

and Procedures

PART II. OTHER INFORMATION

ITEM 1. Legal

Proceedings

ITEM 1A.

Risk Factors

ITEM 2. Unregistered

Sales of Equity

Securities

and Use of

Proceeds

ITEM 3. Defaults

upon Senior

Securities

ITEM 4. Mine

Safety Disclosures

ITEM 5. Other

Information

ITEM 6. Exhibits

SIGNATURES

PART I. FINANCIAL

INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.

CONDENSED BALANCE SHEETS

($ in thousands, except per share data)

(Unaudited)

March 31,

December 31,

2022

2021

ASSETS:

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

of $

4,576,847

and $

6,506,372

, respectively)

4,580,594

6,511,095

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

36,477

and $

29,740

, respectively)

36,477

37,175

Cash and cash equivalents

297,246

385,143

Restricted cash

130,199

65,299

Accrued interest receivable

14,853

18,859

Derivative assets

126,910

50,786

Other assets

1,153

320

Total Assets

5,187,432

7,068,677

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

Repurchase agreements

4,464,109

6,244,106

Dividends payable

7,996

11,530

Derivative liabilities

25,535

7,589

Accrued interest payable

1,018

788

Due to affiliates

1,066

1,062

Other liabilities

95,290

35,505

Total Liabilities

4,595,014

6,300,580

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, 2022 and December 31, 2021

Common Stock, $

0.01

par value;

500,000,000

shares authorized,

177,117,186

shares issued and outstanding as of March 31, 2022 and

176,993,049

shares issued

and outstanding as of December 31, 2021

1,771

1,770

Additional paid-in capital

822,128

849,081

Accumulated deficit

(231,481)

(82,754)

Total Stockholders' Equity

592,418

768,097

Total Liabilities

and Stockholders' Equity

5,187,432

7,068,677

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF OPERATIONS

(Unaudited)

For the Three Months Ended March 31, 2022 and 2021

($ in thousands, except per share data)

Three Months Ended March 31,

2022

2021

Interest income

41,857

26,856

Interest expense

(2,655)

(1,941)

Net interest income

39,202

24,915

Realized losses on mortgage-backed securities

(51,086)

(7,397)

Unrealized losses on mortgage-backed securities and U.S. Treasury

Notes

(309,962)

(88,866)

Gains on derivative and other hedging instruments

177,816

45,472

Net portfolio loss

(144,030)

(25,876)

Expenses:

Management fees

2,634

1,621

Allocated overhead

441

404

Incentive compensation

237

364

Directors' fees and liability insurance

311

272

Audit, legal and other professional fees

304

318

Direct REIT operating expenses

643

421

Other administrative

127

Total expenses

4,697

3,493

Net loss

(148,727)

(29,369)

Basic and diluted net loss per share

(0.84)

(0.34)

Weighted Average Shares Outstanding

176,997,566

85,344,954

Dividends declared per common share

0.155

0.195

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Three Months Ended March 31, 2022 and 2021

(in thousands)

Additional

Retained

Common Stock

Paid-in

Earnings

Par Value

Capital

(Deficit)

Total

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

Balances, January 1, 2022

176,993

1,770

849,081

(82,754)

768,097

Net loss

(148,727)

Cash dividends declared

(27,492)

Stock based awards and amortization

124

539

540

Balances, March 31, 2022

177,117

1,771

822,128

(231,481)

592,418

See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF CASH FLOWS

(Unaudited)

For the Three Months Ended March 31, 2022 and 2021

($ in thousands)

2022

2021

CASH FLOWS FROM OPERATING

ACTIVITIES:

Net loss

(148,727)

(29,369)

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

Stock based compensation

162

259

Realized and unrealized losses on mortgage-backed securities

360,350

96,263

Unrealized losses on U.S. Treasury Notes

698

Realized and unrealized gains on derivative instruments

(101,921)

(45,914)

Changes in operating assets and liabilities:

Accrued interest receivable

4,006

(1,050)

Other assets

(833)

(588)

Accrued interest payable

230

(236)

Other liabilities

204

5,318

Due to affiliates

NET CASH PROVIDED BY OPERATING

ACTIVITIES

114,173

24,763

CASH FLOWS FROM INVESTING ACTIVITIES:

From mortgage-backed securities investments:

Purchases

(1,764,082)

Sales

1,413,039

988,523

Principal repayments

157,112

123,880

Net proceeds from (payments on) derivative instruments

103,900

(10,674)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

1,674,051

(662,353)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from repurchase agreements

12,861,900

7,517,156

Principal payments on repurchase agreements

(14,641,897)

(6,931,062)

Cash dividends

(31,010)

(16,030)

Proceeds from issuance of common stock, net of issuance costs

96,908

Shares withheld from employee stock awards for payment of taxes

(214)

(297)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

(1,811,221)

666,675

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS

AND RESTRICTED CASH

(22,997)

29,085

CASH, CASH EQUIVALENTS

AND RESTRICTED CASH, beginning of the period

450,442

299,506

CASH, CASH EQUIVALENTS

AND RESTRICTED CASH, end of the period

427,445

328,591

SUPPLEMENTAL DISCLOSURE OF

CASH FLOW INFORMATION:

Cash paid during the period for:

Interest

2,425

2,176

SUPPLEMENTAL DISCLOSURE OF

NONCASH INVESTING ACTIVITIES:

Securities acquired settled in later period

217,758

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,

2022

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

2020 Equity Distribution Agreement”) with

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

up to an aggregate amount of $

150,000,000

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

negotiated

transactions.

The Company issued a total of

27,493,650

shares under the August 2020 Equity Distribution Agreement for aggregate

gross proceeds of

approximately $

150.0

million, and net proceeds of approximately $

147.4

million, after commissions and fees, prior to

its termination in June 2021.

On January 20, 2021, Orchid entered into an underwriting agreement (the “January

2021 Underwriting Agreement”) with J.P.

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

7,600,000

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

Morgan purchased the shares of the Company’s common stock from the Company pursuant

to the January 2021 Underwriting

Agreement at $

5.20

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

1,140,000

shares of the Company’s common stock on the same terms and conditions, which

J.P.

Morgan exercised in full on January

21, 2021. The closing of the offering of

8,740,000

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

proceeds to the Company of approximately $

45.2

million, net of offering expenses.

On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021

Underwriting Agreement”) with J.P. Morgan,

relating to the offer and sale of

8,000,000

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

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

Agreement at $

5.45

per share. In addition, the

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

1,200,000

shares of the Company’s common stock on

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

9,200,000

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

of approximately $

50.0

million, net of

offering expenses.

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

2021 Equity Distribution Agreement”) with four

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

an aggregate amount of $

250,000,000

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

negotiated

transactions. The Company issued a total of

49,407,336

shares under the June 2021 Equity Distribution Agreement for aggregate

gross proceeds of approximately $

250.0

million, and net proceeds of approximately $

246.0

million, after commissions and fees, prior to

its termination in October 2021.

On October 29, 2021, Orchid entered into an equity distribution agreement (the

“October 2021 Equity Distribution Agreement”) with

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

up to an aggregate amount of $

250,000,000

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

offerings and privately negotiated

transactions.

Through March 31, 2022, the Company issued a total of

15,835,700

shares under the October 2021 Equity Distribution

Agreement for aggregate gross proceeds of approximately $

78.3

million, and net proceeds of approximately $

77.0

million, after

commissions and fees. Subsequent to March 31, 2022 through April 29, 2022,

the Company issued no shares under the October 2021

Equity Distribution Agreement.

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, 2022

are not necessarily

indicative

of the results

that may

be expected

for

the year

ending December

31, 2022.

The balance

sheet at

December

31, 2021

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, 2021.

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,

2022.

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, 2022

December 31, 2021

Cash and cash equivalents

297,246

385,143

Restricted cash

130,199

65,299

Total cash, cash equivalents

and restricted cash

427,445

450,442

The Company

maintains

cash balances

at three

banks and

excess margin

on account

with two

exchange clearing

members.

At times,

balances may

exceed federally

insured limits.

The Company

has not

experienced

any losses

related to

these balances.

The Federal

Deposit Insurance

Corporation

insures eligible

accounts

up to $250,000

per depositor

at each financial

institution.

Restricted

cash

balances are

uninsured,

but are held

in separate

customer accounts

that are

segregated

from the

general funds

of the counterparty.

The

Company limits

uninsured

balances

to only large,

well-known

banks and

exchange clearing

members and

believes that

it is not

exposed to

any significant

credit risk

on cash and

cash equivalents

or restricted

cash balances.

Mortgage-Backed

Securities

and U.S.

Treasury Notes

The Company

invests primarily

in mortgage

pass-through

(“PT”) residential

mortgage

backed securities

(“RMBS”)

and collateralized

mortgage

obligations

(“CMOs”)

issued by

Freddie Mac,

Fannie Mae

or Ginnie

Mae,

interest-only

(“IO”) securities

and inverse

interest-only

(“IIO”) securities

representing interest in or obligations backed by pools of RMBS. We refer to RMBS

and CMOs as PT RMBS. We refer

to IO and IIO securities as structured RMBS. The Company also invests in U.S.

Treasury Notes, primarily to satisfy collateral

requirements of derivative counterparties. The Company has elected to account

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

under the fair value option. Electing the fair value option requires the Company

to record changes in fair value in the statement of

operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period

and

is consistent with the underlying economics and how the portfolio is managed.

The Company

records securities

transactions

on the trade

date. Security

purchases

that have

not settled

as of the

balance sheet

date

are included

in the portfolio

balance with

an offsetting

liability

recorded,

whereas securities

sold that

have not

settled as

of the balance

sheet date

are

removed from

the portfolio

balance with

an offsetting

receivable

recorded.

Fair value

is defined

as the price

that would

be received

to sell the

asset or

paid to transfer

the liability

in an orderly

transaction

between market

participants

at the measurement

date.

The fair

value measurement

assumes

that the

transaction

to sell the

asset or

transfer

the liability

either occurs

in the principal

market for

the asset

or liability, or

in the absence

of a principal

market, occurs

in the most

advantageous

market for

the asset

or liability. Estimated

fair values

for RMBS

are based

on independent

pricing sources

and/or third

party

broker quotes,

when available.

Estimated

fair values

for U.S.

Treasury Notes

are based

on quoted

prices for

identical

assets in

active

markets.

Income on

PT RMBS

and U.S. Treasury

Notes is based

on the stated

interest

rate of the

security. Premiums

or discounts

present

the date

of purchase

are not amortized.

Premium lost

and discount

accretion

resulting

from monthly

principal

repayments

are reflected

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

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”),

federal funds

(“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.

Gains and

losses on

derivatives,

except those

that result

in cash receipts

or payments,

are

included in

operating

activities

on the statement

of cash flows.

Cash payments

and cash receipts

from settlements

of derivatives,

including

current period

net cash settlements

on interest

rates swaps,

are classified

as an investing

activity

on the statements

of cash flows.

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, 2022

and December

31, 2021 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.

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.

Stock-Based

Compensation

The Company

may grant

equity-based

compensation

to non-employee

members of

its Board

of Directors

and to the

executive

officers

and employees

of the Manager.

Stock-based

awards issued

include performance

units, deferred

stock units

and immediately

vested

common stock

awards. Compensation

expense is

measured

and recognized

for all stock-based

payment awards

made to employees

and

non-employee

directors

based on

the fair

value of our

common stock

on the date

of grant.

Compensation

expense is

recognized

over each

award’s respective

service period

using the

graded vesting

attribution

method. We

do not estimate

forfeiture

rates; rather,

we adjust for

forfeitures

in the periods

in which

they occur.

Income Taxes

Orchid has elected and is organized and operated 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”).

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

income provided that they distribute to their stockholders all of their REIT taxable income

on an annual basis. A REIT must distribute at

least 90% of its REIT taxable income, determined without regard to the

deductions for dividends paid and excluding net capital gain,

and meet other requirements of the Code to retain its tax status.

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

positions will be sustained upon examination

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

All of Orchid’s tax positions are categorized as

highly certain.

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

assessment.

The measurement of

uncertain tax positions is adjusted when new information is available,

or when an event occurs that requires a change.

Recent Accounting

Pronouncements

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

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

Reform on Financial Reporting.

”

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

for modifications

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

market transition from the London Interbank

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

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

be an event that does not require contract

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

determination. The guidance in ASU 2020-04 is

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

rate reform activities occur. The Company does not

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

statements.

In January 2021, the FASB issued ASU 2021-01 “

Reference Rate Reform (Topic 848

).” ASU 2021-01 expands the scope of ASC

848 to include all affected derivatives and give market participants the ability to apply

certain aspects of the contract modification and

hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,

ASU 2021-01 adds

implementation guidance to permit a company to apply certain optional expedients

to modifications of interest rate indexes used for

margining, discounting or contract price alignment of certain derivatives as a result

of reference rate reform initiatives and extends

optional expedients to account for a derivative contract modified as a continuation

of the existing contract and to continue hedge

accounting when certain critical terms of a hedging relationship change to

modifications made as part of the discounting transition. The

guidance in ASU 2021-01 is effective immediately and available generally through December

31, 2022, as reference rate reform

activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.

NOTE 2.

MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES

The following

table presents

the Company’s

RMBS portfolio

as of March

31, 2022

and December

31, 2021:

(in thousands)

March 31, 2022

December 31, 2021

Pass-Through RMBS Certificates:

Fixed-rate Mortgages

4,372,517

6,298,189

Total Pass-Through

Certificates

4,372,517

6,298,189

Structured RMBS Certificates:

Interest-Only Securities

206,617

210,382

Inverse Interest-Only Securities

1,460

2,524

Total Structured

RMBS Certificates

208,077

212,906

Total

4,580,594

6,511,095

As of March

31, 2022

and December

31, 2021,

the Company

held U.S.

Treasury Notes

with a fair

value of approximately

36.5

million

and $

37.2

million, respectively,

primarily

to satisfy

collateral

requirements

of one of

its derivative

counterparties.

The following

table is a

summary of

our net gain

(loss) from

the sale of

RMBS for

the three

months ended

March 31,

2022 and

2021.

Three Months Ended March 31,

2022

2021

Proceeds from sales of RMBS

1,413,039

988,523

Carrying value of RMBS sold

(1,464,125)

(995,920)

Net (loss) gain on sales of RMBS

(51,086)

(7,397)

Gross gain on sales of RMBS

709

2,813

Gross loss on sales of RMBS

(51,795)

(10,210)

Net (loss) gain on sales of RMBS

(51,086)

(7,397)

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,

2022, the

Company had

met all margin

call

requirements.

As of March

31, 2022

and December

31, 2021,

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, 2022

Fair market value of securities pledged, including

accrued interest receivable

3,966,753

576,875

48,035

4,591,663

Repurchase agreement liabilities associated with

these securities

3,848,289

564,223

51,597

4,464,109

Net weighted average borrowing rate

0.36%

0.42%

0.15%

0.37%

December 31, 2021

Fair market value of securities pledged, including

accrued interest receivable

4,624,396

1,848,080

52,699

6,525,175

Repurchase agreement liabilities associated with

these securities

4,403,182

1,789,327

51,597

6,244,106

Net weighted average borrowing rate

0.15%

0.13%

0.15%

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

$113.6 million and $57.3 million as of

March 31, 2022 and December 31, 2021, 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, 2022,

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

240.1

million.

The Company

did not

have an amount

at risk with

any individual

counterparty

that was

greater than

10% of the

Company’s equity

at March

31, 2022

and December

31, 2021.

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,

2022 and

December

31, 2021.

(in thousands)

Derivative and Other Hedging Instruments

Balance Sheet Location

March 31, 2022

December 31, 2021

Assets

Interest rate swaps

Derivative assets, at fair value

65,194

29,293

Payer swaptions (long positions)

Derivative assets, at fair value

60,362

21,493

Interest rate caps

Derivative assets, at fair value

1,354

Total derivative

assets, at fair value

126,910

50,786

Liabilities

Interest rate swaps

Derivative liabilities, at fair value

2,862

Payer swaptions (short positions)

Derivative liabilities, at fair value

25,535

4,423

TBA securities

Derivative liabilities, at fair value

304

Total derivative

liabilities, at fair value

25,535

7,589

Margin Balances Posted to (from) Counterparties

Futures contracts

Restricted cash

16,610

8,035

TBA securities

Other liabilities

(856)

Interest rate swaption contracts

Other liabilities

(34,983)

(6,350)

Total margin

balances on derivative contracts

(18,373)

829

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

T-Note futures

positions

at March

31, 2022

and December

31, 2021.

($ in thousands)

March 31, 2022

Average

Weighted

Contract

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Equity

(1)

Treasury Note Futures Contracts (Short

Positions)

(2)

June 2022 5-year T-Note futures

(Jun 2022 - Jun 2027 Hedge Period)

1,194,000

2.25%

2.83%

32,928

June 2022 10-year Ultra futures

(Jun 2022 - Jun 2032 Hedge Period)

270,000

1.68%

2.06%

10,983

($ in thousands)

December 31, 2021

Average

Weighted

Contract

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Equity

(1)

Treasury Note Futures Contracts (Short

Position)

(2)

March 2022 5-year T-Note futures

(Mar 2022 - Mar 2027 Hedge Period)

369,000

1.56%

1.62%

1,013

March 2022 10-year Ultra futures

(Mar 2022 - Mar 2032 Hedge Period)

220,000

1.22%

1.09%

(3,861)

(1)

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

futures positions from inception.

(2)

5-Year T-Note

futures contracts were valued at a price of $

114.69

at March 31, 2022 and $

120.98

at December 31, 2021.

The contract values

of the short positions were $

1,369.4

million and $

446.4

million at March 31, 2022 and December 31, 2021, respectively.

10-Year Ultra

futures

contracts were valued at a price of $

135.47

at March 31, 2022 and $

146.44

at December 31, 2021. The contract value of the short position was

365.8

million and $

322.2

million at March 31, 2022 and December 31, 2021, respectively

Under our

interest

rate swap

agreements,

we typically

pay a fixed

rate and

receive a

floating rate

based on an

index ("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, 2022

and December

31, 2021.

($ in thousands)

Average

Net

Fixed

Average

Estimated

Average

Notional

Pay

Receive

Fair

Maturity

Amount

Rate

Value

(Years)

March 31, 2022

Expiration > 3 to ≤ 5 years

300,000

0.95%

0.93%

18,138

4.0

Expiration > 5 years

1,100,000

1.51%

0.37%

47,056

7.0

1,400,000

1.39%

0.49%

65,194

6.3

December 31, 2021

Expiration > 3 to ≤ 5 years

955,000

0.64%

0.16%

21,788

4.0

Expiration > 5 years

400,000

1.16%

0.21%

4,643

7.3

1,355,000

0.79%

0.18%

26,431

5.0

The table

below presents

information

related to

the Company’s

interest

rate cap positions

at March

31, 2022.

($ in thousands)

Net

Strike

Estimated

Notional

Swap

Curve

Fair

Expiration

Amount

Cost

Rate

Spread

Value

February 8, 2024

200,000

2,350

0.09%

10Y2Y

1,354

The table

below presents

information

related to

the Company’s

interest

rate swaption

positions

at March 31,

2022 and

December

31,

2021.

($ in thousands)

Option

Underlying Swap

Weighted

Average

Weighted

Average

Adjustable

Average

Fair

Months to

Notional

Fixed

Rate

Term

Expiration

Cost

Value

Expiration

Amount

Rate

(LIBOR)

(Years)

March 31, 2022

Payer Swaptions - long

≤ 1 year

31,905

33,040

11.3

1,282,400

2.44%

3 Month

11.3

>1 year ≤ 2 years

15,300

27,322

18.8

728,400

2.52%

3 Month

10.0

47,205

60,362

14.0

2,010,800

2.47%

3 Month

10.8

Payer Swaptions - short

≤ 1 year

(19,540)

(25,535)

5.8

(1,433,000)

2.47%

3 Month

10.8

December 31, 2021

Payer Swaptions - long

≤ 1 year

4,000

1,575

3.2

400,000

1.66%

3 Month

5.0

>1 year ≤ 2 years

32,690

19,918

18.4

1,258,500

2.46%

3 Month

14.1

36,690

21,493

14.7

1,658,500

2.27%

3 Month

11.9

Payer Swaptions - short

≤ 1 year

(16,185)

(4,423)

5.3

(1,331,500)

2.29%

3 Month

11.4

The

following

table

summarizes

our

contracts

purchase

and

sell

TBA

securities

December

31,

2021

There

were

outstanding TBA contracts as of March 31, 2022.

($ in thousands)

Notional

Net

Amount

Cost

Market

Carrying

Long (Short)

(1)

Basis

(2)

Value

(3)

Value

(4)

December 31, 2021

30-Year TBA securities:

3.0%

(575,000)

(595,630)

(595,934)

(304)

Total

(575,000)

(595,630)

(595,934)

(304)

(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, 2022 and 2021.

(in thousands)

Three Months Ended March 31,

2022

2021

T-Note futures contracts (short position)

79,895

2,476

Eurodollar futures contracts (short positions)

Interest rate swaps

66,284

27,123

Payer swaptions (short positions)

(10,908)

(26,167)

Payer swaptions (long positions)

40,975

40,070

Interest rate caps

(996)

Interest rate floors

1,384

TBA securities (short positions)

2,539

9,133

TBA securities (long positions)

(8,559)

Total

177,816

45,472

Credit Risk-Related Contingent Features

The

use

derivatives

and

other

hedging

instruments

creates

exposure

credit

risk

relating

potential

losses

that

could

recognized in the event

that the counterparties to these

instruments fail to perform their

obligations under the contracts. We

attempt to

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,

may

required

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.

the

Company's

policy

not

offset

assets

and

liabilities

associated

with

open

derivative

contracts.

However,

the

Chicago

Mercantile

Exchange

(“CME”)

rules

characterize

variation

margin

transfers

settlement

payments,

opposed

adjustments

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, 2022

and December

31, 2021.

(in thousands)

March 31, 2022

December 31, 2021

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Counterparties

Agreements

Total

Agreements

Total

PT RMBS - fair value

4,369,564

6,294,102

Structured RMBS - fair value

207,283

212,270

U.S. Treasury Notes

36,477

29,740

Accrued interest on pledged securities

14,816

14,819

18,804

18,817

Restricted cash

113,589

16,610

130,199

57,264

8,035

65,299

Total

4,705,252

53,090

4,758,342

6,582,440

37,788

6,620,228

Assets Pledged

from Counterparties

The table

below summarizes

assets pledged

to us from

counterparties

under our

repurchase

agreements

and derivative

agreements

as of March

31, 2022

and December

31, 2021.

(in thousands)

March 31, 2022

December 31, 2021

Repurchase

Derivative

Repurchase

Derivative

Assets Pledged to Orchid

Agreements

Total

Agreements

Total

Cash

4,172

34,983

39,155

4,339

7,206

11,545

Total

4,172

34,983

39,155

4,339

7,206

11,545

Cash received

as margin

is recognized

as cash and

cash equivalents

with a corresponding

amount recognized

as an increase

repurchase

agreements

or other

liabilities

in the balance

sheets.

NOTE 6. OFFSETTING ASSETS AND LIABILITIES

The Company’s

derivative

agreements

and repurchase

agreements

and reverse

repurchase

agreements

are subject

to underlying

agreements

with master

netting or

similar arrangements,

which provide

for the right

of offset in

the event

of default

or in the

event of

bankruptcy

of either

party to

the transactions.

The Company

reports its

assets and

liabilities

subject to

these arrangements

on a gross

basis.

The following

table presents

information

regarding

those assets

and liabilities

subject to

such arrangements

as if the

Company had

presented

them on a

net basis

as of March

31, 2022

and December

31, 2021.

(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, 2022

Interest rate swaps

65,194

Interest rate swaptions

60,362

(34,983)

25,379

Interest rate caps

1,354

126,910

(34,983)

91,927

December 31, 2021

Interest rate swaps

29,293

Interest rate swaptions

21,493

(6,350)

15,143

50,786

(6,350)

44,436

(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, 2022

Repurchase Agreements

4,464,109

(4,350,520)

(113,589)

Interest rate swaptions

25,535

4,489,644

(4,350,520)

(113,589)

25,535

December 31, 2021

Repurchase Agreements

6,244,106

(6,186,842)

(57,264)

Interest rate swaps

2,862

(2,862)

Interest rate swaptions

4,423

TBA securities

304

6,251,695

(6,189,704)

(57,264)

4,727

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

The Company

did not complete

any public

offerings of

its common

stock during

the three

months ended

March 31,

2022. During

the

year ended

December

31, 2021,

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)

At the Market Offering Program

(3)

First Quarter

5.10

308,048

1,572

Follow-on Offerings

First Quarter

5.31

17,940,000

95,336

At the Market Offering Program

(3)

Second Quarter

5.40

23,087,089

124,746

At the Market Offering Program

(3)

Third Quarter

4.94

35,818,338

177,007

At the Market Offering Program

(3)

Fourth Quarter

4.87

23,674,698

115,398

100,828,173

514,059

(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 ten equity distribution agreements, nine of which have

either been terminated because all shares were sold or

were replaced with a subsequent agreement.

Stock Repurchase Program

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

2,000,000

shares of the Company’s

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

in the stock repurchase program for up to an

additional

4,522,822

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

783,757

shares remaining from the original

2,000,000

share authorization, the increased authorization brought the total authorization

5,306,579

shares, representing 10% of the

Company’s then outstanding share count.

On December 9, 2021, the Board of Directors approved an increase in the

number of shares of the Company’s common stock

available in the stock repurchase program for up to an additional

16,861,994

shares, bringing the remaining authorization under the

stock repurchase program to

17,699,305

shares, representing approximately 10% of the Company’s then outstanding shares

common stock.

As part of the stock repurchase program, shares may be purchased in open market

transactions, block purchases, through

privately negotiated transactions, or pursuant to any trading plan that may be adopted

in accordance with Rule 10b5-1 of the Securities

Exchange Act of 1934, as amended (the “Exchange Act”).

Open market repurchases will be made in accordance with Exchange Act

Rule 10b-18, which sets certain restrictions on the method, timing, price

and volume of open market stock repurchases. The timing,

manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject

to economic and

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

The authorization does not obligate the Company to

acquire any particular amount of common stock and the program may

be suspended or discontinued at the Company’s discretion

without prior notice.

From the inception of the stock repurchase program through March 31, 2022, 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, 2022 or during the year ended December 31, 2021. The

remaining authorization under the stock repurchase program as of March 31, 2022 was

17,699,305

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

0.780

97,601

2022 - YTD

(1)

0.200

35,484

Totals

12.635

475,048

(1)

April 13, 2022

, the Company declared a dividend of $

0.045

per share to be paid on

May 27, 2022

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, 2022.

NOTE 8.

STOCK INCENTIVE PLAN

In 2021,

the Company’s

Board of

Directors

adopted,

and the stockholders

approved,

the Orchid

Island Capital,

Inc. 2021

Equity

Incentive

Plan (the

“2021 Incentive

Plan”) to

replace the

Orchid Island

Capital,

Inc. 2012

Equity Incentive

Plan (the

“2012 Incentive

Plan”

and together

with the

2021 Incentive

Plan, the

“Incentive

Plans”).

The 2021

Incentive

Plan provides

for the award

of stock options,

stock

appreciation

rights, stock

award, performance

units, other

equity-based

awards (and

dividend equivalents

with respect

to awards

performance

units and

other equity-based

awards) and

incentive

awards.

The 2021

Incentive

Plan is administered

by the Compensation

Committee

of the Company’s

Board of

Directors

except that

the Company’s

full Board

of Directors

will administer

awards made

to directors

who are

not employees

of the Company

or its affiliates.

The 2021

Incentive

Plan provides

for awards

of up to

an aggregate

% of the

issued and

outstanding

shares of

our common

stock (on

a fully diluted

basis) at

the time

of the awards,

subject to

a maximum

aggregate

7,366,623

shares of

the Company’s

common stock

that may

be issued

under the

2021 Incentive

Plan. The

2021 Incentive

Plan replaces

the 2012

Incentive

Plan, and

no further

grants will

be made under

the 2012

Incentive

Plan.

However, any

outstanding

awards under

the

2012 Incentive

Plan will

continue

in accordance

with the

terms of

the 2012

Incentive

Plan and

any award

agreement

executed in

connection

with such

outstanding

awards.

Performance

Units

The Company

has issued,

and may

in the future

issue additional,

performance

units under

the Incentive

Plans to

certain executive

officers and

employees

of its Manager.

“Performance

Units” vest

after the

end of a

defined performance

period, based

on satisfaction

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

not include

the right

to vote the

underlying

shares of

common stock.

Performance

Units are

subject to

forfeiture

should the

participant

longer serve

as an executive

officer or

employee of

the Company

or the Manager.

Compensation

expense for

the Performance

Units,

included in

incentive

compensation

on the statements

of operations,

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, 2022 and

2021.

($ in thousands, except per share data)

Three Months Ended March 31,

2022

2021

Weighted

Average

Grant Date

Fair Value

Unvested, beginning of period

133,223

5.88

4,554

7.45

Granted

175,572

3.31

137,897

5.88

Vested and issued

(13,322)

5.88

(2,277)

7.45

Unvested, end of period

295,473

4.35

140,174

5.91

Compensation expense during period

106

Unrecognized compensation expense, end of period

942

812

Intrinsic value, end of period

960

842

Weighted-average remaining vesting term (in years)

1.8

2.1

Stock Awards

The Company

has issued,

and may

in the future

issue additional,

immediately

vested common

stock under

the Incentive

Plans to

certain executive

officers and

employees

of its Manager.

The following

table presents

information

related to

fully vested

common stock

issued during

the three

months ended

March 31,

2022 and

2021. All

of the fully

vested shares

of common

stock issued

during the

three

months ended

March 31,

2022 and

2021, and

the related

compensation

expense, were

granted with

respect to

service performed

during

the fiscal

years ended

December

31, 2021

and 2020,

respectively.

($ in thousands, except per share data)

Three Months Ended March 31,

2022

2021

Fully vested shares granted

175,572

137,897

Weighted average grant date price per share

3.31

5.88

Compensation expense related to fully vested shares of common stock awards

581

811

Deferred

Stock Units

Non-employee

directors

receive a

portion of

their compensation

in the form

of deferred

stock unit

awards (“DSUs”)

pursuant to

the

Incentive

Plans.

Each DSU

represents

a right to

receive one

share of

the Company’s

common stock.

Beginning

in 2022,

each non-

employee director

can elect

to receive

all of his

or her compensation

in the form

of DSUs

The DSUs

are immediately

vested and

are

settled at

a future

date based

on the election

of the individual

participant.

Compensation

expense for

the DSUs

is included

in directors’

fees and

liability

insurance

in the statements

of operations.

The DSUs

contain dividend

equivalent

rights, which

entitle the

participant

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, 2022

and 2021.

($ in thousands, except per share data)

Three Months Ended March 31,

2022

2021

Weighted

Average

Grant Date

Fair Value

Outstanding, beginning of period

142,976

5.38

90,946

5.44

Granted and vested

15,273

4.39

10,422

5.31

Outstanding, end of period

158,249

5.29

101,368

5.43

Compensation expense during period

Intrinsic value, end of period

514

609

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, 2022.

NOTE 10. INCOME TAXES

The Company will generally not be subject to U.S. federal income tax on

its REIT taxable income to the extent that it distributes its

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

including meeting certain asset, income and

stock ownership tests.

A REIT must generally distribute at least 90% of its REIT taxable income,

determined without regard to the

deductions for dividends paid and excluding net capital gain, to its stockholders,

annually to maintain REIT status.

An amount equal to

the sum of which 85% of its REIT ordinary income and 95% of its REIT

capital gain net income, plus certain undistributed income from

prior taxable years, 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, 2022

and 2021.

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,

2022 and

2021.

(in thousands, except per share information)

Three Months Ended March 31,

2022

2021

Basic and diluted EPS per common share:

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

Net loss - Basic and diluted

(148,727)

(29,369)

Weighted average shares of common stock:

Shares of common stock outstanding at the balance sheet date

177,117

94,411

Effect of weighting

(119)

(9,066)

Weighted average shares-basic and diluted

176,998

85,345

Net loss per common share:

Basic and diluted

(0.84)

(0.34)

Anti-dilutive incentive shares not included in calculation

454

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

observable

markets for

assets similar

to those

being priced.

The spread

is then adjusted

based on

variances

in certain

characteristics

between the

market observation

and the asset

being priced.

Those characteristics

include:

type of

asset, the

expected life

of the asset,

the

stability

and predictability

of the expected

future cash

flows of

the asset,

whether

the coupon

of the asset

is fixed or

adjustable,

the

guarantor

of the security

if applicable,

the coupon,

the maturity,

the issuer, size

of the underlying

loans, year

in which

the

underlying

loans

were originated,

loan to value

ratio, state

in which

the underlying

loans reside,

credit score

of the underlying

borrowers

and other

variables

if appropriate.

The fair

value of the

security is

determined

by using

the adjusted

spread.

The Company’s

U.S. Treasury

Notes are

based on

quoted prices

for identical

instruments

in active

markets and

are classified

Level 1 assets.

The Company’s

futures contracts

are Level

1 valuations,

as they are

exchange-traded

instruments

and quoted

market prices

are

readily available.

Futures contracts

are settled

daily. The Company’s

interest

rate swaps

and interest

rate swaptions

are Level

valuations.

The fair

value of interest

rate swaps

is determined

using a discounted

cash flow

approach

using forward

market interest

rates

and discount

rates, which

are observable

inputs. The

fair value

of interest

rate swaptions

is determined

using an option

pricing model.

RMBS (based

on the fair

value option),

derivatives

and TBA securities

were recorded

at fair value

on a recurring

basis during

the

three months

ended March

31, 2022

and 2021.

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,

2022 and

December

31, 2021.

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, 2022

Mortgage-backed securities

4,580,594

U.S. Treasury Notes

36,477

Interest rate swaps

65,194

Interest rate swaptions

34,827

Interest rate caps

1,354

December 31, 2021

Mortgage-backed securities

6,511,095

U.S. Treasury Notes

37,175

Interest rate swaps

26,431

Interest rate swaptions

17,070

TBA securities

(304)

During the three months ended March 31, 2022 and 2021, 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, 2023

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.

On April 1, 2022, pursuant to the third amendment to the management agreement

entered into on November 16, 2021, the

Manager began providing certain repurchase agreement trading, clearing and

administrative services to the Company that had been

previously provided by AVM, L.P.

under an agreement terminated on March 31, 2022.

In consideration for such services, the Company

will pay the following fees to the Manager:

●

A daily fee equal to the outstanding principal balance of repurchase agreement funding

in place as of the end of such day

multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance

less than or equal to $5 billion, and

multiplied by 1.0 basis points for any amount of aggregate outstanding principal

balance in excess of $5 billion, and

●

A fee for the clearing and operational services provided by personnel

of the Manager equal to $10,000 per month.

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 allocated overhead incurred

were approximately $

3.1

million and $

2.0

million for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022 and December 31, 2021,

the net amount

due to affiliates was approximately $

1.1

million and $

1.1

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,

2022, Bimini

owned

2,595,357

shares, or

1.5

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

2020 Equity Distribution Agreement”) with four

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

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

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

negotiated transactions. We issued a total

of 27,493,650 shares under the August 2020 Equity Distribution Agreement for

aggregate gross proceeds of approximately $150.0

million, and net proceeds of approximately $147.4 million, after commissions

and fees,

prior to its termination in June 2021.

On January 20, 2021, we entered into an underwriting agreement (the “January 2021

Underwriting Agreement”) with J.P. Morgan

Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.

Morgan purchased the

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

Underwriting Agreement at $5.20 per share. In addition,

we granted J.P.

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

of our common stock on the same terms and

conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common

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

million, net of offering expenses.

On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting

Agreement”) with J.P. Morgan,

relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from

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

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

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

on the same terms and conditions, which J.P. Morgan

exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common

stock occurred on March 5, 2021,

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

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

Equity Distribution Agreement”) with four

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

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

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

negotiated transactions. We issued a total

of 49,407,336 shares under the June 2021 Equity Distribution Agreement for aggregate

gross proceeds of approximately $250.0

million, and net proceeds of approximately $246.2 million, after commissions

and fees, prior to its termination in October 2021.

On October 29, 2021,

we entered into an equity distribution agreement (the “October 2021

Equity Distribution Agreement”) with

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

amount of $250,000,000 of shares of

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

transactions. Through March

31, 2022, we issued a total of 15,835,700 shares under the October 2021 Equity

Distribution Agreement for aggregate gross proceeds

of approximately $78.3 million, and net proceeds of approximately $77.0 million,

after commissions and fees.

Stock Repurchase Agreement

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

shares of our common stock.

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

to economic

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

The authorization does not obligate the Company

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

suspended or discontinued at the Company’s discretion

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

an increase in the stock repurchase program for up to an

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

remaining from the original 2,000,000

share authorization, the increased authorization brought the total authorization

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

Company’s then outstanding share count. On December 9, 2021, the Board of Directors

approved an increase in the number of shares

of the Company’s common stock available in the stock repurchase program for up

to an additional 16,861,994 shares, bringing the

remaining authorization under the stock repurchase program to 17,699,305 shares, representing

approximately 10% of the Company’s

then outstanding shares of common stock. This stock repurchase program has no

termination date.

From the inception of the stock repurchase program through March 31, 2022, 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, 2022 or the year

ended December 31, 2021.

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 Federal Reserve (the “Fed”), the Federal

Housing Financing Agency (the “FHFA”), Federal Housing Administration (the “FHA”), the Federal Open

Market Committee

(the “FOMC”) and the U.S. Treasury;

●

prepayment rates on mortgages underlying our Agency RMBS and credit

trends insofar as they affect prepayment rates; and

●

other market developments.

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

of operations and financial condition. These

factors include:

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our borrowing costs;

●

our hedging activities;

●

the market value of our investments

●

increases in our cost of funds resulting from increases in the Fed Funds rate that

are controlled by the Fed and are likely to

continue to occur in 2022; 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, 2022,

as compared

to the

Company’s results

of operations

for the three

months ended

March 31,

2021.

Net (Loss)

Income Summary

Net loss

for the three

months ended

March 31,

2022 was

$148.7 million,

or $0.84

per share.

Net loss

for the three

months ended

March 31,

2021 was

$29.4 million,

or $0.34

per share.

The components

of net loss

for the three

months ended

March 31,

2022 and

2021,

along with

the changes

in those

components

are presented

in the table

below:

(in thousands)

2022

2021

Change

Interest income

41,857

26,856

15,001

Interest expense

(2,655)

(1,941)

(714)

Net interest income

39,202

24,915

14,287

Losses on RMBS and derivative contracts

(183,232)

(50,791)

(132,441)

Net portfolio deficiency

(144,030)

(25,876)

(118,154)

Expenses

(4,697)

(3,493)

(1,204)

Net loss

(148,727)

(29,369)

(119,358)

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

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.

As 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.

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.

Described

below are

the Company’s

results of

operations

for the

three months

ended March

31, 2022,

as compared

to the

Company’s results

of operations

for each of

the three

months ended

December

31, 2021,

September

30, 2021,

June 30,

2021 and

March

31, 2021.

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, 2022

(148,727)

(183,232)

34,505

(0.84)

(1.04)

0.20

December 31, 2021

(44,564)

(82,597)

38,033

(0.27)

(0.49)

0.22

September 30, 2021

26,038

(2,887)

28,925

0.20

(0.02)

0.22

June 30, 2021

(16,865)

(40,844)

23,979

(0.17)

(0.41)

0.24

March 31, 2021

(29,369)

(50,791)

21,422

(0.34)

(0.60)

0.26

(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

T-Note futures

contracts,

short positions

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.

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

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

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

2022 to date

and 2021.

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, 2022

177,816

2,539

(1,287)

176,537

December 31, 2021

10,945

2,568

(7,949)

16,326

September 30, 2021

5,375

(2,306)

(1,248)

8,929

June 30, 2021

(34,915)

(5,963)

(5,104)

(23,848)

March 31, 2021

45,472

9,133

(8,559)

(4,044)

48,942

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, 2022

41,857

2,655

(1,287)

3,942

39,202

37,915

December 31, 2021

44,421

2,023

(7,949)

9,972

42,398

34,449

September 30, 2021

34,169

1,570

(1,248)

2,818

32,599

31,351

June 30, 2021

29,254

1,556

(5,104)

6,660

27,698

22,594

March 31, 2021

26,856

1,941

(4,044)

5,985

24,915

20,871

(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, 2022,

we generated

$39.2 million

of net interest

income, consisting

of $41.9

million

interest

income from

RMBS assets

offset by $2.7

million of

interest

expense on

borrowings.

For the comparable

period ended

March 31,

2021, we

generated

$24.9 million

of net interest

income, consisting

of $26.9

million of

interest

income from

RMBS assets

offset by $1.9

million of

interest

expense on

borrowings.

The $15.0

million increase

in interest

income was

due to a 36

basis point

("bps")

increase in

the yield

on average

RMBS,

partially

offset by the

$1,513.1

million increase

in average

RMBS. The

$0.7 million

increase in

interest

expense was

due to a

$1,465.5

million increase

in average

outstanding

borrowings.

We had more

average assets

and borrowings

during

the first

quarter of

2022 compared

to the first

quarter of

2021 as we

deployed the

proceeds

of our capital

raising activity

during the

year

ended December

31, 2021.

On an economic

basis, our

interest

expense on

borrowings

for the three

months ended

March 31,

2022 and

2021 was

$3.9 million

and $6.0

million, respectively,

resulting

in $37.9

million and

$20.9 million

of economic

net interest

income, respectively.

The lower

economic interest

expense during

the three

months ended

March 31,

2022 was

due to the

positive 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 2022 to

date and

2021 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, 2022

5,545,844

41,857

3.02%

5,354,107

2,655

3,942

0.20%

0.29%

December 31, 2021

6,056,259

44,421

2.93%

5,728,988

2,023

9,972

0.14%

0.70%

September 30, 2021

5,136,331

34,169

2.66%

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,504,887

29,254

2.60%

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

4,032,716

26,856

2.66%

3,888,633

1,941

5,985

0.20%

0.62%

($ in thousands)

Net Interest Income

Net Interest Spread

GAAP

Economic

GAAP

Economic

Basis

(2)

Basis

(4)

Three Months Ended

March 31, 2022

39,202

37,913

2.82%

2.73%

December 31, 2021

42,398

34,449

2.79%

2.23%

September 30, 2021

32,599

31,351

2.53%

2.43%

June 30, 2021

27,698

22,594

2.46%

1.99%

March 31, 2021

24,915

20,871

2.46%

2.04%

(1)

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

tables on pages 32 and 33 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 32 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,

2022 and

2021 was

$41.9 million

and $26.9

million, respectively.

We had

average RMBS

holdings of

$5,545.8

million and

$4,032.7

million for

the three

months ended

March 31,

2022 and 2021,

respectively.

The

yield on our

portfolio

was 3.02%

and 2.66%

for the three

months ended

March 31,

2022 and

2021, respectively.

For the three

months

ended March

31, 2022

as compared

to the three

months ended

March 31,

2021, there

was a $15.0

million increase

in interest

income due

to a 36 bps

increase in

the yield

on average

RMBS,

combined with

a $1,513.1

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 2022 to

date and

2021.

($ in thousands)

Average RMBS Held

Interest Income

Realized Yield on Average RMBS

Structured

Three Months Ended

RMBS

Total

RMBS

Total

RMBS

Total

March 31, 2022

5,335,353

210,491

5,545,844

40,066

1,791

41,857

3.00%

3.40%

3.02%

December 31, 2021

5,878,376

177,883

6,056,259

42,673

1,748

44,421

2.90%

3.93%

2.93%

September 30, 2021

5,016,550

119,781

5,136,331

33,111

1,058

34,169

2.64%

3.53%

2.66%

June 30, 2021

4,436,135

68,752

4,504,887

29,286

(32)

29,254

2.64%

(0.18)%

2.60%

March 31, 2021

3,997,965

34,751

4,032,716

26,869

(13)

26,856

2.69%

(0.15)%

2.66%

Interest Expense and the Cost of Funds

We had average

outstanding

borrowings

of $5,354.1

million and

$3,888.6

million and

total interest

expense of

$2.7 million

and $1.9

million for

the three

months ended

March 31,

2022 and

2021, respectively.

Our average

cost of funds

was 0.20%

for both the

three months

ended March

31, 2022

and 2021.

Contributing

to the increase

in interest

expense was

a $1,465.5

million increase

in average

outstanding

borrowings

during the

three months

ended March

31, 2022

as compared

to the three

months ended

March 31,

2021.

Our economic

interest

expense

was $3.9

million and

$6.0 million

for the three

months ended

March 31,

2022 and

2021, respectively.

There was

a 33 bps

decrease in

the average

economic cost

of funds

to 0.29%

for the three

months ended

March 31,

2022 from

0.62% for

the three

months ended

March 31,

2021.

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

5 bps below

the average

one-month

LIBOR and

56 bps below

the average

six-month

LIBOR for

the quarter

ended March

31, 2022.

Our average

economic cost

of funds

was 4 bps

above the

average one-month

LIBOR and

47 bps

below the

average six-month

LIBOR for

the quarter

ended March

31, 2022.

The average

term to maturity

of the outstanding

repurchase

agreements

was 22 days

at March

31, 2022

and 27 days

at December

31, 2021.

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

2022 to date

and 2021

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, 2022

5,354,107

2,655

3,942

0.20%

0.29%

December 31, 2021

5,728,988

2,023

9,972

0.14%

0.70%

September 30, 2021

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

3,888,633

1,941

5,985

0.20%

0.62%

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, 2022

0.25%

0.76%

(0.05)%

(0.56)%

0.04%

(0.47)%

December 31, 2021

0.09%

0.23%

0.05%

(0.09)%

0.61%

0.47%

September 30, 2021

0.09%

0.16%

0.04%

(0.03)%

0.14%

0.07%

June 30, 2021

0.10%

0.18%

0.04%

(0.04)%

0.51%

0.43%

March 31, 2021

0.13%

0.23%

0.07%

(0.03)%

0.49%

0.39%

Gains or Losses

The table

below presents

our gains

or losses

for the three

months ended

March 31,

2022 and

2021.

(in thousands)

2022

2021

Change

Realized losses on sales of RMBS

(51,086)

(7,397)

(43,689)

Unrealized losses on RMBS

(309,962)

(88,866)

(221,096)

Total losses on

RMBS

(361,048)

(96,263)

(264,785)

Gains on interest rate futures

79,895

2,488

77,407

Gains on interest rate swaps

66,284

27,123

39,161

Losses on payer swaptions (short positions)

(10,908)

(26,167)

15,259

Gains on payer swaptions (long positions)

40,975

40,070

905

Losses on interest rate caps

(996)

Gains on interest rate floors

1,384

(1,384)

Gains (losses) on TBA securities (long positions)

(8,559)

8,586

Gains on TBA securities (short positions)

2,539

9,133

(6,594)

Total

(183,232)

(50,791)

(132,441)

We invest in

RMBS with

the intent

to earn net

income from

the realized

yield on those

assets over

their related

funding and

hedging

costs, and

not for the

purpose of

making short

term gains

from sales.

However, we

have sold,

and may continue

to sell,

existing

assets to

acquire new

assets, which

our management

believes might

have higher

risk-adjusted

returns in

light of current

or anticipated

interest

rates,

federal government

programs

or general

economic conditions

or to manage

our balance

sheet as part

of our asset/liability

management

strategy. During

the three

months ended

March 31,

2022 and

2021, we

received proceeds

of $1,413.0

million and

$988.5 million,

respectively, from

the sales

of RMBS.

Realized

and unrealized

gains and

losses on

RMBS are

driven in

part by changes

in yields

and interest

rates, which

affect the

pricing

of the securities

in our portfolio.

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 2022

to date and

2021.

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, 2022

2.42%

2.33%

3.39%

4.17%

0.84%

December 31, 2021

1.26%

1.51%

2.35%

3.10%

0.21%

September 30, 2021

1.00%

1.53%

2.18%

2.90%

0.12%

June 30, 2021

0.87%

1.44%

2.27%

2.98%

0.13%

March 31, 2021

0.94%

1.75%

2.39%

3.08%

0.19%

(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

$4.7 million

and $3.5

million for

the three

months ended

March 31,

2022 and

2021,

respectively.

The table

below presents

a breakdown

of operating

expenses for

the three

months ended

March 31,

2022 and

2021.

(in thousands)

2022

2021

Change

Management fees

2,634

1,621

1,013

Overhead allocation

441

404

Accrued incentive compensation

237

364

(127)

Directors fees and liability insurance

311

272

Audit, legal and other professional fees

304

318

(14)

Other direct REIT operating expenses

643

421

222

Other expenses

127

Total expenses

4,697

3,493

1,204

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, 2023 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.

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 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.

On April 1, 2022, pursuant to the third amendment to the management agreement

entered into on November 16, 2021, the

Manager began providing certain repurchase agreement trading, clearing and

administrative services to the Company that had been

previously provided by AVM, L.P.

under an agreement terminated on March 31, 2022.

In consideration for such services, the Company

will pay the following fees to the Manager:

●

A daily fee equal to the outstanding principal balance of repurchase agreement funding

in place as of the end of such day

multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance

less than or equal to $5 billion, and

multiplied by 1.0 basis points for any amount of aggregate outstanding principal

balance in excess of $5 billion, and

●

A fee for the clearing and operational services provided by personnel

of the Manager equal to $10,000 per month.

The following table summarizes the management fee and overhead allocation

expenses for each quarter in 2022 to date and

2021.

($ in thousands)

Average

Advisory Services

Orchid

Management

Overhead

Three Months Ended

MBS

Equity

Fee

Allocation

Total

March 31, 2022

5,545,844

853,576

2,634

441

3,075

December 31, 2021

6,056,259

806,382

2,587

443

3,030

September 30, 2021

5,136,331

672,384

2,156

390

2,546

June 30, 2021

4,504,887

542,679

1,792

395

2,187

March 31, 2021

4,032,716

456,687

1,621

404

2,025

Financial

Condition:

Mortgage-Backed Securities

As of March

31, 2022,

our RMBS

portfolio

consisted

of $4,580.6

million of

Agency RMBS

at fair value

and had a

weighted

average

coupon on

assets of

3.11%.

During the

three months

ended March

31, 2022,

we received

principal

repayments

of $157.1

million

compared

to $123.9

million for

the three

months ended

March 31,

2021.

The average

three month

prepayment

speeds for

the quarters

ended March

31, 2022

and 2021

were 10.7%

and 12.0%,

respectively.

The following

table presents

the 3-month

constant prepayment

rate (“CPR”)

experienced

on our structured

and PT RMBS

sub-

portfolios,

on an annualized

basis, for

the quarterly

periods presented.

CPR is a

method of

expressing

the prepayment

rate for

a mortgage

pool that

assumes that

a constant

fraction

of the remaining

principal

is prepaid

each month

or year. Specifically,

the CPR

in the chart

below represents

the three

month prepayment

rate of the

securities

in the respective

asset category.

Structured

PT RMBS

RMBS

Total

Three Months Ended

Portfolio (%)

March 31, 2022

8.1

19.5

10.7

December 31, 2021

9.0

24.6

11.4

September 30, 2021

9.8

25.1

12.4

June 30, 2021

10.9

29.9

12.9

March 31, 2021

9.9

40.3

12.0

The following

tables summarize

certain characteristics

of the Company’s

PT RMBS

and structured

RMBS as of

March 31,

2022 and

December

31, 2021:

($ in thousands)

Weighted

Percentage

Average

Weighted

Maturity

Fair

Entire

Average

Longest

Asset Category

Value

Portfolio

Coupon

Months

Maturity

March 31, 2022

Fixed Rate RMBS

4,372,517

95.5%

3.01%

336

1-Dec-51

Interest-Only Securities

206,617

4.5%

3.42%

257

25-Jan-52

Inverse Interest-Only Securities

1,460

0.0%

3.75%

297

15-Jun-42

Total Mortgage Assets

4,580,594

100.0%

3.11%

318

25-Jan-52

December 31, 2021

Fixed Rate RMBS

6,298,189

96.7%

2.93%

342

1-Dec-51

Interest-Only Securities

210,382

3.2%

3.40%

263

25-Jan-52

Inverse Interest-Only Securities

2,524

0.1%

3.75%

300

15-Jun-42

Total Mortgage Assets

6,511,095

100.0%

3.03%

325

25-Jan-52

($ in thousands)

March 31, 2022

December 31, 2021

Percentage of

Agency

Fair Value

Entire Portfolio

Fair Value

Entire Portfolio

Fannie Mae

3,016,954

65.9%

4,719,349

72.5%

Freddie Mac

1,563,640

34.1%

1,791,746

27.5%

Total Portfolio

4,580,594

100.0%

6,511,095

100.0%

March 31, 2022

December 31, 2021

Weighted Average Pass-through Purchase Price

107.82

107.19

Weighted Average Structured Purchase Price

15.25

15.21

Weighted Average Pass-through Current Price

98.85

105.31

Weighted Average Structured Current Price

15.61

14.08

Effective Duration

(1)

4.890

3.390

(1)

Effective duration is the approximate percentage change in price

for a 100 bps change in rates.

An effective duration of 4.890 indicates that an

interest rate increase of 1.0% would be expected to cause a 4.890% decrease in the value

of the RMBS in the Company’s investment portfolio

at March 31, 2022.

An effective duration of 3.390 indicates that an interest rate increase

of 1.0% would be expected to cause a 3.390%

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

at December 31, 2021. 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, 2022

and 2021,

including

securities

purchased

during the

period that

settled after

the end of

the period,

if any.

($ in thousands)

2022

2021

Total Cost

Average

Price

Weighted

Average

Yield

Total Cost

Average

Price

Weighted

Average

Yield

Pass-through RMBS

1,971,296

107.09

1.38%

Structured RMBS

4,807

6.93

14.21%

Borrowings

As of March

31, 2022,

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

22 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, 2022,

we had obligations

outstanding

under the

repurchase

agreements

of approximately

$4,464.1

million with

a net

weighted

average borrowing

cost of 0.37%.

The remaining

maturity of

our outstanding

repurchase

agreement

obligations

ranged from

6 to

167 days,

with a weighted

average remaining

maturity of

22 days.

Securing

the repurchase

agreement

obligations

as of March

31, 2022

are RMBS

with an estimated

fair value,

including

accrued interest,

of approximately

$4,591.7

million and

a weighted

average

maturity of

340 months,

and cash pledged

to counterparties

of approximately

$113.6 million.

Through April

28, 2022,

we have been

able to maintain

our repurchase

facilities

with comparable

terms to

those that

existed at

March 31,

2022 with

maturities

through September

14, 2022.

The table below presents information about our period end,

maximum and average balances of borrowings for each quarter in

2022 to date and 2021.

($ in thousands)

Difference Between Ending

Ending

Maximum

Average

Borrowings and

Balance of

Average Borrowings

Three Months Ended

Borrowings

Amount

Percent

March 31, 2022

4,464,109

6,244,106

5,354,107

(889,998)

(16.62)%

(1)

December 31, 2021

6,244,106

6,419,689

5,728,988

515,118

8.99%

September 30, 2021

5,213,869

5,214,254

4,864,287

349,582

7.19%

June 30, 2021

4,514,704

4,517,953

4,348,192

166,512

3.83%

March 31, 2021

4,181,680

4,204,935

3,888,633

293,047

7.54%

(1)

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

ended March 31, 2022 reflects the disposal of RMBS pledged as

collateral. During the quarter ended March 31, 2022, the Company’s investment

in RMBS decreased $510.4 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.

We have both

internal

and external

sources of

liquidity. However,

our material

unused sources

of liquidity

include cash

balances,

unencumbered

assets and

our ability

to sell encumbered

assets to

raise cash.

Our

balance sheet

also generates

liquidity

on an on-going

basis through

payments of

principal

and interest

we 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.

Internal

Sources of

Liquidity

Our internal

sources of

liquidity

include our

cash balances,

unencumbered

assets and

our ability

to liquidate

our encumbered

security

holdings.

Our balance

sheet also

generates

liquidity

on an on-going

basis through

payments

of principal

and interest

we receive

on our

RMBS portfolio.

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 as

PT RMBS.

However, we anticipate

that we would

be able to

liquidate

such securities

readily, even in

distressed

markets,

although

we would

likely do

so at prices

below where

such securities

could be sold

in a more

stable market.

To enhance our liquidity

even

further, we 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

sell assets

in 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.

External

Sources of

Liquidity

Our primary

external

sources of

liquidity

are our ability

to (i) borrow

under master

repurchase

agreements,

(ii) use

the TBA

security

market and

(iii) sell

our equity

or debt

securities

in public

offerings

or private

placements.

Our borrowing

capacity will

vary over

time as the

market value

of our interest

earning assets

varies.

Our master

repurchase

agreements

have no

stated expiration,

but can be

terminated

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.

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, 2022,

haircuts on

our pledged

collateral

remained

stable and

as of March

31, 2022,

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

(“MSFTAs”), 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

of 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

on 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.

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, 2022,

we had cash

and cash equivalents

of $297.2

million.

We generated

cash flows

of $202.9

million from

principal

and interest

payments on

our RMBS

and had average

repurchase

agreements

outstanding

of $5,354.1

million during

the three

months ended

March 31,

2022.

As described

more fully

below, we may

also access

liquidity

by selling

our equity

or debt securities

in public

offerings or

private

placements.

Stockholders’

Equity

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

four sales agents pursuant to which we

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

shares of our common stock in transactions that

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

of 27,493,650 shares under the

August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately

$150.0 million, and net proceeds of

approximately $147.4 million, after commissions and fees,

prior to its termination in June 2021.

On January 20, 2021, we entered into the January 2021 Underwriting Agreement

with J.P. Morgan Securities LLC (“J.P.

Morgan”),

relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from

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

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

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

on the same terms and conditions, which J.P. Morgan

exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our

common stock occurred on January 25,

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

On March 2, 2021, we entered into the March 2021 Underwriting Agreement with

J.P.

Morgan, relating to the offer and sale of

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

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

J.P.

Morgan a 30-day option to purchase up to an

additional 1,200,000 shares of our common stock on the same terms and

conditions, which J.P. Morgan exercised in full on March 3,

2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March

5, 2021, with proceeds to us of

approximately $50.0

million, net of offering expenses payable.

On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four

sales agents pursuant to which we may

could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of

shares of our common stock in transactions that

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

of 49,407,336 shares under the

June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately

$250.0 million, and net proceeds of

approximately $246.2 million, after commissions and fees, prior to its termination in October

2021.

On October 29, 2021, we entered into the October 2021 Equity Distribution

Agreement with four sales agents pursuant to which

we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares

of our common stock in transactions

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

March 31, 2022, we issued a total of

15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate

gross proceeds of approximately $78.3 million,

and net proceeds of approximately $77.0 million, after commissions and fees.

Outlook

Economic Summary

The first

quarter of

2022 was

a transition

period whereby

the Fed migrated

from reluctantly

acknowledging

they needed

to start

removing the

emergency

monetary

policy regime

in place

since the

COVID-19

pandemic emerged

in the U.S.

during the

first quarter

2020 towards

a more aggressive

tightening

cycle.

The Fed announced

the first

rate hike

at their

March 2022

meeting and

simultaneously

announced

quantitative

tightening

would begin

soon, likely

in May 2022.

The acceleration

in the rate

of inflation

that first

emerged during

the second

quarter of

2021, and

was deemed

“transitory”

by the Fed

at the time,

accelerated

even further

into 2022

and has continued

do so in the

second quarter

of 2022 to

date.

All measures

of inflation

– personal

consumption

expenditures,

the consumer

price index

and

the producer

price index

– are the

highest levels

seen since

the early

1980s.

Inflation

has been

exacerbated,

both in the

U.S. and

globally,

by the war

in Ukraine

and COVID

related lock-downs

in China.

The war

in Ukraine

in particular

has caused

global inflationary

pressures

that may have

yet to peak.

As the war

in Ukraine

began in

late February

2022, western

nations began

to impose

progressively

severe sanctions

on Russia.

These sanctions,

and related

boycotts

of Russian

goods,

have created

shortages

of many commodities.

Ukraine is

also a major

global supplier

of many commodities

as well,

particularly

food.

As cases

of COVID-19

increased

in many

population

centers in

China, authorities

imposed lock-downs

aggressively

which led

to the closure

of many manufacturing

operations,

further exacerbating

the many

supply chain

constraints

across the

world.

In the U.S.,

the economy

continues

to grow

and,

in particular,

the

labor market

continues

to tighten.

The unemployment

rate appears

poised to

drop below

the pre-pandemic

lows, unemployment

claims

are at the

lowest levels

since the

1950s and

wages are

growing rapidly,

although

still less

than the

rate of inflation.

All of these

factors have

led the Fed,

and most market

participants,

to anticipate

that inflation,

particularly

food and

energy inflation,

will not

recede in

the near

term and

may even accelerate

further.

Inflation

for goods

other than

food and

energy may

moderate,

as the

necessities

of life cannot

be ignored

and other

goods can,

potentially

lessening

price pressures

for these

goods.

The cost

of housing

and

rents are

expected to

remain elevated

as affordability

continues

to deteriorate

due to higher

mortgage

rates and

inflated home

prices.

sum, inflation

is very far

above the

Fed’s target

level of 2%

and not likely

to recede

in the near-term.

Given the

outlook for

inflation

and the

Fed’s anticipated

response,

interest

rate volatility

has become

very elevated

and is not

far below

the extreme

peak seen

in March

of 2020 when

the COVID-19

pandemic first

emerged in

the U.S.

Given the

magnitude

of the forces

driving the

market and

the uncertainty

that exists

with respect

to the war

in Ukraine,

COVID related

lockdowns

in China

and the uncertain

capacity

of the U.S.

economy to

weather

these forces,

it is likely

that volatility

will remain

very elevated

until these

forces subside.

The

outlook for

the remainder

of 2022 hinges

on how these

developments

unfold, the

extent to

which the

Fed has to

raise rates

and possibly

sell assets

from their

portfolio,

and the impact

these factors

have on

the growth

rate of the

U.S. economy

and the unemployment

rate.

Interest

Rates

As the outlook

for inflation

changed materially

to the upside

and the

resulting

change in

monetary

policy by the

Fed unfolded

over the

course of

the first

quarter of

2022, interest

rates moved

much higher

and the curve

flattened.

During the

first quarter

of 2022, the

yield on

the 2-year

U.S. Treasury

Note increased

by over 160

basis points,

the yield

on the 5-year

U.S. Treasury

Note increased

by almost

120

basis points

and the yield

on the 10-year

U.S. Treasury

Note increased

by 82.8 basis

points.

The spread

between the

2-year and

10-year

points thus

declined, or

flattened,

by almost

80 basis points.

In early

April of

2022 the yield

curve actually

inverted

by approximately

7.5

basis points,

albeit for

only a brief

period.

Since then,

the yield

curve has

re-steepened

and was just

above 20

basis points

on April

28,

2022.

The impetus

for the re-steepening

was the release

of the FOMC

minutes from

the Fed’s January

2022 meeting

which strongly

implied the

Fed may actually

sell assets

from their

portfolio.

The market

expects this

may occur

as early as

the third

quarter of

2022.

The

minutes also

revealed that

the Fed

viewed such

asset sales

were akin

to 100 to

150 basis

points of

tightening

to the Fed

Funds rate,

thus

the market

reduced the

number of

hikes priced

in over the

course of

the next

year and

the curve

steepened.

As of April

28th, 2022

market

pricing, as

reflected

in the Fed

Funds futures

market, anticipates

between 225

and 250 basis

points of

additional

hikes by the

end of the

year.

The Agency

RMBS Market

The sharp

increase in

interest

rates, the

end of net

Agency RMBS

purchases

by the Fed

and the pending

run-off of

the Fed’s Agency

RMBS portfolio,

with the

potential for

outright

sales in addition

to the prepayment

related run-off,

resulted

in poor returns

for the sector.

The

poor performance

has continued

into the

second quarter

as all of

these factors

remain.

The Agency

RMBS market

is transitioning

away

from a prolonged

period of

support.

The market

benefited

from not only

daily purchases

by the Fed

- $40 billion

per month

in addition

the reinvestment

of all paydowns

on their

existing holdings

– but also

by the bank

community. Demand

from the

bank community

is a

byproduct

of their

deposit base

growth resulting

from asset

purchases.

Going forward

the RMBS

market faces

meaningful

headwinds

the Fed is

only purchasing

enough RMBS

to replace

a decreasing

portion of

their monthly

pay-downs

and eventually

may consider

outright

sales, and

the banking

community

will likely

buy fewer

RMBS assets

as their

deposit base

shrinks

as the Fed

removes reserves

from the

system.

The total

return for

Agency RMBS

for the first

quarter of

2022 was -5.0%

and the excess

return versus

U.S. Treasuries

was -1.2%.

Longer duration/lower

coupon mortgages

underperformed

higher coupon/lower

duration

as 30-year

underperformed

15-year maturities

and lower

coupons of

each tenor

underperformed

higher coupons.

The same pattern

held for

excess returns

versus comparable

duration

U.S. Treasuries.

The trend

has also continued

into the

second quarter

as interest

rates continue

to rise and

volatility

remains at

or near

multi-year

highs.

Recent Legislative

and Regulatory

Developments

The Fed has

taken a number

of actions

to stabilize

markets as

a result

of the impacts

of the COVID-19

pandemic.

On March 15,

2020, the

Fed announced

a $700 billion

asset purchase

program

to provide

liquidity

to the U.S.

Treasury and

Agency RMBS

markets.

Specifically, the

Fed announced

that it would

purchase

at least $500

billion of

U.S. Treasuries

and at least

$200 billion

of Agency

RMBS.

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 on

March 3,

2020. On

June 30,

2020, Fed

Chairman

Powell announced

expectations

to maintain

interest

rates at

this level

until the

Fed is

confident

that the

economy has

weathered

recent events

and is on

track to

achieve maximum

employment

and price

stability

goals. The

FOMC continued

to reaffirm

this commitment

at all subsequent

meetings through

December

of 2021,

as well as

an intention

to allow

inflation

to climb modestly

above their

2% target

and maintain

that level

for a period

sufficient for

inflation

to average

2% long term.

January 26,

2022, the

FOMC reiterated

its goals

of maximum

employment

and a 2%

long-run

inflation

rate and

stated that,

with a strong

labor market

and inflation

well above

2%, it expected

it would

soon be appropriate

to raise

the target

Fed Funds

rate.

In response

to the deterioration

in the markets

for U.S.

Treasuries, Agency

RMBS and

other mortgage

and fixed

income markets

investors

liquidated

investments

in response

to the economic

crisis resulting

from the

actions to

contain and

minimize the

impacts of

the

COVID-19

pandemic,

on the morning

of Monday, March

23, 2020,

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.

Through November

of 2021,

the Fed was

committed

to purchasing

$80 billion

of U.S.

Treasuries and

$40 billion

of Agency

RMBS each

month. In

November

of 2021,

it began

tapering

its net asset

purchases

each month

and ended

net asset

purchases

entirely

by early March

of 2022.

The minutes

to the March

16, 2022

FOMC meeting

implied that

the Fed would

begin reducing

its balance

sheet by

a maximum

$60 billion

of U.S.

Treasuries and

$35 billion

of Agency

RMBS each

month, phased

in over three

months and

likely beginning

in May 2022.

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.

The

$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

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

of the CARES

Act began

to expire

in July 2020,

including

a moratorium

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 to

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, 2021,

providing

for extensions

of many of

the CARES

Act policies

and programs

as well as

additional

relief. On

January 29,

2021, the

CDC issued

guidance extending

eviction moratoriums

for covered

persons through

March 31,

2021. The

FHFA subsequently

extended

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 until

July 31,

2021 and

September

30, 2021,

respectively. The

U.S. Housing

and Urban

Development

Department

subsequently

extended

the FHA

foreclosure

and eviction

moratoria

July 31, 2021

and September

30, 2021,

respectively.

Despite the

expirations

of these

foreclosure

moratoria,

a final rule

adopted by

the

CFPB on

June 28,

2021 effectively

prohibited

servicers

from initiating

a foreclosure

before January

1, 2022 in

most instances.

Following

the end of

this limitation,

foreclosure

starts for

January and

February

of 2022 were

up 29% and

40% month-over-month

and 126%

and

176% year-over-year,

respectively, although

they remain

below pre-pandemic

levels.

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.

September

30, 2019,

the FHFA announced

that Fannie

Mae and Freddie

Mac were

allowed to

increase their

capital buffers

to $25 billion

and $20 billion,

respectively, from

the prior

limit of $3

billion each.

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

to implement

both a risk-based

capital framework

and minimum

leverage

capital

requirements.

The final

rule on the

new capital

framework

for the GSEs

was published

in the federal

in December

2020.

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

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. On

September

14, 2021,

the U.S.

Treasury and

the FHFA suspended

certain

policy provisions

in the January

agreement,

including

limits on

loans acquired

for cash

consideration,

multifamily

loans, loans

with higher

risk characteristics

and second

homes and

investment

properties.

On February

25, 2022,

the FHFA published

a final rule,

effective as

April 26,

2022, amending

the GSE capital

framework

established

in December

2020 by, among

other things,

replacing

the fixed

leverage

buffer equal

to 1.5% of

a GSE’s adjusted

total assets

with a dynamic

leverage

buffer equal

to 50% of

a GSE’s stability

capital buffer,

reducing

the risk weight

floor from

10% to 5%,

and removing

the requirement

that the

GSEs must

apply an overall

effectiveness

adjustment

to their

credit risk

transfer

exposures.

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. However,

the ICE Benchmark

Administration,

in its capacity

as administrator

USD LIBOR,

has announced

that it intends

to extend

publication

of USD LIBOR

(other than

one-week and

two-month

tenors) by

months to

June 2023.

Notwithstanding

this possible

extension,

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 ARRC,

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.

We will monitor

the emergence

of SOFR

carefully

as it appears

likely to

become the

new benchmark

for hedges

and a range

interest

rate investments.

At this time,

however, no consensus

exists as

to what rate

or rates

may become

accepted alternatives

to LIBOR.

On December

7, 2021,

the CFPB

released

a final rule

that amends

Regulation

Z, which

implemented

the Truth in

Lending Act,

aimed

at addressing

cessation

of LIBOR

for both

closed-end

(e.g., home

mortgage)

and open-end

(e.g., home

equity line

of credit)

products.

The

rule, which

mostly becomes

effective

in April of

2022, establishes

requirements

for the selection

of replacement

indices for

existing

LIBOR-

linked consumer

loans. Although

the rule

does not

mandate the

use of SOFR

as the alternative

rate, it

identifies

SOFR as a

comparable

rate for

closed-end

products

and states

that for

open-end products,

the CFPB

has determined

that ARRC’s

recommended

spread-adjusted

indices based

on SOFR

for consumer

products

to replace

the one-month,

three-month,

or six-month

USD LIBOR

index “have

historical

fluctuations

that are

substantially

similar to

those of

the LIBOR

indices that

they are

intended

to replace.”

The CFPB

reserved

judgment,

however, on a

SOFR-based

spread-adjusted

replacement

index to

replace the

one-year USD

LIBOR until

it obtained

additional

information.

On December

8, 2021,

the House

of Representatives

passed the

Adjustable

Interest

Rate (LIBOR)

Act of 2021

(H.R. 4616)

(the

“LIBOR Act”),

which provides

for a statutory

replacement

benchmark

rate for

contracts

that use

LIBOR as

a benchmark

and do not

contain

any fallback

mechanism

independent

of LIBOR.

Pursuant

to the LIBOR

Act, SOFR

becomes the

new benchmark

rate by operation

of law

for any such

contract.

The LIBOR

Act establishes

a safe harbor

from litigation

for claims

arising out

of or related

to the use

of SOFR

as the

recommended

benchmark

replacement.

The LIBOR

Act makes

clear that

it should

not be construed

to disfavor

the use of

any benchmark

on a prospective

basis.

The LIBOR

Act also

attempts

to forestall

challenges

that it is

impairing

contracts.

It provides

that the

discontinuance

of LIBOR

and the

automatic

statutory

transition

to a replacement

rate neither

impairs or

affects the

rights of

a party to

receive payment

under such

contracts,

nor allows

a party to

discharge

their performance

obligations

or to declare

a breach

of contract.

It amends

the Trust Indenture

Act of 1939

to state

that the

“the right

of any holder

of any indenture

security

to receive

payment of

the principal

of and interest

on such indenture

security shall

not be deemed

to be impaired

or affected”

by application

of the LIBOR

Act to any

indenture

security.

On December

9, 2021,

the United

States Senate

referred the

LIBOR Act

to the Committee

on Banking,

Housing and

Urban Affairs.

One-week and

two-month

U.S. dollar

LIBOR rates

phased out

on December

31, 2021,

but other

U.S. dollar

tenors may

continue until

June 30,

2023. We will

monitor the

emergence

of SOFR

carefully

as it appears

likely to

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, extended

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

applied to

outstanding

single-family

pools and

newly issued

single-family

pools and

was first

reflected

when January

2021 factors

were released

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 anticipated,

however, that

delinquent

loans will

be repurchased

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

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

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

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

prepayment

risk because

holders

of those

mortgages

are most

likely to

refinance

to 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

to their

par value

and have an

effective

interest

rate based

on the discount

and the term

of the underlying

loan, an

increase in

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

to 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 of

the

economic,

health and

market turmoil

brought about

by COVID-19.

On March 23,

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, but

ended these

purchases

in March 2022

and announced

plans to reduce

its balance

sheet.

The Fed’s planned

reduction

of its

balance sheet

could negatively

impact our

investment

portfolio.

Further, the

moratoriums

on foreclosures

and evictions

described

above

will likely

delay potential

defaults

on loans that

would otherwise

be bought

out of Agency

RMBS pools

as described

above.

Depending

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

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.

Increases

in the Fed

Funds rate

or LIBOR

typically 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

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

The first

quarter of

2022 was

extremely volatile

as the Fed

pivoted

quickly from

unprecedented

monetary

policy accommodation

to the

rapid removal

of the accommodation.

Current

market pricing

in the futures

markets implies

the Fed

will raise

the target

for the Fed

Funds

rate to approximately

3.25% by

the third

quarter of

2023 and

to over 2.5%

by the end

of 2022.

The U.S.

economy has

recovered

quickly

from

the COVID-19

induced downturn

with the

help of the

Fed’s monetary

policy and

equally

unprecedented

fiscal stimulus

from the

government.

As the economy

recovered

rapidly, inflationary

pressures

emerged and

were exacerbated

by numerous

supply constraints,

including

the supply

of labor, resulting

in a sub-4%

unemployment

rate which

continues

to fall and

wage growth

above 5%.

The war in

Ukraine has

further stimulated

inflationary

pressures

as Russia

and Ukraine

are leading

suppliers

of food,

energy and

many other

commodities.

COVID-19

induced shutdowns

in China

have also

increased

supply constraints,

another source

of inflationary

pressure.

the second

quarter of

2022 unfolds,

these trends

have intensified

and the Fed

appears even

more intent

on removing

their accommodation

as quickly

as possible.

The Fed

may even begin

outright

sales of U.S.

Treasury and

Agency RMBS

assets later

this year.

For the Company,

this means

our funding

costs are

likely to

rise materially

over the

course of

2022 and

possibly into

2023.

As interest

rates have

risen the

prices of

the Company’s

assets have

fallen.

Investors

fear possible

outright

sales of Agency

RMBS by

the

Fed, in

addition to

the Fed and

most banks

buying far

fewer Agency

RMBS as

well.

During the

first quarter

of 2022,

these securities

have

underperformed

the hedge

instruments

the Company

has employed

and they

may continue

to do so.

This puts

downward

pressure on

the

Company’s shareholders

equity and

book value

per share.

As interest

rates have

risen,

refinancing

and purchase

activity

in the residential

housing market

has slowed.

However, as the

Company’s Agency

RMBS assets

are trading

at discounts,

this lowers

the yield

the Company

realizes.

In sum, the

current market

environment

is challenging

for the Company’s

portfolio

and all Agency

RMBS and/or

mortgage

focused and

levered investors.

To counter these challenging

market conditions,

the Company

continues

to take steps

to minimize

their

impact through

asset selection

and the lower

use of leverage.

The Company’s

share prices

have traded

below our

book value

per share

since late

in 2021.

The Company

increased

the size of

the share

buy-back program

in late 2021

and has the

option to

repurchase

up to

10% of our

outstanding

shares, which

could result

in accretive

purchases

to book value

per share

owing to

the common

stock price

trading

at a discount

to the Company’s

book value.

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

discussed

in our annual

report on

Form 10-K

for the year

ended December

31, 2021.

Capital Expenditures

At March

31, 2022,

we had no

material commitments

for capital

expenditures.

Off-Balance

Sheet Arrangements

At March

31, 2022,

we did not

have any off-balance

sheet arrangements.

Dividends

In addition

to other

requirements

that must

be satisfied

to continue

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

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

0.780

97,601

2022 - YTD

(1)

0.200

35,484

Totals

12.635

475,048

(1)

On April 13, 2022, the Company declared a dividend of $0.045 per share

to be paid on May 27, 2022.

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, 2022.

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

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.

If prepayments

are slower

or faster

than assumed,

the life of

the Agency

RMBS will

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,

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

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, 2022

and December

31, 2021,

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. We

have a negatively

convex asset

profile and

a linear

to slightly

positively

convex hedge

portfolio

(short positions).

It is not

uncommon for

us to have

losses in

both directions.

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,

2022 and

December

31, 2021.

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,

if 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, 2022

-200 Basis Points

(2.12)%

(16.38)%

-100 Basis Points

(0.24)%

(1.89)%

-50 Basis Points

0.16%

1.27%

+50 Basis Points

(0.10)%

(0.80)%

+100 Basis Points

(0.50)%

(3.84)%

+200 Basis Points

(1.80)%

(13.88)%

As of December 31, 2021

-200 Basis Points

(2.01)%

(17.00)%

-100 Basis Points

(0.33)%

(2.76)%

-50 Basis Points

0.19%

1.59%

+50 Basis Points

(0.48)%

(4.04)%

+100 Basis Points

(1.64)%

(13.91)%

+200 Basis Points

(4.79)%

(40.64)%

(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