Orchid Island Capital, Inc.

ORC

US68571X3017

Specialized REITs

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Apr. 25	Orchid Island Capital, Inc. Reports Earnings Results for the First Quarter Ended March 31, 2024	CI
Apr. 10	Orchid Island Capital, Inc. Provides Earnings Guidance for the First Quarter Ended March 31, 2024	CI

ORCHID ISLAND CAPITAL : MANAGEMENT'S (form 10-Q)

April 30, 2021 at 02:32 pm EDT

DISCUSSION

AND ANALYSIS OF FINANCIAL

CONDITION

AND RESULTS OF

OPERATIONS

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

read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The



discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are

those that are not historical in nature. As a result of many factors, such as those set forth under "Risk Factors" in our most recent Annual



Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.

Overview

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



("RMBS") which are issued and
guaranteed by a federally chartered corporation or agency ("Agency RMBS"). Our

investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,



such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the "GSEs") and collateralized

mortgage obligations ("CMOs") issued by the GSEs ("PT RMBS") and (ii) structured Agency RMBS, such as interest-only securities ("IOs"), inverse



interest-only securities ("IIOs") and
principal only securities ("POs"), among other types of structured Agency RMBS.

We were formed by Bimini in August 2010, commenced operations on November 24, 2010 and completed our initial public offering ("IPO")



on February 20, 2013.

We are externally managed by Bimini Advisors, an investment adviser registered with the Securities

and Exchange Commission (the "SEC").

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

through a combination of capital appreciation and the payment of regular monthly distributions. We intend to achieve this objective

by investing in and strategically allocating capital between the two categories of Agency RMBS described above. We seek



to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our

structured Agency RMBS portfolio, and (ii) the interest income we generate from the unleveraged portion of our structured Agency RMBS



portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured

as repurchase agreements. PT RMBS and structured Agency RMBS typically exhibit materially different sensitivities to movements in interest

rates. Declines in the value of one portfolio may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will vary and will be actively managed in an effort to maintain the level of income generated by the

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

strategy will enhance our liquidity, earnings, book value stability and asset selection opportunities in various interest



rate environments.

We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue



Code of 1986, as
amended (the "Code").

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



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

our REIT qualification.

The Company's common stock trades on the New York Stock Exchange under the symbol "ORC".




Capital Raising Activities

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

2020 Equity Distribution Agreement") with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount

of $200,000,000 of shares of our common stock in transactions that were deemed to be "at the market" offerings and

privately negotiated transactions.

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

gross proceeds of $19.8 million, and net proceeds of approximately $19.4 million, net of commissions and fees, prior to

its termination in August 2020.

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

Equity Distribution Agreement") with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount

of $150,000,000 of shares of our common stock in transactions that are deemed to be "at the market" offerings and privately

negotiated transactions. Through March 31,

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



Agreement for aggregate gross proceeds of
approximately $54.1 million, and net proceeds of approximately $53.2

million, net of commissions and fees.

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

Underwriting Agreement") with J.P. Morgan Securities LLC ("J.P. Morgan"), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.

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



Agreement at $5.20 per share. In addition,
we granted J.P.

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



of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing
of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with net proceeds to us of approximately

$45.2 million,

net of offering expenses.

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

Agreement") with J.P. Morgan, relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.

In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,200,000 shares of our common stock on the

same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock

occurred on March 5, 2021, with net proceeds to us of approximately $50.1 million, net of offering expenses.

Stock Repurchase Agreement

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

shares of our common stock. The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to

economic

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



The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may be

suspended or discontinued at the Company's discretion without prior notice. On February 8, 2018, the Board of Directors approved an increase

in the stock repurchase program for up to an additional 4,522,822 shares of the Company's common stock. Coupled with the 783,757 shares

remaining from the original 2,000,000 share authorization, the increased authorization brought the total authorization to 5,306,579

shares, representing 10% of the Company's then outstanding share count. This stock repurchase program has no termination

date.

From the inception of the stock repurchase program through March 31, 2021, the Company



repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4

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

of $7.10

per

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

ended March 31, 2021. The remaining authorization under the repurchase program as of March 31, 2021 was 837,311 shares.

Factors that Affect our Results of Operations and Financial Condition

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

financial condition. These factors include:



?

interest rate trends;
?

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

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

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

the Fed, the Federal Housing Financing Agency (the "FHFA"), the Federal Open Market Committee (the "FOMC") and the U.S. Treasury;

prepayment rates on mortgages underlying our Agency RMBS and credit trends



insofar as they affect prepayment rates; and
?

other market developments.

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



of operations and financial condition. These
factors include:











25
?

our degree of leverage;
?

our access to funding and borrowing capacity;
?

our borrowing costs;
?

our hedging activities;
?

the market value of our investments; and
?

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



registration exemption under the Investment
Company Act.


Results of

Operations

Described

below are

the Company's

results of

operations

for the three

months ended

March 31,

2021, as compared

to the
Company's results

of operations

for the three

months ended

March 31,

2020.


Net (Loss)

Income Summary


Net loss for

the three

months ended

March 31,

2021 was $29.4

million, or

$0.34 per

share. Net

loss for the

three months

ended
March 31, 2020

was $91.2

million, or

$1.41 per

share. The

components

of net loss

for the three

months ended

March 31,

2021 and

2020,
along with

the changes

in those components

are presented

in the table

below:

(in thousands)
2021
2020
Change
Interest income
$
26,856
$
35,671
$
(8,815)
Interest expense
(1,941)
(16,523)
14,582
Net interest income
24,915
19,148
5,767
Losses on RMBS and derivative contracts
(50,791)
(108,206)
57,415
Net portfolio deficiency
(25,876)
(89,058)
63,182
Expenses
(3,493)
(2,141)
(1,352)
Net loss
$
(29,369)
$
(91,199)
$
61,830

GAAP and Non-GAAP Reconciliations

In addition to the results presented in accordance with GAAP,

our results of operations discussed below include certain non-GAAP financial information, including "Net Earnings Excluding Realized and Unrealized Gains and Losses", "Economic Interest Expense" and "Economic Net Interest Income."

Net Earnings Excluding Realized and Unrealized Gains and Losses



We have elected to account for our Agency RMBS under the fair value option.
Securities held under the fair value
option are recorded at estimated fair value, with changes in the fair value
recorded as unrealized gains or losses through
the statements of operations.

In addition, we have not designated our derivative financial instruments used
for hedging purposes as hedges for
accounting purposes, but rather hold them for economic hedging purposes. Changes
in fair value of these instruments are
presented in a separate line item in the Company's statements of operations and
are not included in interest expense.

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




Presenting net earnings excluding realized and unrealized gains and losses
allows management to: (i) isolate the net
interest income and other expenses of the Company over time, free of all fair
value adjustments and (ii) assess the
effectiveness of our funding and hedging strategies on our capital allocation
decisions and our asset allocation performance.






26

Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio.

We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment.



Our presentation of net earnings excluding realized and
unrealized gains and losses may not be comparable to similarly-titled measures
of other companies, who may use different
calculations. As a result, net earnings excluding realized and unrealized gains
and losses should not be considered as a
substitute for our GAAP net income (loss) as a measure of our financial
performance or any measure of our liquidity under
GAAP.

The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains and losses.



Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
March 31, 2021
$
(29,369)
$
(50,791)
$
21,422
$
(0.34)
$
(0.60)
$
0.26
December 31, 2020
16,479
(4,605)
21,084
0.23
(0.07)
0.30
September 30, 2020
28,076
5,745
22,331
0.42
0.09
0.33
June 30, 2020
48,772
28,749
20,023
0.74
0.43
0.31
March 31, 2020
(91,199)
(108,206)
17,007
(1.41)
(1.68)
0.27

(1)

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

instruments,



including net interest income or expense on
interest rate swaps
.

Economic Interest Expense and Economic Net Interest Income

We use derivative and other hedging instruments, specifically Eurodollar,



Fed Funds and Treasury Note ("T-Note")
futures contracts, short positions in U.S. Treasury securities, interest rate
swaps and swaptions, to hedge a portion of the
interest rate risk on repurchase agreements in a rising rate environment.

We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these instruments are presented in a separate line item in our statements of operations and not included in interest expense. As such, for financial reporting purposes,

interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.


For the purpose of computing economic net interest income and ratios relating to
cost of funds measures, GAAP
interest expense has been adjusted to reflect the realized and unrealized gains
or losses on certain derivative instruments
the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury

futures, and interest rate swaps and swaptions,
that pertain to each period presented. We believe that adjusting our interest
expense for the periods presented by the gains
or losses on these derivative instruments would not accurately reflect our
economic interest expense for these periods. The
reason is that these derivative instruments may cover periods that extend into
the future, not just the current period. Any
realized or unrealized gains or losses on the instruments reflect the change in
market value of the instrument caused by
changes in underlying interest rates applicable to the term covered by the
instrument, not just the current period. For each
period presented, we have combined the effects of the derivative financial
instruments in place for the respective period with
the actual interest expense incurred on borrowings to reflect total economic
interest expense for the applicable period.
Interest expense, including the effect of derivative instruments for the period,
is referred to as economic interest expense.
Net interest income, when calculated to include the effect of derivative
instruments for the period, is referred to as economic








27

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


The Company may invest in TBAs, which are forward contracts for the purchase or
sale of Agency RMBS at a
predetermined price, face amount, issuer, coupon and stated maturity on an
agreed-upon future date. The specific Agency
RMBS to be delivered into the contract are not known until shortly before the
settlement date. We may choose, prior to
settlement, to move the settlement of these securities out to a later date by
entering into a dollar roll transaction. The
Agency RMBS purchased or sold for a forward settlement date are typically priced
at a discount to equivalent securities
settling in the current month. Consequently, forward purchases of Agency RMBS
and dollar roll transactions represent a
form of off-balance sheet financing. These TBAs are accounted for as derivatives
and marked to market through the income
statement. Gains or losses on TBAs are included with gains or losses on other
derivative contracts and are not included in
interest income for purposes of the discussions below.

We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP.



The non-GAAP measures help
management to evaluate its financial position and performance without the
effects of certain transactions and GAAP
adjustments that are not necessarily indicative of our current investment
portfolio or operations. The unrealized gains or
losses on derivative instruments presented in our statements of operations are
not necessarily representative of the total
interest rate expense that we will ultimately realize. This is because as
interest rates move up or down in the future, the
gains or losses we ultimately realize, and which will affect our total interest
rate expense in future periods, may differ from
the unrealized gains or losses recognized as of the reporting date.


Our presentation of the economic value of our hedging strategy has important
limitations. First, other market
participants may calculate economic interest expense and economic net interest
income differently than the way we
calculate them. Second, while we believe that the calculation of the economic
value of our hedging strategy described
above helps to present our financial position and performance, it may be of
limited usefulness as an analytical tool.
Therefore, the economic value of our investment strategy should not be viewed in
isolation and is not a substitute for
interest expense and net interest income computed in accordance with GAAP.

The tables below present a reconciliation of the adjustments to interest expense
shown for each period relative to our
derivative instruments, and the income statement line item, gains (losses) on
derivative instruments, calculated in
accordance with GAAP for each quarter of 2021 to date and 2020.

Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
March 31, 2021
$
45,472
$
9,133
$
(8,559)
$
(4,044)
$
48,942
December 31, 2020
8,538
(436)
5,480
(5,790)
$
9,284
September 30, 2020
4,079
131
3,336
(6,900)
$
7,512
June 30, 2020
(8,851)
582
1,133
(5,751)
$
(4,815)
March 31, 2020
(82,858)
(7,090)
-
(4,900)
$
(70,868)

Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
















28
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
March 31, 2021
$
26,856
$
1,941
$
(4,044)
$
5,985
$
24,915
$
20,871
December 31, 2020
25,893
2,011
(5,790)
7,801
23,882
18,092
September 30, 2020
27,223
2,043
(6,900)
8,943
25,180
18,280
June 30, 2020
27,258
4,479
(5,751)
10,230
22,779
17,028
March 31, 2020
35,671
16,523
(4,900)
21,423
19,148
14,248

(1)

Reflects the effect of derivative instrument hedges for only the



period presented.
(2)

Calculated by adding the effect of derivative instrument hedges

attributed to the period presented to GAAP interest expense. (3)

Calculated by adding the effect of derivative instrument hedges



attributed to the period presented to GAAP net interest income.
Net Interest Income

During the

three months

ended March

31, 2021,

we generated

$24.9 million

of net interest

income, consisting

of $26.9 million

of
interest income

from RMBS

assets offset

by $1.9 million

of interest

expense on

borrowings.

For the comparable

period ended

March 31,
2020, we generated

$19.1 million

of net interest

income, consisting

of $35.7 million

of interest

income from

RMBS assets

offset by $16.5
million of

interest expense

on borrowings.

The $8.8 million

decrease in

interest income

was due to

a 170 basis

point ("bps")

decrease in
the yield on

average RMBS,

partially offset

by the $762.9

million increase

in average

RMBS. The

$14.6 million

decrease in

interest
expense was

due to a 191

bps decrease

in the average

cost of funds,

partially offset

by a $759.5

million increase

in average

outstanding
borrowings.

We had more

average assets

and borrowings

during the

first quarter

of 2021 compared

to the first

quarter of

2020 as we
deployed the

proceeds of

our capital

raising activity

during the

second half

of 2020 and

the first

quarter of

2021.


On an economic

basis, our

interest

expense on

borrowings

for the three

months ended

March 31,

2021 and 2020

was $6.0 million
and $21.4

million, respectively,

resulting in

$20.9 million

and $14.2

million of

economic net

interest

income, respectively.

The lower
economic interest

expense during

the three

months ended

March 31,

2021 was due

to the 191

bps decrease

in the average

cost of funds
noted above,

partially offset

by the $759.5

million increase

in average

outstanding

borrowings

and the negative

performance

of our
hedging activities

during the

period.

The tables

below provide

information

on our portfolio

average balances,

interest income,

yield on

assets, average

borrowings,

interest
expense, cost

of funds,

net interest

income and

net interest

spread for

each quarter

in 2021 to date

and 2020 on

both a GAAP

and
economic basis.


($ in thousands)
Average
Yield on
Interest Expense
Average Cost of Funds
RMBS
Interest
Average
Average
GAAP
Economic
GAAP
Economic
Held
(1)
Income
RMBS
Borrowings
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
March 31, 2021
$
4,032,716
$
26,856
2.66%
$
3,888,633
$
1,941
$
5,985
0.20%
0.62%
December 31, 2020
3,633,631
25,893
2.85%
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,422,564
27,223
3.18%
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
3,126,779
27,258
3.49%
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,269,859
35,671
4.36%
3,129,178
16,523
21,423
2.11%
2.74%

($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended









29
March 31, 2021
$
24,915
$
20,871
2.46%
2.04%
December 31, 2020
23,882
18,093
2.62%
1.94%
September 30, 2020
25,180
18,280
2.93%
2.07%
June 30, 2020
22,779
17,028
2.89%
2.12%
March 31, 2020
19,148
14,248
2.25%
1.62%

(1)

Portfolio yields and costs of borrowings presented in the tables above

and the tables on pages



29 and 30 are calculated based on the
average balances of the underlying investment portfolio/borrowings

balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the



beginning and ending balances.
(2)

Economic interest expense and economic net interest income

presented in the table above and the tables on page 30 include

the effect of our derivative instrument hedges for only the periods presented. (3) Represents

interest cost of our borrowings and the effect of derivative

instrument hedges attributed to the period divided by average RMBS. (4) Economic

net interest spread is calculated by subtracting average economic

cost of funds from realized yield on average RMBS.

Interest Income and Average Asset Yield



Our interest

income for

the three

months ended

March 31,

2021 and

2020 was $26.9

million and

$35.7 million,

respectively.

We had
average RMBS

holdings of

$4,032.7 million

and $3,269.9

million for

the three

months ended

March 31,

2021 and 2020,

respectively.

The
yield on our

portfolio

was 2.66%

and 4.36%

for the three

months ended

March 31,

2021 and 2020,

respectively. For

the three

months
ended March

31, 2021 as

compared

to the three

months ended

March 31,

2020, there

was a $8.8

million decrease

in interest

income due
to a 170 bps

decrease in

the yield

on average

RMBS,

partially offset

by a $762.9

million increase

in average

RMBS.


The table

below presents

the average

portfolio

size, income

and yields

of our respective

sub-portfolios,

consisting

of structured

RMBS
and PT RMBS

for each quarter

in 2021 to

date and 2020.


($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
March 31, 2021
$
3,997,965
$
34,751
$
4,032,716
$
26,869
$
(13)
$
26,856
2.69%
(0.15)%
2.66%
December 31, 2020
3,603,885
29,746
3,633,631
25,933
(40)
25,893
2.88%
(0.53)%
2.85%
September 30, 2020
3,389,037
33,527
3,422,564
27,021
202
27,223
3.19%
2.41%
3.18%
June 30, 2020
3,088,603
38,176
3,126,779
27,004
254
27,258
3.50%
2.67%
3.49%
March 31, 2020
3,207,467
62,392
3,269,859
35,286
385
35,671
4.40%
2.47%
4.36%

Interest Expense and the Cost of Funds



We had average

outstanding

borrowings

of $3,888.6

million and

$3,129.2 million

and total

interest

expense of

$1.9 million

and $16.5
million for

the three

months ended

March 31,

2021 and 2020,

respectively. Our

average cost

of funds was

0.20% and

2.11% for the three
months ended

March 31,

2021 and

2020, respectively.

Contributing

to the decrease

in interest

expense was

a 191 bps

decrease

in the
average cost

of funds,

partially offset

by a $759.5

million increase

in average

outstanding

borrowings

during the

three months

ended
March 31,

2021 as compared

to the three

months ended

March 31,

2020.

Our economic

interest expense

was $6.0 million

and $21.4

million for

the three

months ended

March 31,

2021 and 2020,

respectively.
There was

a 212 bps

decrease in

the average

economic cost

of funds to

0.62% for

the three

months ended

March 31,

2021 from

2.74%
for the three

months ended

March 31,

2020.

Since all of

our repurchase

agreements

are short-term,

changes in

market rates

directly affect

our interest

expense. Our

average cost
of funds calculated

on a GAAP

basis was 7

bps above the

average one-month

LIBOR and

3 bps below

the average

six-month

LIBOR for
the quarter

ended March

31, 2021.

Our average

economic cost

of funds was

49 bps above

the average

one-month

LIBOR and

39 bps
above the average

six-month LIBOR

for the quarter

ended March

31, 2021.

The average

term to maturity

of the outstanding

repurchase





















30
agreements

was 43 days

at March

31, 2021 and

31 days at

December 31,

2020.

The tables

below present

the average

balance of

borrowings

outstanding,

interest expense

and average

cost of funds,

and average
one-month

and six-month

LIBOR rates

for each quarter

in 2021 to date

and 2020 on

both a GAAP

and economic

basis.


($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Three Months Ended
Borrowings
Basis
Basis
Basis
Basis
March 31, 2021
$
3,888,633
$
1,941
$
5,985
0.20%
0.62%
December 31, 2020
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,129,178
16,523
21,423
2.11%
2.74%

Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
December 31, 2020
0.15%
0.27%
0.08%
(0.04)%
0.76%
0.64%
September 30, 2020
0.17%
0.35%
0.08%
(0.10)%
0.94%
0.76%
June 30, 2020
0.55%
0.70%
0.05%
(0.10)%
0.82%
0.67%
March 31, 2020
1.34%
1.43%
0.77%
0.68%
1.40%
1.31%

Gains or Losses


The table

below presents

our gains

or losses for

the three

months ended

March 31,

2021 and 2020.


(in thousands)
2021
2020
Change
Realized losses on sales of RMBS
$
(7,397)
$
(28,380)
$
20,983
Unrealized (losses) gains on RMBS
(88,866)
3,032
(91,898)
Total losses on

RMBS
(96,263)
(25,348)
(70,915)
Gains (losses) on interest rate futures
2,488
(12,556)
15,044
Gains (losses) on interest rate swaps
27,123
(60,623)
87,746
Losses on payer swaptions (short positions)
(26,167)
-
(26,167)
Gains (losses) on payer swaptions (long positions)
40,070
(2,589)
42,659
Gains on interest rate floors
1,384
-
1,384
Losses on TBA securities (long positions)
(8,559)
-
(8,559)
Gains (losses) on TBA securities (short positions)
9,133
(7,090)
16,223
Total
$
(50,791)
$
(108,206)
$
57,415

We invest in

RMBS with

the intent

to earn net

income from

the realized

yield on those

assets over

their related

funding and

hedging
costs, and

not for the

purpose of

making short

term gains

from sales.

However, we have

sold, and may

continue to

sell,

existing assets

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,

2021 and 2020,

we received

proceeds of

$988.5 million

and $1,808.9

million,
respectively, from

the sales of

RMBS. Most

of these sales

in the first

quarter of

2020 occurred

during the

second half

of March 2020

as we
sold assets

in order to

maintain sufficient

cash and liquidity

and reduce

risk associated

with the

market turmoil

brought about

by COVID-
19.






























31

Realized and

unrealized

gains and

losses on RMBS

are driven

in part by

changes in

yields and

interest rates,

which affect

the pricing
of the securities

in our portfolio.

As rates increased

during the

three months

ended March

31, 2021,

it had a negative

impact on

our RMBS
portfolio.

Gains and losses

on interest

rate futures

contracts are

affected by

changes in

implied forward

rates during

the reporting

period.
The table

below presents

historical

interest rate

data for each

quarter end

during 2021

to date and

2020.

5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%

(1)

Historical 5 and 10 Year

U.S. Treasury Rates are obtained from quoted

end of day prices on the Chicago Board Options Exchange. (2)



Historical 30 Year and

15 Year Fixed

Rate Mortgage Rates are obtained from Freddie Mac's

Primary Mortgage Market Survey.

(3)

Historical LIBOR is obtained from the Intercontinental Exchange Benchmark

Administration Ltd.

Expenses

Total

operating expenses were approximately $3.5 million and $2.1 million for the three months ended March 31, 2021 and 2020, respectively.



The table below presents a breakdown of operating expenses for the three months
ended March
31, 2021 and 2020.

(in thousands)
2021
2020
Change
Management fees
$
1,621
$
1,377
$
244
Overhead allocation
404
347
57
Accrued incentive compensation
364
(436)
800
Directors fees and liability insurance
272
260
12
Audit, legal and other professional fees
318
255
63
Other direct REIT operating expenses
421
206
215
Other expenses
93
132
(39)
Total expenses
$
3,493
$
2,141
$
1,352

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



to the terms of a management
agreement. The management agreement has been renewed through February 20,

2022 and provides for automatic one-year extension options thereafter and is subject to certain termination rights.

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

the Company.



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

?

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

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



and less than or equal to $500
million, and
?

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

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

incurred on its behalf and to pay the Manager the Company's pro rata portion of certain overhead costs set forth in the management agreement.



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

fee equal to three times the average annual management fee, as defined in the management agreement,

before or on the last day of the term of the agreement.

The following table summarizes the management fee and overhead allocation expenses



for each quarter in 2021 to date and
2020.

($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
March 31, 2021
$
4,032,716
$
453,353
$
1,621
$
404
$
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
348
1,616
March 31, 2020
3,269,859
376,673
1,377
347
1,724

Financial

Condition:

Mortgage-Backed Securities

As of March

31, 2021,

our RMBS portfolio

consisted of

$4,338.5 million

of Agency RMBS

at fair value

and had a

weighted average
coupon on

assets of 3.02%.

During the

three months

ended March

31, 2021,

we received

principal repayments

of $123.9

million
compared to

$142.3 million

for the three

months ended

March 31,

2020.

The average

three month

prepayment

speeds for

the quarters
ended March

31, 2021 and

2020 were

12.0% and

11.9%, respectively.


The following

table presents

the 3-month constant

prepayment

rate ("CPR")

experienced on

our structured

and PT RMBS
sub-portfolios,

on an annualized

basis, for

the quarterly

periods presented.

CPR is a method

of expressing

the prepayment
rate for a mortgage

pool that assumes

that a constant

fraction of

the remaining

principal is

prepaid each

month or year.
Specifically, the

CPR in the chart

below represents

the three month

prepayment rate

of the securities

in the respective

asset
category.

Assets that

were not owned

for the entire

quarter have

been excluded

from the calculation.

The exclusion

of certain
assets during

periods of high

trading activity

can create a

very high,

and often volatile,

reliance on

a small sample

of underlying
loans.


Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9

The following

tables summarize

certain characteristics

of the Company's

PT RMBS and

structured

RMBS as of

March 31,

2021 and
December 31,

2020:

($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31, 2021
Fixed Rate RMBS
$
4,297,731
99.1%
2.95%
335
1-Mar-51
Total Mortgage-backed Pass-through
4,297,731
99.1%
2.95%
335
1-Mar-51















































































































33
Interest-Only Securities
35,521
0.8%
3.98%
264
25-May-50
Inverse Interest-Only Securities
5,284
0.1%
3.77%
311
15-Jun-42
Total Structured RMBS
40,805
0.9%
3.93%
275
25-May-50
Total Mortgage Assets
$
4,338,536
100.0%
3.02%
331
1-Mar-51
December 31, 2020
Fixed Rate RMBS
$
3,560,746
95.5%
3.09%
339
1-Jan-51
Fixed Rate CMOs
137,453
3.7%
4.00%
312
15-Dec-42
Total Mortgage-backed Pass-through
3,698,199
99.2%
3.13%
338
1-Jan-51
Interest-Only Securities
28,696
0.8%
3.98%
268
25-May-50
Total Structured RMBS
28,696
0.8%
3.98%
268
25-May-50
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51

($ in thousands)
March 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
3,439,588
79.3%
$
2,733,960
73.4%
Freddie Mac
898,948
20.7%
992,935
26.6%
Total Portfolio
$
4,338,536
100.0%
$
3,726,895
100.0%

March 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.56
$
107.43
Weighted Average Structured Purchase Price
$
18.69
$
20.06
Weighted Average Pass-through Current Price
$
106.14
$
108.94
Weighted Average Structured Current Price
$
13.83
$
10.87
Effective Duration
(1)
4.090
2.360

(1)

Effective duration is the approximate percentage change

in price for a 100 bps change in rates.



An effective duration of 4.090 indicates that an
interest rate increase of 1.0% would be expected to cause a 4.090% decrease in

the value of the RMBS in the Company's investment

portfolio

at March 31, 2021.

An effective duration of 2.360 indicates that an interest rate

increase of 1.0% would be expected to cause a 2.360% decrease in the value of the RMBS in the Company's investment

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

securities

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

funding cost hedges.

Effective duration quotes for individual investments are obtained from The Yield Book, Inc.



The following

table presents

a summary

of portfolio

assets acquired

during the three

months ended

March 31, 2021

and
2020,

including securities

purchased

during the period

that settled

after the end

of the period,

if any.

($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
1,971,296
$
107.09
1.38%
$
1,334,350
$
107.18
2.28%
Structured RMBS
4,807
6.93
0.14
-
-
0.00%

Borrowings

As of March

31, 2021,

we had established

borrowing

facilities

in the repurchase

agreement

market with

a number of

commercial
banks and other

financial institutions

and had borrowings

in place with

21 of these

counterparties.

None of these

lenders are

affiliated with
the Company. These

borrowings

are secured

by the Company's

RMBS and

cash, and bear

interest at

prevailing

market rates.

We believe
our established

repurchase

agreement

borrowing

facilities

provide borrowing

capacity in

excess of

our needs.







































34
As of March

31, 2021,

we had obligations

outstanding

under the

repurchase

agreements

of approximately

$4,181.7 million

with a net
weighted average

borrowing

cost of 0.18%.

The remaining

maturity of

our outstanding

repurchase

agreement

obligations

ranged from

1 to
166 days, with

a weighted

average remaining

maturity of

43 days.

Securing the

repurchase

agreement

obligations

as of March

31, 2021
are RMBS

with an estimated

fair value,

including accrued

interest,

of approximately

$4,285.9 million

and a weighted

average maturity

of
339 months,

and cash pledged

to counterparties

of approximately

$102.6 million.

Through April

30, 2021,

we have been

able to maintain
our repurchase

facilities

with comparable

terms to those

that existed

at March 31,

2021 with

maturities

through October

8, 2021.

The table below presents information about our period end, maximum and average balances



of borrowings for each quarter in
2021 to date and 2020.

($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
March 31, 2021
$
4,181,680
$
4,204,935
$
3,888,633
$
293,047
7.54%
December 31, 2020
3,595,586
3,597,313
3,438,444
157,142
4.57%
September 30, 2020
3,281,303
3,286,454
3,228,021
53,282
1.65%
June 30, 2020
3,174,739
3,235,370
2,992,494
182,245
6.09%
March 31, 2020
2,810,250
4,297,621
3,129,178
(318,928)
(10.19)%
(1)

(1)

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

ended March 31, 2020 reflects the disposal of RMBS pledged as collateral in order to maintain cash and liquidity in response to the dislocations

in the financial and mortgage markets resulting from the economic impacts of COVID-19.

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

in RMBS decreased $642.1 million.

Liquidity and Capital Resources



Liquidity is

our ability

to turn non-cash

assets into

cash, purchase

additional

investments,

repay principal

and interest

on borrowings,
fund overhead,

fulfill margin

calls and

pay dividends.

Our principal

immediate sources

of liquidity

include cash

balances, unencumbered
assets and

borrowings

under repurchase

agreements.

Our borrowing

capacity will

vary over time

as the market

value of our

interest
earning assets

varies.

Our balance

sheet also

generates

liquidity

on an on-going

basis through

payments of

principal and

interest

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.

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

to 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

to
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
















35
funds or risk

operating

the portfolio

with less liquidity.

Our master

repurchase

agreements

have no stated

expiration,

but can be

terminated

at any time

at our option

or at the

option of the
counterparty. However,

once a definitive

repurchase

agreement

under a master

repurchase

agreement

has been entered

into, it generally
may not be

terminated

by either

party.

A negotiated

termination

can occur, but

may involve

a fee to

be paid by

the party

seeking to
terminate

the repurchase

agreement

transaction,

as it did during

the three

months ended

March 31,

2020.

Under our

repurchase

agreement funding

arrangements,

we are required

to post margin

at the initiation

of the borrowing.

The margin
posted represents

the haircut,

which is a

percentage

of the market

value of the

collateral

pledged.

To the extent the market

value of the
asset collateralizing

the financing

transaction

declines, the

market value

of our posted

margin will

be insufficient

and we will

be required

to
post additional

collateral.

Conversely, if

the market

value of the

asset pledged

increases in

value, we

would be over

collateralized

and we
would be entitled

to have excess

margin returned

to us by the

counterparty.

Our lenders

typically

value our

pledged securities

daily to
ensure the

adequacy of

our margin

and make margin

calls as needed,

as do we.

Typically, but not always,

the parties

agree to a

minimum
threshold

amount for

margin calls

so as to avoid

the need for

nuisance margin

calls on a

daily basis.

Our master

repurchase

agreements
do not specify

the haircut;

rather haircuts

are determined

on an individual

repurchase

transaction

basis. Throughout

the three

months
ended March

31, 2021,

haircuts on

our pledged

collateral

remained

stable and

as of March

31, 2021,

our weighted

average haircut

was
approximately

5.0% of the

value of our

collateral.

TBAs represent

a form of

off-balance sheet

financing and

are accounted

for as derivative

instruments.

(See Note

4 to our Financial
Statements

in this Form

10-Q

for additional

details on

our TBAs).

Under certain

market conditions,

it may be uneconomical

for us to

roll our
TBAs into

future months

and we may

need to take

or make physical

delivery of

the underlying

securities.

If we were

required to

take
physical delivery

to settle a

long TBA,

we would have

to fund our

total purchase

commitment

with cash

or other financing

sources and

our
liquidity position

could be negatively

impacted.


Our TBAs are

also subject

to margin

requirements

governed by

the Mortgage-Backed

Securities

Division ("MBSD")

of the FICC

and
by our master

securities

forward transaction

agreements,

which may

establish margin

levels in

excess of the

MBSD. Such

provisions
require that

we establish

an initial

margin based

on the notional

value of the

TBA, which

is subject

to increase

if the estimated

fair value

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,

we
believe that

we will have

adequate sources

of liquidity

to meet such

obligations.

As discussed

earlier, we invest

a portion

of our capital

in structured

Agency RMBS.

We generally

do not apply

leverage to

this portion
of our portfolio.

The leverage

inherent in

structured

securities

replaces the

leverage obtained

by acquiring

PT securities

and funding

them
in the repurchase

market.

This structured

RMBS strategy

has been a

core element

of the Company's

overall investment

strategy since
inception.

However, we have

and may continue

to pledge

a portion

of our structured

RMBS in order

to raise our

cash levels,

but generally
will not pledge

these securities

in order to

acquire additional

assets.

The following

table summarizes

the effect on

our liquidity

and cash flows

from contractual

obligations

for repurchase

agreements

and
interest expense

on repurchase

agreements.

(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
4,181,680
$
-
$
-
$
-
$
4,181,680


















36
Interest expense on repurchase agreements
(1)
1,800
-
-
-
1,800
Totals
$
4,183,480
$
-
$
-
$
-
$
4,183,480

(1)

Interest expense

on repurchase

agreements is

based on current

interest rates

as of March 31,

2021 and the

remaining term

of the liabilities

existing
at that date.

In future

periods, we

expect to continue

to finance

our activities

in a manner

that is consistent

with our current

operations

through
repurchase

agreements.

As of March

31, 2021,

we had cash

and cash equivalents

of $211.4 million.

We generated

cash flows

of $149.7
million from

principal and

interest

payments on

our RMBS

and had average

repurchase

agreements

outstanding

of $3,888.6

million during
the three

months ended

March 31,

2021.

Stockholders'

Equity

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

with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares

of our common stock in transactions that were deemed to be "at the market" offerings and privately negotiated transactions.

We issued a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8

million, and net proceeds of approximately $19.4 million, net of commissions and fees, prior to its termination in August 2020.

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

four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares

of our common stock in transactions that are deemed to be "at the market" offerings and privately negotiated transactions. Through March 31,

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



gross proceeds of approximately $54.1 million,
and net proceeds of approximately $53.2 million, net of commissions and fees.

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

with J.P.

Morgan Securities LLC ("J.P. Morgan"), relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share.

In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,140,000 shares of our common stock on the

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

stock occurred on January 25, 2021, with net proceeds to us of approximately $45.2 million, net of offering expenses.



On March 2, 2021 we entered into the "March 2021 Underwriting Agreement with
J.P. Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our
common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted

J.P.

Morgan a 30-day option to purchase up to an additional 1,200,000 shares of our common stock on the same terms and conditions,

which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March



5, 2021, with net proceeds to us of
approximately $50.1 million, net of offering expenses payable.

Outlook


Economic Summary

During the first

quarter of 2021

the economy

made tremendous

strides towards

recovery from

the COVID-19

pandemic.
Evidence of

the recovery

was pervasive.

New cases of

COVID-19, which

peaked around

the turn of

the year, moderated
significantly, as

did hospitalizations

and deaths.

As a result

of the U.S. Senate

run-off elections

in early January,

both of which
were won by

Democrats,

one party was

now in control

of the White

House and both

houses of Congress.

This led the

way to a
new stimulus

package being

passed that was

at the high

end of market

expectations

- $1.9 trillion.

The American

Rescue Plan
Act of 2021 was

signed into

law on March

11, 2021.

This marked

the third legislative

act related

to the nation's

recovery from

37
the COVID-19

pandemic, after

the $2.2 trillion

CARES Act (described

below), which

passed on March

27, 2020 and

the $2.3
trillion

Consolidated

Appropriations

Act of 2021,

which contained

$900 billion

of COVID-19

relief and was

signed on December
27, 2020.

Given the momentum

the administration

had after passing

the American

Rescue Plan

Act of 2021,

President

Biden
shortly thereafter

announced plans

for a $2 trillion-plus

infrastructure

bill.

The vaccine

roll-out,

which initially

seemed
haphazard, improved

to the point

where the U.S.

became a world

leader.

The U.S. was

well on its

way to herd

immunity as
over 200 million

inoculations

were administered

by April 21, 2021,

well ahead

of even the

most optimistic

projections at

the
beginning of

the year.

Economic data

released over

the course of

the first quarter

has been consistently

very strong.

Fueled
by two rounds

of stimulus

checks

during the first

quarter, consumers

have been spending.

Retail sales,

home sales, demand
for new cars

and other durable

goods are all

benefitting

from the stimulus

and considerable

pent-up demand.

Job growth
appears to be

accelerating

quickly, and the unemployment

rate has dropped

to 6.0%.

All of the developments

described
above have stoked

inflation fears.

The most obvious

evidence of

potential price

pressures relate

to supply shortages

of a
variety of

consumer goods

and commodities

caused by the

combination

of still constrained

production and

surging demand
that have begun

to surface

across the

economy.


The factors

highlighted

above have led

to a surging

economy, which grew

at an annualized

rate of 6.4%

during the

first
quarter.

They have also

impacted the

financial markets.

The various

broad equity

indices are

making new all-time

highs on a
frequent basis,

and corporate

debt issuance

levels - both

investment

grade and high

yield - are

at or near record

levels
reflecting

the demand for

capital and

investor appetite

for yield.

U.S. Treasury rates,

at least longer-term

rates, have

risen
significantly. The

ten-year U.S.

Treasury note yield

increased from

0.916% to 1.742%

over the course

of the first

quarter, an
increase of

82.6 basis points,

and the U.S.

Treasury curve

has steepened

substantially.

The market

has moved up
expectations

for a recovery

from the pandemic

and return to

normalcy significantly.

The Federal

Reserve (the

"Fed") gave

a
green light

to higher rates,

referring to

them as a sign

of economic

strength.

However, when the

market has

attempted to

price
in an acceleration

to the timing

of the rate increases

by the Fed,

the Fed has

pushed back

against such

sentiment.

These
efforts have largely

been successful,

and current

market pricing

only reflects

one interest

rate hike by

the end of 2022.


Legislative

Response and

the Federal

Reserve


Congress passed

the CARES Act

quickly in

response to

the pandemic's

emergence last

spring and followed

with
additional legislation

over the ensuing

months.

However, as certain

provisions

of the CARES

Act expired,

such as
supplemental

unemployment

insurance last

July, there appeared

to be a need

for additional

stimulus for

the economy

to deal
with the surge

in the pandemic

that occurred

as cold

weather set in,

particularly

over the Christmas

holiday.

As mentioned
above, the Federal

government eventually

passed an additional

stimulus package

in late December

of 2020 and again

in
March of 2021.

In addition,

the Fed has provided,

and continues

to provide,

as much support

to the markets

and the economy
as it can within

the constraints

of its mandate.

During the third

quarter of 2020,

the Fed unveiled

a new monetary

policy
framework

focused on average

inflation rate

targeting that

allows the

Fed Funds rate

to remain quite

low, even if inflation

is
expected to temporarily

surpass the

2% target level.

Further, the Fed

will look

past the presence

of very tight

labor markets,
should they be

present at

the time.

This marks

a significant

shift from

their prior

policy framework,

which was focused

on the
unemployment

rate as a key

indicator of

impending inflation.

Adherence to

this policy

could steepen

the U.S. Treasury

curve
as short-term

rates could

remain low

for a considerable

period but longer-term

rates could rise

given the Fed's

intention to

let
inflation potentially

run above 2%

in the future

as the economy

more fully

recovers.

As mentioned

above, this

appears to

be
occurring early

in 2021 now that

effective vaccines

have been found

and inoculations

are distributed

at an accelerating

pace.

Interest Rates

Interest rates

steadily increased

throughout the

first quarter

as described

above and levels

of implied

volatility

rose as well.

Mortgage rates

slowly declined

at the end of

2020 as originators

added capacity

and could handle

ever increasing

levels of
production volume.

This trend in

mortgage rates

quickly reversed

during the first

quarter of 2021

as rates began

to increase,
especially

in late February

and March. With

the increase

in interest

rates, prepayment

activity slowed.

The percent

of the
Agency RMBS

universe with

sufficient rate

incentive to

economically

refinance has

declined from

approximately

80% at the
end of 2020 to

approximately

46% at the end

of the first

quarter. However, the

spread between

rates available

to borrowers
and the implied

yield on a current

coupon mortgage,

known as the

primary/secondary

spread, has

continued to

compress.


38
The spread is

still slightly

above long-term

average levels

so further

compression

is possible,

meaning rates

available to
borrowers could

remain at current

levels even

if U.S. Treasury

rates increased

further. Since the

end of the first

quarter,
interest rates

have declined

by approximately

20 basis points

in the case

of the 10-year

U.S. Treasury

note.

Accordingly,
prepayment levels

on RMBS securities

are likely

to remain high

unless U.S.

Treasury rates

increase above

current levels.

The Agency RMBS

Market

The market

conditions that

prevailed throughout

the first quarter

were not conducive

to mortgage

performance.

In fact,
apart from

high yield

bonds, all fixed

income sectors

had negative returns

for quarter.

Interest rates

rose rapidly, and volatility
was elevated.

Agency RMBS

had negative

absolute and

excess returns

for the first

quarter of -1.2%

and -0.3%, respectively
(both vs U.S

Treasuries

and LIBOR/swaps).

There is a

benefit to higher

interest rates,

and as interest

rates rose

prepayment
levels declined.

The Mortgage

Bankers Association

refinance index

declined from

approximately

4700 in early

January 2021
to approximately

2900 in early

April 2021,

before rebounding

slightly in

mid-April 2021.

The Agency RMBS

market continues
to be essentially

bifurcated with

two separate

and distinct

sub-markets.

Lower coupon fixed

rate mortgages,

coupons

of 1.5%
through 2.5%,

are purchased

by the Fed.

Fed purchase

activity maintains

substantial

price pressure

under these coupons,
and they benefit

from attractive

TBA dollar

roll drops.

Higher coupons

in the TBA market

do not have

the benefit

of Fed
purchases.

Importantly, the Fed

tends to take

the worst

performing

collateral

out of the market.

The absence of

Fed
purchases of

higher coupons

means the market

is left to absorb

still very

high prepayment

speeds on these

securities

as rates
have not risen

enough to eliminate

the economic

incentive to

refinance.

The market

expects prepayments

on higher coupons
will eventually

decline as "burn

out" sets in

- a phenomenon

whereby refinancing

activity declines

as borrowers

are exposed to
refinancing

incentives

for an extended

period.

Through the

March 2021 prepayment

report released

in early April,

this has yet
to occur.

While market

participants

continue to favor

specified

pools that have

favorable

prepayment characteristics

that mute
the refinance

incentive,

the premium

over generic

TBA securities

has declined

significantly

with the reduced

refinance
incentive caused

by the increase

in rates available

to borrowers.

Recent Legislative

and Regulatory

Developments

The Fed conducted

large scale

overnight repo

operations

from late 2019

until July

2020 to address

disruptions

in the U.S.
Treasury, Agency debt and

Agency MBS financing

markets. These

operations ceased

in July 2020

after the central

bank
successfully

tamed volatile

funding costs

that had threatened

to cause disruption

across the

financial system.


The Fed has taken

a number

of other actions

to stabilize

markets as

a result of

the impacts

of the COVID-19

pandemic.

In
March of 2020,

the Fed announced

a $700 billion

asset purchase

program to

provide liquidity

to the U.S. Treasury

and Agency
RMBS markets.

The Fed also

lowered the

Fed Funds rate

to a range of

0.0% - 0.25%,

after having

already lowered

the Fed
Funds rate by

50 bps earlier

in the month.

Later that same

month the Fed

announced

a program to

acquire U.S.

Treasuries
and Agency RMBS

in the amounts

needed to support

smooth market

functioning.

With these

purchases, market

conditions
improved substantially.

Currently, the Fed is

committed to

purchasing $80

billion of

U.S. Treasuries

and $40 billion

of Agency
RMBS each month.

Chairman Powell

and the Fed have

reiterated

their commitment

to this level

of asset purchases

at every
meeting since

their meeting

on June 30,

2020. Chairman

Powell has

also maintained

that the Fed

expects to

maintain interest
rates at this

level until

the Fed is confident

that the economy

has weathered

the pandemic

and its impact

on economic

activity
and is on track

to achieve its

maximum employment

and price stability

goals. The Fed

has

taken various

other steps

to support
certain other

fixed income

markets, to

support mortgage

servicers and

to implement

various portions

of the Coronavirus

Aid,
Relief, and

Economic Security

("CARES")

Act.

The CARES Act

was passed by

Congress and

signed into

law by President

Trump on March

27, 2020.

The CARES

Act
provided many

forms of direct

support to individuals

and small businesses

in order to

stem the steep

decline in

economic
activity.

This over $2

trillion COVID-19

relief bill,

among other things,

provided for

direct payments

to each American

making
up to $75,000

a year, increased

unemployment

benefits for

up to four months

(on top of

state benefits),

funding to hospitals
and health providers,

loans and investments

to businesses,

states and municipalities

and grants to

the airline

industry. On April
24, 2020, President

Trump signed an

additional

funding bill

into law that

provides an

additional $484

billion of

funding to
individuals,

small businesses,

hospitals, health

care providers

and additional

coronavirus

testing efforts.

Various provisions

of

39
the CARES Act

began to expire

in July 2020,

including a

moratorium

on evictions

(July 25, 2020),

expanded unemployment
benefits (July

31, 2020), and

a moratorium

on foreclosures

(August 31, 2020).

On August 8,

2020, President

Trump issued
Executive Order

13945, directing

the Department

of Health and

Human Services,

the Centers

for Disease

Control and
Prevention ("CDC"),

the Department

of Housing and

Urban Development,

and Department

of the Treasury

to take measures

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 of 2021,

providing for

extensions of

many of the

CARES Act

policies and

programs as

well as
additional relief.

The package provided

for, among other things,

direct payments

to most Americans

with a gross

income of
less than $75,000

a year, extension

of unemployment

benefits through

March 14, 2021,

funding for

procurement

of vaccines
and health providers,

loans to qualified

businesses,

funding for

rental assistance

and funding

for schools.

On January

29,
2021, the CDC

issued guidance

extending eviction

moratoriums

for covered persons

through March

31, 2021,

which was
further extended

to June 30,

2021 on March

29, 2021.

In addition,

on February

9, 2021, the

FHFA announced that

the
foreclosure

moratorium

begun under the

CARES Act for

loans backed

by Fannie Mae

and Freddie

Mac and the

eviction
moratorium

for real estate

owned by Fannie

Mae and Freddie

Mac were extended

until March

31, 2021, which

was further
extended to

June 30, 2021

on February

25,

2021. On February

16, 2021, the

U.S. Housing

and Urban Development
Department announced

the extension

of the FHA eviction

and foreclosure

moratorium

to June 30, 2021.

On March 11, 2021, the

$1.9 trillion

American Rescue

Plan Act of

2021 was signed

into law.

This stimulus

program
furthered the

Federal government's

efforts to stabilize

the economy and

provide assistance

to sectors of

the population

still
suffering from

the various

physical and

economic effects

of the pandemic.

In January 2019,

the Trump administration

made statements

of its plans

to work with

Congress to

overhaul Fannie

Mae
and Freddie

Mac and expectations

to announce a

framework

for the development

of a policy

for comprehensive

housing
finance reform

soon. On September

30, 2019, the

FHFA announced that

Fannie Mae

and Freddie

Mac were allowed

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

register in

December 2020.

On January 14,

2021, the U.S.

Treasury and
the FHFA executed

letter agreements

allowing the

GSEs to continue

to retain capital

up to their

regulatory

minimums,

including
buffers, as prescribed

in the December

rule.

These letter

agreements provide,

in part, (i)

there will

be no exit from
conservatorship

until all material

litigation is

settled and the

GSE has common

equity Tier

1 capital of

at least 3%

of its assets,
(ii) the GSEs

will comply

with the FHFA's regulatory

capital framework,

(iii) higher-risk

single-family

mortgage acquisitions

will
be restricted

to current

levels, and (iv)

the U.S. Treasury

and the FHFA will

establish a timeline

and process

for future GSE
reform. However,

no definitive

proposals or

legislation

have been released

or enacted

with respect

to ending the
conservatorship,

unwinding the

GSEs, or materially

reducing the

roles of the

GSEs in the

U.S. mortgage

market.

In 2017, policymakers

announced that

LIBOR will

be replaced by

December 31,

2021. The directive

was spurred

by the
fact that banks

are uncomfortable

contributing

to the LIBOR

panel given the

shortage of

underlying

transactions

on which to
base levels

and

the liability

associated with

submitting

an unfounded

level. The

ICE Benchmark

Administration,

in its capacity
as administrator

of USD LIBOR,

has confirmed

that it will

cease publication

of (i) the

one-week and

two-month USD

LIBOR
settings immediately

following the

LIBOR publication

on December

31, 2021, and

(ii) the overnight

and one, three,

six and 12-
month USD LIBOR

settings immediately

following the

LIBOR publication

on June 30, 2023.

A joint statement

by key regulatory
authorities

calls on banks

to cease entering

into new contracts

that use USD

LIBOR as a reference

rate by no later

than
December 31,

2021. The Alternative

Reference Rates

Committee,

a steering committee

comprised of

large U.S.

financial
institutions,

has proposed

replacing USD-LIBOR

with

a new SOFR,

a rate based

on U.S. repo

trading. Many

banks believe
that it may

take four to

five years

to complete

the transition

to SOFR, for

certain, despite

the 2021 deadline.

We will monitor

the
emergence of

this new rate

carefully

as it will potentially

become the new

benchmark

for hedges and

a range of

interest rate
investments.

At this time,

however, no consensus

exists as to

what rate or

rates may become

accepted alternatives

to LIBOR.


40
Effective January

1, 2021, Fannie

Mae, in alignment

with Freddie

Mac, will

extend the timeframe

for its delinquent

loan
buyout policy

for Single-Family

Uniform Mortgage-Backed

Securities

(UMBS) and Mortgage-Backed

Securities

(MBS) from
four consecutively

missed monthly

payments to

twenty-four

consecutively

missed monthly

payments (i.e.,

24 months past
due). This

new timeframe

will apply

to outstanding

single-family

pools and newly

issued single-family

pools and was

first
reflected when

January 2021

factors were

released on

the fourth business

day in February

2021.


For Agency RMBS

investors, when

a delinquent

loan is bought

out of a pool

of mortgage

loans, the removal

of the loan
from the pool

is the same

as a total prepayment

of the loan.

The respective

GSEs currently

anticipate,

however, that
delinquent loans

will be repurchased

in most cases

before the 24-month

deadline under

one of the following

exceptions listed
below.

• a

loan that is

paid in full,

or where the

related lien

is released

and/or the

note debt is

satisfied or

forgiven;
• a

loan repurchased

by a seller/servicer

under applicable

selling and

servicing

requirements;
• a

loan entering

a permanent

modification,

which generally

requires it

to be removed

from the MBS.

During any
modification

trial period,

the loan will

remain in the

MBS until the

trial period

ends;
• a

loan subject

to a short sale

or deed-in-lieu

of foreclosure;

or
• a

loan referred

to foreclosure.

Because of these

exceptions,

the GSEs currently

believe based

on prevailing

assumptions

and market conditions

this
change will

have only a

marginal impact

on prepayment

speeds, in aggregate.

Cohort level

impacts may

vary. For example,
more than half

of loans referred

to foreclosure

are historically

referred within

six months of

delinquency. The degree

to which
speeds are affected

depends on

delinquency

levels, borrower

response, and

referral to

foreclosure

timelines.

The scope and

nature of the

actions the

U.S. government

or the Fed will

ultimately

undertake are

unknown and

will
continue to evolve,

especially

in light of

the COVID-19

pandemic, President

Biden's new administration

and the new

Congress
in the United

States.

Effect on Us

Regulatory

developments,

movements in

interest rates

and prepayment

rates affect

us in many

ways, including

the
following:

Effects on our

Assets

A change in or

elimination

of the guarantee

structure of

Agency RMBS

may increase

our costs (if,

for example,

guarantee
fees increase)

or require

us to change our

investment

strategy altogether.

For example,

the elimination

of the guarantee
structure of

Agency RMBS

may cause us

to change our

investment

strategy to

focus on non-Agency

RMBS, which

in turn
would require

us to significantly

increase our

monitoring of

the credit

risks of our

investments

in addition

to interest

rate and
prepayment risks.

Lower long-term

interest rates

can affect the

value of our

Agency RMBS

in a number

of ways. If

prepayment rates

are
relatively

low (due, in

part, to the

refinancing

problems described

above), lower

long-term interest

rates can increase

the value
of higher-coupon

Agency RMBS.

This is because

investors typically

place a premium

on assets with

yields that

are higher than
market yields.

Although lower

long-term interest

rates may increase

asset values

in our portfolio,

we may not be

able to invest
new funds in

similarly-yielding

assets.

If prepayment

levels increase,

the value of

our Agency

RMBS affected

by such prepayments

may decline.

This is because
a principal

prepayment accelerates

the effective

term of an Agency

RMBS, which

would shorten

the period during

which an
investor would

receive above-market

returns (assuming

the yield on

the prepaid asset

is higher than

market yields).

Also,
prepayment proceeds

may not be able

to be reinvested

in similar-yielding

assets. Agency

RMBS backed

by mortgages

with
high interest

rates are more

susceptible

to prepayment

risk because

holders of those

mortgages are

most likely

to refinance

to

41
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.

In March of

2020, the Fed

announced that

it would
purchase Agency

RMBS and U.S.

Treasuries in

the amounts needed

to support

smooth market

functioning,

which largely
stabilized

the Agency RMBS

market, a commitment

it reaffirmed

at all subsequent

Fed meetings,

including its

most recent
meeting in April

of 2021. If the

Fed modifies,

reduces or

suspends its

purchases of

Agency RMBS,

our investment

portfolio
could be negatively

impacted. Further,

the moratoriums

on foreclosures

and evictions

described above

will likely

delay
potential defaults

on loans that

would otherwise

be bought out

of Agency MBS

pools as described

above.

Depending on

the
ultimate resolution

of the foreclosure

or evictions,

when and if it

occurs, these

loans may be

removed from

the pool into

which
they were securitized.

If this were

to occur, it would

have the effect

of delaying

a prepayment

on the Company's

securities

until
such time.

As the majority

of the Company's

Agency RMBS

assets were

acquired at

a premium

to par, this will

tend to
increase the

realized yield

on the asset

in question.

Because we base

our investment

decisions on

risk management

principles

rather than

anticipated

movements in

interest
rates, in a

volatile interest

rate environment

we may allocate

more capital

to structured

Agency RMBS

with shorter

durations.
We believe these

securities

have a lower

sensitivity

to changes in

long-term interest

rates than other

asset classes.

We may
attempt to mitigate

our exposure

to changes in

long-term

interest

rates by investing

in IOs and IIOs,

which typically

have
different sensitivities

to changes in

long-term interest

rates than PT

RMBS, particularly

PT RMBS backed

by fixed-rate
mortgages.

Effects on our

borrowing costs

We leverage our

PT RMBS portfolio

and a portion

of our structured

Agency RMBS

with principal

balances through

the use
of short-term

repurchase agreement

transactions.

The interest

rates on our

debt are determined

by the short

term interest

rate
markets. An

increase in

the Fed Funds

rate or LIBOR

would increase

our borrowing

costs, which

could affect our

interest rate
spread if there

is no corresponding

increase in

the interest

we earn on our

assets. This

would be most

prevalent with

respect to
our Agency RMBS

backed by fixed

rate mortgage

loans because

the interest

rate on a

fixed-rate

mortgage loan

does not
change even though

market rates

may change.

In order to

protect our

net interest

margin against

increases in

short-term

interest rates,

we may enter

into interest

rate
swaps, which

economically

convert our

floating-rate

repurchase agreement

debt to fixed-rate

debt, or utilize

other hedging
instruments

such as Eurodollar,

Fed Funds and

T-Note futures

contracts or

interest rate

swaptions.

42

Summary

COVID-19 continues

to dominate the

performance

of the markets

and economy.

In the case

of the first

quarter of 2021
this meant the

recovery from

the pandemic,

in stark contrast

to the first

quarter of 2020

when the pandemic

first emerged

in the
U.S. The recovery

has been driven

by many factors

- the emergence

and widespread

distribution

of a very effective

vaccine,
substantial

government stimulus

and accommodative

monetary policy. The

economy is recovering

rapidly as

the emergence

of
an effective vaccine

has allowed

pent-up demand

to lead to

a surge in demand

for goods and

services,

fueled further

by
multiple rounds

of stimulus

checks and numerous

other means

of financial

support provided

by the government.

Financial
markets are

benefiting from

extremely lose

financial conditions,

abundant liquidity,

high risk

tolerance and

an insatiable
demand for returns.


The surge in

economic activity

during the first

quarter of 2021

and expectations

for activity

to return to

pre-pandemic

levels
much sooner

than anticipated

caused interest

rates to rise

rapidly as

well.

The yield on

the 10-year

U.S. Treasury

note
increased by

over 82 basis

points and closed

the quarter

at approximately

1.75%, not far

below the yield

level that prevailed
last January

before the pandemic

emerged last

March.

In addition,

the U.S. Treasury

curve has steepened

as the market
fears an outbreak

in inflation

caused by the

combination

of abundant liquidity

via government

stimulus,

loose financial
conditions and

very strong

demand for all

types of goods

and services.

Constrained

supply

of needed raw

materials,

various
inputs to consumer

goods, such

as micro chips,

and even labor

have exacerbated

the upward

pressure on

prices. It

remains to
be seen if these

price pressures

prove to be temporary

or lead to more

sustained inflation.

The Fed believes

the effects are
transitory.

Current market

pricing is

roughly in line

with the Fed's

view as the

Eurodollar

and Fed Funds

futures markets

only
reflect at

most one interest

rate hike by

the end of 2022.

The Agency RMBS

market did

not perform

well during

the first quarter

as market conditions

- rapidly rising

rates and
increased volatility

- led to extension

fears in mortgage

cash flows,

driving convexity

related selling

and spread widening.

Agency RMBS

had negative

absolute and

excess returns

for the first

quarter of 2021

of -1.2% and

-0.3%, respectively

(both vs
U.S. Treasuries

and LIBOR/swaps).

A positive impact

from higher

rates and lowered

prepayment expectations

is slower
premium amortization,

which enhances

net income

all else equal.

The Mortgage

Bankers Association

refinance index

declined
from approximately

4700 in early

January 2021

to approximately

2900 in early

April, before

rebounding slightly

in mid-April.

As
was the case

for much of

2020, the Agency

RMBS market

continues to

be essentially

bifurcated with

two separate

and distinct
sub-markets.

Lower coupon

fixed rate mortgages,

coupons of 1.5%

through 2.5%,

are purchased

by the Fed and

benefit from
the substantial

price pressure

and attractive

TBA dollar

roll drops.

Higher coupons

in the TBA market

do not have

the benefit
of Fed purchases,

so the market

is left to

absorb still

very high prepayment

speeds on

these securities

as rates have

not risen
enough to eliminate

the economic

incentive to

refinance.

The market

expects prepayments

on higher coupons

will eventually
decline as "burn

out" sets in,

although this

has yet to occur.

One final element

to poor MBS

performance

for the quarter

was
the impact of

higher rates

on the premiums

paid for specified

pools.

The

premium over

generic TBA

securities

has declined
significantly

with the reduced

refinance incentive

caused by the

increase in

rates available

to borrowers.

Now that the

containment

of the COVID-19

pandemic appears

to be within

sight, at least

in the U.S.,

the economy

and life
as we were

accustomed to

should return

to pre-pandemic

norms.

The key questions

the market

must grapple

with going
forward relate

to whether there

have been any

permanent changes

that will result,

including, for

example, inflationary
pressures resulting

from the unprecedented

government stimulus

and monetary

quantitative

easing by the

Fed, the impact

of
the many technological

advancements

that were born

out of the pandemic,

such as employees'

ability to effectively

work
remotely, the

desire to live

in congested cities

and the implications

for commercial

real estate values

for the cities

that many
may not want

to return to,

and the willingness

to gather in

large numbers

or travel by

air. These factors

will matter

to the
Company to the

extent they

impact the levels

of interest

rates and the

efficacy of refinancing

specifically, and

economic activity
and inflation

generally.

Critical Accounting Estimates





































43

Our condensed financial statements are prepared in accordance with GAAP.



GAAP requires our management to make
some complex and subjective decisions and assessments. Our most critical
accounting estimates involve decisions and
assessments which could significantly affect reported assets, liabilities,
revenues and expenses.

There have been no
changes to our critical accounting estimates as discussed in our annual report
on Form 10-K for the year ended December
31, 2020.

Capital Expenditures

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

Off-Balance Sheet Arrangements

At March 31, 2021, we did not have any off-balance sheet arrangements.

Dividends

In addition to other requirements that must be satisfied to qualify as a REIT,



we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, determined without
regard to the deduction for dividends paid and
excluding any net capital gains. REIT taxable income (loss) is computed in
accordance with the Code, and can be greater
than or less than our financial statement net income (loss) computed in
accordance with GAAP.

These book to tax
differences primarily relate to the recognition of interest income on RMBS,
unrealized gains and losses on RMBS, and the
amortization of losses on derivative instruments that are treated as funding
hedges for tax purposes.

We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO.




(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.260
23,374
Totals
$
11.915
$
365,337

(1)

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

share to be paid on May 26, 2021.



The effect of this dividend is included in
the table above, but is not reflected in the Company's financial statements

as of March 31, 2021.

Inflation



Virtually all of our assets and liabilities are interest rate sensitive in
nature. As a result, interest rates and other factors
influence our performance far more so than does inflation. Changes in interest
rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our
distributions will be determined by our Board of Directors consistent with our
obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our
REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost
and/or fair market value without considering
inflation.

44

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET

RISK



Market risk is the exposure to loss resulting from changes in market factors
such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The primary market risks
that we are exposed to are interest rate risk,
prepayment risk, spread risk, liquidity risk, extension risk and counterparty
credit risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.



Changes in the general level of interest rates can affect our net interest
income, which is the difference between the
interest income earned on interest-earning assets and the interest expense
incurred in connection with our interest-bearing
liabilities, by affecting the spread between our interest-earning assets and
interest-bearing liabilities. Changes in the level of
interest rates can also affect the rate of prepayments of our securities and the
value of the RMBS that constitute our
investment portfolio, which affects our net income, ability to realize gains
from the sale of these assets and ability to borrow,
and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects
of changes in interest rates on our
operations. The principal instruments that we use are futures contracts,
interest rate swaps and swaptions. These
instruments are intended to serve as an economic hedge against future interest
rate increases on our repurchase
agreement borrowings.

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

prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions.

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



Hedging techniques are also
limited by the rules relating to REIT qualification.

In order to preserve our REIT status,



we may be forced to terminate a
hedging transaction at a time when the transaction is most needed.

Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.

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



fixed-rate RMBS and hybrid
adjustable-rate RMBS. We generally seek to acquire low duration assets that
offer high levels of protection from mortgage
prepayments provided that they are reasonably priced by the market.

Although the duration of an individual asset can
change as a result of changes in interest rates, we strive to maintain a hedged
PT RMBS portfolio with an effective duration
of less than 2.0. The stated contractual final maturity of the mortgage loans
underlying our portfolio of PT RMBS generally
ranges up to 30 years. However, the effect of prepayments of the underlying
mortgage loans tends to shorten the resulting
cash flows from our investments substantially. Prepayments occur for various
reasons, including refinancing of underlying
mortgages and loan payoffs in connection with home sales,

and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.

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

While


prepayment activity will always affect the cash flows associated with the
securities, the interest only nature of IOs may
cause their durations to become extremely negative when prepayments are high,
and less negative when prepayments are
low.

Prepayments affect the durations of IIOs similarly, but the floating

rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes

their price movements, and model duration, to be affected by changes in both prepayments and one month LIBOR, both current and anticipated levels.



As a result, the duration of IIO securities will
also vary greatly.

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








































45
As a result, we gauge the interest rate sensitivity of our assets by measuring
their effective duration. While modified duration
measures the price sensitivity of a bond to movements in interest rates,
effective duration captures both the movement in
interest rates and the fact that cash flows to a mortgage related security are
altered when interest rates move. Accordingly,
when the contract interest rate on a mortgage loan is substantially above
prevailing interest rates in the market, the effective
duration of securities collateralized by such loans can be quite low because of
expected prepayments.

We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly,



we assess our interest rate risk by
estimating the duration of our assets and the duration of our liabilities. We
generally calculate duration using various third
party models.

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


The following sensitivity analysis shows the estimated impact on the fair value
of our interest rate-sensitive investments
and hedge positions as of March 31, 2021 and December 31, 2020, assuming rates
instantaneously fall 200 bps, fall 100
bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to
reflect the impact of convexity, which is the

measure

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


All changes in value in the table below are measured as percentage changes from
the investment portfolio value and
net asset value at the base interest rate scenario. The base interest rate
scenario assumes interest rates and prepayment
projections as of March 31, 2021 and December 31, 2020.

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

the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover,

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

while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of the overall management of our investment portfolio.




Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of March 31, 2021
-200 Basis Points
(0.93)%
(8.66)%
-100 Basis Points
0.03%
0.29%
-50 Basis Points
0.20%
1.87%
+50 Basis Points
(0.60)%
(5.61)%
+100 Basis Points
(1.45)%
(13.50)%
+200 Basis Points
(3.57)%
(33.27)%
As of December 31, 2020
-200 Basis Points
2.43%
21.85%
-100 Basis Points
1.35%
12.08%
-50 Basis Points
0.69%
6.18%
+50 Basis Points
(0.90)%
(8.03)%
+100 Basis Points
(2.39)%
(21.42)%
+200 Basis Points
(6.60)%
(59.22)%

(1)

Interest rate sensitivity is derived from models that are dependent

on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no

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



differ materially from
these estimates.

(2)

Includes the effect of derivatives and other securities used for

hedging purposes.

(3)

Estimated dollar change in investment portfolio value expressed as a

percent of the total fair value of our investment portfolio as of such

date.

(4)

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



equity as of such date.


46

In addition to changes in interest rates, other factors impact the fair value of
our interest rate-sensitive investments,
such as the shape of the yield curve, market expectations as to future interest
rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the
fair value of our assets would likely differ

from

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

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect



the rate at which
mortgage prepayments occur, including changes in the level of and directional
trends in housing prices, interest rates,
general economic conditions, loan age and size, loan-to-value ratio, the
location of the property and social and demographic
conditions. Additionally, changes to government sponsored entity underwriting
practices or other governmental programs
could also significantly impact prepayment rates or expectations. Generally,
prepayments on Agency

RMBS increase during
periods of falling mortgage interest rates and decrease during periods of rising
mortgage interest rates. However, this may
not always be the case.

We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.




Spread Risk

When the market spread widens between the yield on our Agency RMBS and benchmark
interest rates, our net book
value could decline if the value of our Agency RMBS falls by more than the
offsetting fair value increases on our hedging
instruments tied to the underlying benchmark interest rates. We refer to this as
"spread risk" or "basis risk." The spread risk
associated with our mortgage assets and the resulting fluctuations in fair value
of these securities can occur independent of
changes in benchmark interest rates and may relate to other factors impacting
the mortgage and fixed income markets,
such as actual or anticipated monetary policy actions by the Fed, market
liquidity, or changes in required rates of return on
different assets. Consequently, while we use futures contracts and

interest rate swaps and swaptions to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

Liquidity Risk



The primary liquidity risk for us arises from financing long-term assets with
shorter-term borrowings through repurchase
agreements. Our assets that are pledged to secure repurchase agreements are
Agency RMBS and cash. As of March 31,
2021, we had unrestricted cash and cash equivalents of $211.4 million and
unpledged securities of approximately $218.0
million (not including securities pledged to us) available to meet margin calls
on our repurchase agreements and derivative
contracts, and for other corporate purposes. However, should the value of our
Agency RMBS pledged as collateral or the
value of our derivative instruments suddenly decrease, margin calls relating to
our repurchase and derivative agreements
could increase, causing an adverse change in our liquidity position. Further,
there is no assurance that we will always be
able to renew (or roll) our repurchase agreements. In addition, our
counterparties have the option to increase our haircuts
(margin requirements) on the assets we pledge against repurchase agreements,
thereby reducing the amount that can be
borrowed against an asset even if they agree to renew or roll the repurchase
agreement. Significantly higher haircuts can
reduce our ability to leverage our portfolio or even force us to sell assets,
especially if correlated with asset price declines or
faster prepayment rates on our assets.

Extension Risk



The projected weighted average life and the duration (or interest rate
sensitivity) of our investments is based on our
Manager's assumptions regarding the rate at which the borrowers will prepay the
underlying mortgage loans. In general, we
use futures contracts and interest rate swaps and swaptions to help manage our
funding cost on our investments in the
event that interest rates rise. These hedging instruments allow us to reduce our
funding exposure on the notional amount of
the instrument for a specified period of time.


However, if prepayment rates decrease in a rising interest rate environment, the
average life or duration of our fixed-
rate assets or the fixed-rate portion of the ARMs or other assets generally
extends. This could have a negative impact on
our results from operations, as our hedging instrument expirations are fixed and
will, therefore, cover a smaller percentage
of our funding exposure on our mortgage assets to the extent that their average
lives increase due to slower prepayments.
This situation may also cause the market value of our Agency RMBS and CMOs
collateralized by fixed rate mortgages or
hybrid ARMs to decline by more than otherwise would be the case while most of
our hedging instruments would not receive
any incremental offsetting gains. In extreme situations, we may be forced to
sell assets to maintain adequate liquidity,

which

could cause us to incur realized losses.

Counterparty Credit Risk



We are exposed to counterparty credit risk relating to potential losses that
could be recognized in the event that the
counterparties to our repurchase agreements and derivative contracts fail to
perform their obligations under such
agreements. The amount of assets we pledge as collateral in accordance with our
agreements varies over time based on
the market value and notional amount of such assets as well as the value of our
derivative contracts. In the event of a
default by a counterparty, we may not receive payments provided for

under the terms of our agreements and may have
difficulty obtaining our assets pledged as collateral under such agreements. Our
credit risk related to certain derivative
transactions is largely mitigated through daily adjustments to collateral
pledged based on changes in market value and we
limit our counterparties to registered central clearing exchanges and major
financial institutions with acceptable credit
ratings, monitoring positions with individual counterparties and adjusting
collateral posted as required. However, there is no
guarantee our efforts to manage counterparty credit risk will be successful and
we could suffer significant losses if
unsuccessful.

Latest news about Orchid Island Capital, Inc.

Orchid Island Capital, Inc. Reports Earnings Results for the First Quarter Ended March 31, 2024	Apr. 25	CI
Orchid Island Capital, Inc. Provides Earnings Guidance for the First Quarter Ended March 31, 2024	Apr. 10	CI
Orchid Island Capital, Inc. Announces April 2024 Monthly Dividend, Payable on May 30, 2024	Apr. 10	CI
Orchid Island Capital Keeps Monthly Dividend at $0.12 a Share, Payable April 26 to Holders of Record March 28	Mar. 13	MT
Orchid Island Capital, Inc. Announces March 2024 Monthly Dividend, Payable on April 26, 2024	Mar. 13	CI
Orchid Island Capital Keeps February Cash Dividend at $0.12 a Share, Payable March 26 to Holders of Record on Feb. 29	Feb. 15	MT
Orchid Island Capital, Inc. Announces February 2024 Monthly Dividend, Payable on March 26, 2024	Feb. 14	CI
Transcript : Orchid Island Capital, Inc., Q4 2023 Earnings Call, Feb 02, 2024	Feb. 02
Tranche Update on Orchid Island Capital, Inc.'s Equity Buyback Plan announced on July 30, 2015.	Feb. 01	CI
Orchid Island Capital, Inc. Reports Earnings Results for the Full Year Ended December 31, 2023	Feb. 01	CI
Orchid Island Capital, Inc. Reports Earnings Results for the Fourth Quarter Ended December 31, 2023	Feb. 01	CI
Orchid Island Capital, Inc. Provides Earnings Guidance for the Fourth Quarter Ended December 31, 2023	Jan. 10	CI
Orchid Island Capital, Inc. Declares Cash Dividend for the Month of January 2024, Payable on February 27, 2024	Jan. 10	CI
Orchid Island Capital Maintains Monthly Cash Dividend at $0.12 per Share, Payable Jan. 29 to Shareholders of Record Dec. 29	Dec. 13	MT
Orchid Island Capital, Inc. Declares Monthly Cash Dividend for the Month of December 2023, Payable on January 29, 2024	Dec. 12	CI
Orchid Island Capital Keeps November Cash Dividend at $0.12 per Share, Payable Dec. 27 to Holders of Record Nov. 30	Nov. 15	MT
Orchid Island Capital, Inc. Declares a Monthly Cash Dividend for the Month of November 2023, Payable on December 27, 2023	Nov. 15	CI
Transcript : Orchid Island Capital, Inc., Q3 2023 Earnings Call, Oct 27, 2023	23-10-27
Tranche Update on Orchid Island Capital, Inc.'s Equity Buyback Plan announced on July 30, 2015.	23-10-26	CI
Orchid Island Capital, Inc. Reports Earnings Results for the Third Quarter and Nine Months Ended September 30, 2023	23-10-26	CI
Orchid Island Capital Insider Bought Shares Worth $111,050, According to a Recent SEC Filing	23-10-13	MT
Orchid Island Capital, Inc. Provides Earnings Guidance for the Quarter Ended September 30, 2023	23-10-11	CI
Orchid Island Capital, Inc. Declares Cash Dividend for the Month of October 2023, Payable on November 28, 2023	23-10-11	CI
Orchid Island Capital Insider Bought Shares Worth $235,700, According to a Recent SEC Filing	23-10-03	MT
Orchid Island Capital Keeps Monthly Dividend at $0.16 per Share; Payable Oct. 27 to Shareholders of Record on Sept. 29	23-09-11	MT

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Company Profile

Orchid Island Capital, Inc. is a specialty finance company that invests in residential mortgage-backed securities RMBS. The Company's investment portfolio consists of two categories of Agency RMBS: traditional pass-through Agency RMBS, such as mortgage pass through certificates and collateralized mortgage obligations (CMOs) issued by the government-sponsored enterprise (GSEs), and structured Agency RMBS, such as interest only securities (IOs), inverse interest only securities and principal only securities (POs), among other types of structured Agency RMBS. The Company's business objective is to provide attractive risk-adjusted total returns to its investors over the long term through a combination of capital appreciation and the payment of regular monthly distributions. The Company intends to achieve this objective by investing in and strategically allocating capital between pass-through Agency RMBS and structured Agency RMBS. The Company is externally managed by Bimini Advisors, LLC.

Sector

Specialized REITs

Calendar

10:00am - Q1 2024 Earnings Call

Related indices

Russell 2000

More about the company

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Analysts' Consensus

Sell

Buy

Mean consensus

HOLD

Number of Analysts

Last Close Price

8.39

Average target price

Consensus

EPS Revisions

Estimates Revisions

Quarterly earnings - Rate of surprise

Company calendar

Sector Mortgage REITs

	1st Jan change	Capi.
ORCHID ISLAND CAPITAL, INC.	-0.47%	457M
ANNALY CAPITAL MANAGEMENT, INC.	-3.51%	9.3B
AGNC INVESTMENT CORP.	-5.81%	6.74B
STARWOOD PROPERTY TRUST, INC.	-9.09%	6.09B
RITHM CAPITAL CORP.	+4.12%	5.39B
BLACKSTONE MORTGAGE TRUST, INC.	-17.02%	3.21B
ARBOR REALTY TRUST, INC.	-17.39%	2.47B
APOLLO COMMERCIAL REAL ESTATE FINANCE, INC.	-8.60%	1.54B
READY CAPITAL CORPORATION	-15.12%	1.52B
LADDER CAPITAL CORP	-6.17%	1.34B

Mortgage REITs

Orchid Island Capital, Inc.

Equities

ORC

US68571X3017

Specialized REITs

ORCHID ISLAND CAPITAL : MANAGEMENT'S (form 10-Q)

Latest news about Orchid Island Capital, Inc.

Chart Orchid Island Capital, Inc.

Company Profile

Income Statement Evolution

Analysts' Consensus

EPS Revisions

Quarterly earnings - Rate of surprise

Sector Mortgage REITs