Edgar Filing: Orchid Island Capital, Inc.

orc10q20150331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number: 001-35236

Orchid Island Capital, Inc.

(Exact name of registrant as specified in its charter)

Maryland		27-3269228
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3305 Flamingo Drive, Vero Beach, Florida 32963

(Address of principal executive offices) (Zip Code)

(772) 231-1400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ý Non-accelerated filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

Number of shares outstanding at April 28, 2015: 18,329,179

ORCHID ISLAND CAPITAL, INC.

TABLE OF CONTENTS

		Page

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements		1
	Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	1
	Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014	2
	Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2015	3
	Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014	4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		39
ITEM 4. Controls and Procedures		43

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		44
ITEM 1A. Risk Factors		44
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
ITEM 3. Defaults Upon Senior Securities		44
ITEM 4. Mine Safety Disclosures		44
ITEM 5. Other Information		44
ITEM 6. Exhibits		45
SIGNATURES		46

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.
BALANCE SHEETS
($ in thousands, except per share data)

	(Unaudited)
	March 31, 2015		December 31, 2014
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties	$	1,546,952	$	1,517,304
Unpledged		129,669		31,867
Total mortgage-backed securities		1,676,621		1,549,171
Cash and cash equivalents		78,105		93,137
Restricted cash		8,263		7,790
Accrued interest receivable		6,883		6,211
Derivative assets, at fair value		218		1,217
Other assets		725		282
Total Assets	$	1,770,815	$	1,657,808

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Repurchase agreements	$	1,459,490	$	1,436,651
Payable for unsettled securities purchased		79,186		-
Accrued interest payable		368		628
Due to affiliates		386		330
Other liabilities		639		2,121
Total Liabilities		1,540,069		1,439,730

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000,000 shares authorized; no shares issued
and outstanding as of March 31, 2015 and December 31, 2014		-		-
Common Stock, $0.01 par value; 500,000,000 shares authorized, 17,924,383
shares issued and outstanding as of March 31, 2015 and 16,699,656 shares issued
and outstanding as of December 31, 2014		179		167
Additional paid-in capital		230,567		217,419
Retained earnings		-		492
Total Stockholders' Equity		230,746		218,078
Total Liabilities and Stockholders' Equity	$	1,770,815	$	1,657,808

See Notes to Financial Statements
ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2015 and 2014
($ in thousands, except per share data)

	2015			2014
Interest income	$	14,614		$	3,783
Interest expense		(1,296	)		(411	)
Net interest income		13,318			3,372
Realized (losses) gains on mortgage-backed securities		(32	)		911
Unrealized gains on mortgage-backed securities		6,320			1,540
Losses on derivative instruments		(12,351	)		(1,693	)
Net portfolio income		7,255			4,130

Expenses:
Management fees		855			303
Accrued incentive compensation		165			-
Directors' fees and liability insurance		248			84
Audit, legal and other professional fees		160			73
Direct REIT operating expenses		42			45
Other administrative		276			30
Total expenses		1,746			535

Net income	$	5,509		$	3,595

Basic and diluted net income per share	$	0.33		$	0.71

Weighted Average Shares Outstanding		16,846,950			5,093,554

Dividends declared per common share	$	0.54		$	0.54
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2015
($ in thousands, except per share data)

			Additional
	Common		Paid-in			Retained
	Stock		Capital			Earnings			Total
Balances, January 1, 2015	$	167	$	217,419		$	492		$	218,078
Net income		-		-			5,509			5,509
Cash dividends declared, $0.54 per share		-		(3,238	)		(6,001	)		(9,239	)
Issuance of common stock pursuant to public offerings		12		16,163			-			16,175
Issuance of common stock pursuant to equity
compensation plan		-		189			-			189
Amortization of equity compensation		-		34			-			34
Balances, March 31, 2015	$	179	$	230,567		$	-		$	230,746
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2015 and 2014
($ in thousands)

	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,509		$	3,595
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Stock based compensation		223			-
Realized and unrealized gains on mortgage-backed securities		(6,288	)		(2,451	)
Realized and unrealized losses on interest rate swaptions		1,091			156
Realized and unrealized gains on forward settling to-be-announced securities		(57	)		-
Changes in operating assets and liabilities:
Accrued interest receivable		(565	)		(1,316	)
Other assets		(444	)		(115	)
Accrued interest payable		(260	)		25
Other liabilities		(1,690	)		145
Due to affiliates		56			50
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(2,425	)		89

CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases		(125,348	)		(506,249	)
Sales		40,255			141,297
Principal repayments		43,011			10,373
Increase in restricted cash		(473	)		(1,650	)
Payment on net settlement of to-be-announced securities		(35	)		-
Purchase of interest rate swaptions, net of margin cash received		207			(200	)
NET CASH USED IN INVESTING ACTIVITIES		(42,383	)		(356,429	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements		3,251,722			1,669,242
Principal payments on repurchase agreements		(3,228,882	)		(1,336,553	)
Cash dividends		(9,239	)		(3,450	)
Proceeds from issuance of common stock, net of issuance costs		16,175			62,499
NET CASH PROVIDED BY FINANCING ACTIVITIES		29,776			391,738

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(15,032	)		35,398
CASH AND CASH EQUIVALENTS, beginning of the period		93,137			8,169
CASH AND CASH EQUIVALENTS, end of the period	$	78,105		$	43,567

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,556		$	386

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period	$	79,186		$	39,503
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

MARCH 31, 2015

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Orchid Island Capital, Inc., (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to February 20, 2013 Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”). Orchid began operations on November 24, 2010 (the date of commencement of operations). From incorporation through November 24, 2010, Orchid’s only activity was the issuance of common stock to Bimini.

On February 20, 2013, Orchid completed the initial public offering (“IPO”) of its common stock in which it sold approximately 2.4 million shares of its common stock and raised gross proceeds of $35.4 million. Orchid is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

Orchid completed a secondary offering of 1,800,000 common shares on January 23, 2014. The underwriters exercised their overallotment option in full for an additional 270,000 shares on January 29, 2014. The aggregate net proceeds to Orchid were approximately $24.2 million which were invested in residential mortgage-backed securities (“RMBS”) that are issued and the principal and interest of which are guaranteed by a federally chartered corporation or agency (“Agency RMBS”) on a leveraged basis.

Orchid completed a secondary offering of 3,200,000 common shares on March 24, 2014. The underwriters exercised their overallotment option in full for an additional 480,000 shares on April 11, 2014. The aggregate net proceeds to Orchid were approximately $44.0 million which were invested in Agency RMBS securities on a leveraged basis.

On June 17, 2014, Orchid entered into an equity distribution agreement (the “June 2014 Equity Distribution Agreement”) with two sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $35,000,000 of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. The Company issued a total of 2,528,416 shares under the June 2014 Equity Distribution Agreement for aggregate proceeds of approximately $34.2 million, net of commissions and fees, prior to its termination.

On September 3, 2014, Orchid entered into a second equity distribution agreement (the “September 2014 Equity Distribution Agreement”) with two sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $75,000,000 of shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. The September 2014 Equity Distribution Agreement replaced the June 2014 Equity Distribution Agreement. The Company issued a total of 5,087,646 shares under the September 2014 Equity Distribution Agreement for aggregate proceeds of approximately $69.1 million, net of commissions and fees, prior to its termination.

On March 2, 2015, Orchid entered into a third equity distribution agreement (the “March 2015 Equity Distribution Agreement”) with two sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $100,000,000 of shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. The March 2015 Equity Distribution Agreement replaced the September 2014 Equity Distribution Agreement. Through March 31, 2015, the Company issued a total of 1,196,572 shares under the March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $16.0 million, net of commissions and fees. After March 31, 2015, the Company issued an additional 393,892 shares under the March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $5.1 million, net of commissions and fees.

Basis of Presentation and Use of Estimates

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month periods ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates affecting the accompanying financial statements are the fair values of RMBS, Eurodollar futures contracts, to-be-announced (“TBA”) securities, as discussed below, and interest rate swaptions.

Statement of Comprehensive Income (Loss)

In accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income. Comprehensive income is the same as net income for the periods presented.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. At March 31, 2015, restricted cash consisted of $6,078,000 of cash held by a broker as margin on Eurodollar futures contracts and $2,185,000 of cash held on deposit as collateral with repurchase agreement counterparties. At December 31, 2014 restricted cash consisted of approximately $5,174,000 of cash held by a broker as margin on Eurodollar futures contracts and $2,616,000 of cash held on deposit as collateral with repurchase agreement counterparties.

The Company maintains cash balances at four banks, and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. At March 31, 2015, the Company’s cash deposits exceeded federally insured limits by approximately $78.8 million. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The Company limits uninsured balances to only large, well-known bank and derivative counterparties and believes that it is not exposed to any significant credit risk on cash and cash equivalents or restricted cash balances.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through (“PT”) certificates, collateralized mortgage obligations, and interest only (“IO”) securities and inverse interest only (“IIO”) securities representing interest in or obligations backed by pools of RMBS. These investments meet the requirements to be classified as available for sale under ASC 320-10-25, Debt and Equity Securities (which requires the securities to be carried at fair value on the balance sheet with changes in fair value charged to other comprehensive income, a component of stockholders’ equity). However, the Company has elected to account for its investment in RMBS under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the statement of operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.

The Company records RMBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date are included in the RMBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the RMBS balance with an offsetting receivable recorded.

The fair value of the Company’s investments in RMBS is governed by FASB ASC 820, Fair Value Measurement. The definition of fair value in FASB ASC 820 focuses on the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party broker quotes, when available.

Income on PT RMBS securities is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized. For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively from the reporting period based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying statements of operations.

Derivative Financial Instruments

The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are T-Note and Eurodollar futures contracts and options to enter in interest rate swaps (“interest rate swaptions”), but may enter into other derivatives in the future.

The Company purchases a portion of its Agency RMBS through delayed delivery transactions (forward purchase commitments), including TBA securities. At times when market conditions are conducive, the Company may choose to move the settlement of these TBA securities out to a later date by entering into an offsetting short position, which is then net settled for cash, and simultaneously entering into a substantially similar TBA securities trade for a later settlement date. Such a set of transactions is referred to as a TBA “dollar roll” transaction. The TBA securities purchased at the later settlement date are typically priced at a discount to securities for settlement in the current month. This difference is referred to as the “price drop.” The price drop represents compensation to us for foregoing net interest margin and is referred to as TBA “dollar roll income.” Specified pools of mortgage loans can also be the subject of a dollar roll transaction, when market conditions allow.

The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception and throughout the term of the TBA security that it will take physical delivery of the Agency RMBS upon settlement of the trade. The Company accounts for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with TBA securities and dollar roll transactions are reported in gain (loss) on derivative instruments in the accompanying statements of operations. The fair value of TBA securities is estimated based on similar methods used to value RMBS securities.

The Company has elected to not treat any of its derivative financial instruments as hedges in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be carried at fair value. Changes in fair value are recorded in earnings for each period.

Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties to honor their commitments. In addition, the Company may be required to post collateral based on any declines in the market value of the derivatives. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement. To mitigate this risk, the Company uses only well-established commercial banks as counterparties.

Financial Instruments

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value, either in the body of the financial statements or in the accompanying notes. RMBS, Eurodollar and T-Note futures contracts, interest rate swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 11 of the financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities generally approximates their carrying values as of March 31, 2015 and December 31, 2014 due to the short-term nature of these financial instruments.

Repurchase Agreements

The Company finances the acquisition of the majority of its PT RMBS through the use of repurchase agreements under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accounts for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

Manager Compensation

The Company is externally managed by Bimini Advisors, LLC (“the Manager” or “Bimini Advisors”), a Maryland limited liability company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred. Refer to Note 12 for the terms of the management agreement.

Earnings Per Share

The Company follows the provisions of FASB ASC 260, Earnings Per Share. Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted average number of shares of common stock outstanding or subscribed during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

Income Taxes

Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). REITs are generally not subject to federal income tax on their REIT taxable income provided that they distribute to their stockholders at least 90% of their REIT taxable income on an annual basis. In addition, a REIT must meet other provisions of the Code to retain its tax status.

Orchid measures, recognizes and presents its uncertain tax positions in accordance with FASB ASC 740, Income Taxes. Under that guidance, Orchid assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.

Recent Accounting Pronouncements

In June 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions. The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015. The ASU is not expected to materially impact the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 amends the accounting guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings, and requires additional disclosure about certain transactions by the transferor. ASU 2014-11 is effective for certain transactions that qualify for sales treatment for the first interim or annual period beginning after December 15, 2014. The new disclosure requirements for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that qualify for secured borrowing treatment is effective for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2015. We currently record our repurchase arrangements as secured borrowings and do not anticipate that ASU 2014-11 will have a material impact on the Company’s financial statements.

NOTE 2. MORTGAGE-BACKED SECURITIES

The following table presents the Company’s RMBS portfolio as of March 31, 2015 and December 31, 2014:

(in thousands)
	March 31, 2015		December 31, 2014
Pass-Through RMBS Certificates:
Hybrid Adjustable-rate Mortgages	$	69,619	$	70,400
Adjustable-rate Mortgages		3,755		3,794
Fixed-rate Mortgages		1,522,833		1,412,593
Total Pass-Through Certificates		1,596,207		1,486,787
Structured RMBS Certificates:
Interest-Only Securities		65,232		46,611
Inverse Interest-Only Securities		15,182		15,773
Total Structured RMBS Certificates		80,414		62,384
Total	$	1,676,621	$	1,549,171

The following table summarizes the Company’s RMBS portfolio as of March 31, 2015 and December 31, 2014, according to the contractual maturities of the securities in the portfolio. Actual maturities of RMBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

(in thousands)
	March 31, 2015			December 31, 2014
Greater than five years and less than ten years		$	766		$	967
Greater than or equal to ten years			1,675,855			1,548,204
Total		$	1,676,621		$	1,549,171

The Company generally pledges its RMBS assets as collateral under repurchase agreements. At March 31, 2015 and December 31, 2014, the Company had unpledged securities totaling $129.7 million and $31.9 million, respectively. The unpledged balance at March 31, 2015 includes unsettled security purchases with a fair value of approximately $79.3 million that will be pledged as collateral under repurchase agreements on their settlement dates in April 2015.

NOTE 3. REPURCHASE AGREEMENTS

As of March 31, 2015, the Company had outstanding repurchase obligations of approximately $1,459.5 million with a net weighted average borrowing rate of 0.36%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $1,552.7 million and cash pledged to counterparties of approximately $2.2 million. As of December 31, 2014, the Company had outstanding repurchase obligations of approximately $1,436.7 million with a net weighted average borrowing rate of 0.36%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $1,522.9 million and cash pledged to counterparties of approximately $2.6 million.

As of March 31, 2015 and December 31, 2014, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)
	OVERNIGHT			BETWEEN 2				BETWEEN 31				GREATER
	(1 DAY OR			AND				AND				THAN
	LESS)			30 DAYS				90 DAYS				90 DAYS			TOTAL
March 31, 2015
Fair market value of securities pledged, including
accrued interest receivable		$	-		$	1,297,828			$	254,907		$	-		$	1,552,735
Repurchase agreement liabilities associated with
these securities		$	-		$	1,222,961			$	236,529		$	-		$	1,459,490
Net weighted average borrowing rate			-			0.36	%			0.38	%		-			0.36	%
December 31, 2014
Fair market value of securities pledged, including
accrued interest receivable		$	-		$	984,823			$	534,238		$	3,844.00		$	1,522,905
Repurchase agreement liabilities associated with
these securities		$	-		$	929,831			$	502,947		$	3,873.00		$	1,436,651
Net weighted average borrowing rate			-			0.36	%			0.37	%		0.38	%		0.36	%

If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable and cash posted by the Company as collateral. At March 31, 2015, the Company had a maximum amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) of approximately $92.7 million. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at March 31, 2015 and December 31, 2014.

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivatives and other hedging contracts. To date, we have entered into Eurodollar and T-Note futures contracts and interest rate swaptions, but may enter into other contracts in the future. The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

In addition, the Company utilizes TBA securities as a means of investing in and financing Agency RMBS or as a means of reducing its exposure to Agency RMBS, and not as a hedge. The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception and throughout the term of the TBA securities that it will take physical delivery of the Agency RMBS upon settlement of the trade.

Derivative Assets (Liability), at Fair Value

The table below summarizes fair value information about our derivative assets and liability as of March 31, 2015 and December 31, 2014.

(in thousands)
Derivative Instruments and Related Accounts	Balance Sheet Location	March 31, 2015			December 31, 2014
Assets
Eurodollar futures - Margin posted to counterparty	Restricted cash	$	6,078		$	5,174
Payer swaptions	Derivative assets, at fair value		126			1,217
TBA securities	Derivative assets, at fair value		92			-
		$	6,296		$	6,391
Liability
Payer swaptions - Margin posted by counterparty	Other liabilities	$	(207	)	$	(1,364	)

The tables below present information related to the Company’s Eurodollar futures positions at March 31, 2015 and December 31, 2014.

($ in thousands)
	March 31, 2015								December 31, 2014
				Average								Average
	Weighted			Contract					Weighted			Contract
	Average			Notional		Open			Average			Notional		Open
Expiration Year	LIBOR Rate			Amount		Equity(1)			LIBOR Rate			Amount		Equity(1)
2015		0.51	%	$	800,000	$	(1,791	)		0.63	%	$	650,000	$	(1,039	)
2016		1.13	%		900,000		(3,435	)		1.54	%		800,000		139
2017		1.74	%		825,000		(4,976	)		2.23	%		800,000		(1,041	)
2018		2.09	%		800,000		(5,061	)		2.54	%		800,000		(2,361	)
Total / Weighted Average		1.37	%	$	835,714	$	(15,263	)		1.73	%	$	760,000	$	(4,302	)

(1)	Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

The table below presents information related to the Company’s interest rate swaption positions at March 31, 2015.

($ in thousands)
	Option						Underlying Swap
					Weighted								Weighted
					Average				Fixed			Receive	Average
			Fair		Months to		Notional		Pay			Rate	Term
Expiration	Cost		Value		Expiration		Amount		Rate			(LIBOR)	(Years)
March 31, 2015
≤ 1 year	$	5,350	$	126		3	$	375,000		2.79	%	3 Month		7.3
December 31, 2014
≤ 1 year	$	5,350	$	1,217		6	$	375,000		2.79	%	3 Month		7.3

The following table summarizes our contracts to purchase and sell TBA securities as of March 31, 2015.

($ in thousands)
										Net
	Notional			Cost			Market			Carrying
	Amount(1)			Basis(2)			Value(3)			Value(4)
Open purchase trade	$	75,000		$	81,722		$	81,730		$	8
Open sale trade		(75,000	)		(81,930	)		(81,950	)		(20	)
Unsettled offsetting purchases and sales trades		-			-			104			104
	$	-		$	(208	)	$	(116	)	$	92

(1)	Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2)	Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)	Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4)	Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets, at fair value in our consolidated balance sheets.

Gain (Loss) From Derivative Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the statements of operations for the three months ended March 31, 2015 and 2014.

(in thousands)
	Three Months Ended March 31,
	2015			2014
Eurodollar futures contracts (short positions)	$	(11,317	)	$	(1,537	)
Payer swaptions		(1,091	)		(156	)
Net TBA securities		57			-
	$	(12,351	)	$	(1,693	)

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments are included in restricted cash on our balance sheets.

NOTE 5. OFFSETTING ASSETS AND LIABILITIES

The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis.

The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2015 and December 31, 2014.

(in thousands)
Offsetting of Assets
										Gross Amount Not Offset
										in the Balance Sheet
							Net Amount			Financial
	Gross Amount			Gross Amount			of Assets			Instruments			Cash
	of Recognized			Offset in the			Presented in the			Received as			Received as				Net
	Assets			Balance Sheet			Balance Sheet			Collateral			Collateral				Amount
March 31, 2015
Derivative assets - Payer swaptions		$	126		$	-		$	126		$	-		$	(126	)		$	-
December 31, 2014
Derivative asset - Payer swaption		$	1,217		$	-		$	1,217		$	-		$	(1,217	)		$	-

(in thousands)
Offsetting of Liabilities
										Gross Amount Not Offset
										in the Balance Sheet
							Net Amount			Financial
	Gross Amount			Gross Amount			of Liabilities			Instruments
	of Recognized			Offset in the			Presented in the			Posted as				Cash Posted				Net
	Liabilities			Balance Sheet			Balance Sheet			Collateral				Collateral				Amount
March 31, 2015
Repurchase Agreements		$	1,459,490		$	-		$	1,459,490		$	(1,457,305	)		$	(2,185	)		$	-
December 31, 2014
Repurchase Agreements		$	1,436,651		$	-		$	1,436,651		$	(1,434,035	)		$	(2,616	)		$	-

The amounts disclosed for collateral received by or posted to the same counterparty up to and not exceeding the net amount of the asset or liability presented in the balance sheet. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Notes 3 and 4 for a discussion of collateral posted or received against or for repurchase obligations and derivative instruments.

NOTE 6. CAPITAL STOCK

Common Stock Issuances

During 2015 and 2014, the Company completed the following public offerings of shares of its common stock.

($ in thousands, except per share amounts)
		Weighted
		Average
		Price
		Received				Net
Type of Offering	Period	Per Share(1)		Shares		Proceeds(2)
2015
At the Market Offering Program(3)	First Quarter	$	13.66		1,210,487	$	16,175
At the Market Offering Program(3)	Second Quarter		13.25		363,892		5,114
					1,574,379	$	21,289
2014
Secondary Offering	First Quarter	$	12.50		2,070,000	$	24,174
Secondary Offering(4)	First Quarter		12.55		3,680,000		43,989
At the Market Offering Program(3)	Second Quarter		13.14		537,499		6,914
At the Market Offering Program(3)	Third Quarter		13.99		3,389,441		46,372
At the Market Offering Program(3)	Fourth Quarter		13.87		3,675,207		49,846
					13,352,147	$	171,295

(1)	Weighted average price received per share is gross of underwriters’ discount, if applicable, and other offering costs.

(2)	Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs.

(3)

The Company has entered into three equity distribution agreements, two of which have been cancelled and replaced with the current agreement, to publicly offer and sell shares of the Company’s common stock in at the market and privately negotiated transactions from time to time. The net proceeds and shares issued in the second quarter of 2015 under this program are not reflected in the Company’s financial statements as of March 31, 2015. As of March 31, 2015, shares with a value of $83.6 million remain available for issuance under the March 2015 Equity Distribution Agreement.

(4)	Includes net proceeds received of $5.7 million and 480,000 shares issued to the underwriters in April 2014 pursuant to the exercise of their overallotment option related to the March 2014 offering.

Cash Dividends

The table below presents the cash dividends declared on the Company’s common stock during 2015 and 2014.

(in thousands, except per share amount)
Declaration Date	Record Date	Payment Date	Per Share Amount		Total
2015
April 9, 2015(1)	April 27, 2015	April 30, 2015	$	0.18	$	3,303
March 10, 2015	March 27, 2015	March 31, 2015		0.18		3,205
February 10, 2015	February 25, 2015	February 27, 2015		0.18		3,017
January 13, 2015	January 26, 2015	January 30, 2015		0.18		3,017
Totals			$	0.72	$	12,542
Declaration Date	Record Date	Payment Date	Per Share Amount		Total
2014
December 9, 2014	December 26, 2014	December 30, 2014	$	0.18	$	3,004
November 12, 2014	November 25, 2014	November 28, 2014		0.18		2,737
October 9, 2014	October 28, 2014	October 31, 2014		0.18		2,358
September 9, 2014	September 25, 2014	September 30, 2014		0.18		2,348
August 12, 2014	August 26, 2014	August 29, 2014		0.18		1,999
July 10, 2014	July 28, 2014	July 31, 2014		0.18		1,759
June 11, 2014	June 25, 2014	June 30, 2014		0.18		1,712
May 8, 2014	May 27, 2014	May 30, 2014		0.18		1,641
April 8, 2014	April 25, 2014	April 30, 2014		0.18		1,636
March 11, 2014	March 26, 2014	March 31, 2014		0.18		1,550
February 11, 2014	February 25, 2014	February 28, 2014		0.18		974
January 9, 2014	January 27, 2014	January 31, 2014		0.18		925
Totals			$	2.16	$	22,643

(1)	The effect of the dividend declared in April 2015 is not reflected in the Company’s financial statements as of March 31, 2015.

NOTE 7. STOCK INCENTIVE PLAN

In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder, approved, the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees, directors and other service providers, including employees of the Manager and other affiliates. The Incentive Plan provides for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards. The Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except that the Company’s full Board of Directors will administer awards made to directors who are not employees of the Company or its affiliates. The Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate 4,000,000 shares of the Company’s common stock that may be issued under the Incentive Plan.

Restricted Stock Awards

On April 25, 2014, the Compensation Committee granted each of our non-employee directors 6,000 shares of restricted common stock subject to a three year vesting schedule whereby 2,000 shares of the award vest on the first, second and third anniversaries of the award date. Directors will have all the rights of a stockholder with respect to the awards, including the right to receive dividends and vote the shares. The awards are subject to forfeiture should the director no longer be a member of the Board of Directors of the Company prior to the respective vesting dates.

The table below presents information related to the Company’s restricted common stock at March 31, 2015 and December 31, 2014.




	March 31, 2015		December 31, 2014
Unvested restricted common shares outstanding		24,000		24,000
Weighted average grant date value	$	12.23	$	12.23
Intrinsic value	$	318,000	$	313,000
Unrecognized compensation expense	$	204,000	$	228,000
Weighted-average remaining vesting term (in years)		2.0		2.3

Compensation expense recognized during the three months ended March 31, 2015 related to these restricted shares was $24,000.

Stock Awards

The Company issues immediately vested common stock under the Incentive Plan to certain executive officers and directors. The following table presents information related to fully vested common stock issued during the three months ended March 31, 2015.

Fully vested shares granted		21,715
Weighted average grant date value	$	13.28
Compensation expense related to fully vested common share awards	$	-	(1)

(1)	The fully vested shares presented in the table above were granted in January 2015 with respect to service performed during 2014. Approximately $250,000 of compensation expense related to these share awards were accrued and recognized in 2014.

Performance Units

The Company issues performance units under the Incentive Plan to certain executive officers. “Performance Units” vest after the end of a defined performance period, based on satisfaction of the performance conditions set forth in the performance unit agreement. When earned, each Performance Unit will be settled by the issuance of one share of the Company’s Common Stock, at which time the Performance Unit will be cancelled. The Performance Units contain dividend equivalent rights which entitle the Participants to receive distributions declared by the Company on Common Stock, but do not include the right to vote the shares. Performance Units are subject to forfeiture should the participant no longer serve as an executive officer for the Company. Compensation expense for the Performance Units are recognized over the remaining vesting period once it becomes probable that the performance conditions will be achieved.

The following table presents information related to Performance Units outstanding during the three months ended March 31, 2015.

Performance units granted during the period		7,508
Weighted average grant date value	$	13.32
Compensation expense related to performance units	$	10,000
Intrinsic value, at period end	$	99,000
Unrecognized compensation expense, at period end	$	90,000
Weighted average remaining vesting term (in years), at period end.		2.1

NOTE 8. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any reported or unreported contingencies at March 31, 2015.

NOTE 9. INCOME TAXES

The Company will generally not be subject to federal income tax on its REIT taxable income to the extent that it distributes its REIT taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income to its stockholders, of which 85% generally must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other requirements.

NOTE 10. EARNINGS PER SHARE (EPS)

The Company had dividend eligible shares of restricted common stock and Performance Units that were outstanding during the three months ended March 31, 2015. The basic and diluted per share computations include these unvested shares of restricted common stock if there is income available to Common Stock, as they have dividend participation rights. The shares of restricted common stock and Performance Units have no contractual obligation to share in losses. Because there is no such obligation, the shares of restricted common stock and Performance Units are not included in the basic and diluted EPS computations when no income is available to Common Stock even though they are considered participating securities.

The table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2015 and 2014.

(in thousands, except per-share information)
	Three Months Ended March 31,
	2015			2014
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per common share:
Net income - Basic and diluted	$	5,509		$	3,595
Weighted average common shares:
Common shares outstanding at the balance sheet date		17,924			8,612
Unvested dividend eligible share based compensation
outstanding at the balance sheet date		32			-
Effect of weighting		(1,109	)		(3,518	)
Weighted average shares-basic and diluted		16,847			5,094
Income per common share:
Basic and diluted	$	0.33		$	0.71

NOTE 11. FAIR VALUE

Authoritative accounting literature establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:

·	Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),

Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and

Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

The Company’s RMBS, interest rate swaptions and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our positions in RMBS, interest rate swaptions and TBA securities determined by either an independent third-party or do so internally.

RMBS, interest rate swaptions, TBA securities and Eurodollar futures contracts were recorded at fair value on a recurring basis during the three months ended March 31, 2015 and 2014. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

(in thousands)
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
	Measurements		(Level 1)		(Level 2)		(Level 3)
March 31, 2015
Mortgage-backed securities	$	1,676,621	$	-	$	1,676,621	$	-
Eurodollar futures contracts		6,078		6,078		-		-
Payer swaptions		126		-		126		-
TBA securities		92		-		92		-
December 31, 2014
Mortgage-backed securities	$	1,549,171	$	-	$	1,549,171	$	-
Eurodollar futures contracts		5,174		5,174		-		-
Payer swaptions		1,217		-		1,217		-

During the three months ended March 31, 2015 and 2014, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

NOTE 12. RELATED PARTY TRANSACTIONS

Management Agreement

At the completion of its IPO, the Company entered into a management agreement with Bimini Advisors (the “Manager”), which provides for an initial term through February 20, 2016 with automatic one-year extensions and is subject to certain termination rights. Under the terms of the management agreement, Bimini Advisors is responsible for administering the business activities and day-to-day operations of the Company. Bimini Advisors receives a monthly management fee in the amount of:

One-twelfth of 1.5% of the first $250 million of the Company’s equity, as defined in the management agreement,
One-twelfth of 1.5% of the first $250 million of the Company’s equity, as defined in the management agreement,
One-twelfth of 1.00% of the Company’s equity that is greater than $500 million.

The Company is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf. In addition, Bimini Advisors began allocating to the Company its pro rata portion of certain overhead costs set forth in the management agreement commencing with the calendar quarter beginning July 1, 2014. Should the Company terminate the management agreement without cause, it shall pay to Bimini Advisors 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 initial term or automatic renewal term.

Total expenses recorded during the three months ended March 31, 2015 and 2014 for the management fee and costs incurred were approximately $1,095,000 and $303,000, respectively.

At March 31, 2015 and December 31, 2014, the net amount due to affiliates was approximately $386,000 and $330,000, respectively.

Other Relationships with Bimini

John B. Van Heuvelen, one of our independent director nominees, owns shares of common stock of Bimini. Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Bimini and owns shares of common stock of Bimini. Hunter Haas, our Chief Financial Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS (“PT RMBS”) and (ii) structured Agency RMBS, such as collateralized mortgage obligations (“CMOs”), 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, a registered investment adviser 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 pass-through Agency 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 pass-through Agency RMBS and certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. Pass-through Agency 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 to our stockholders and maintain our REIT qualification.

On October 3, 2014, we received approval to list our common stock on the New York Stock Exchange (“NYSE”). The Company’s common stock began trading on the NYSE at the commencement of trading on October 8, 2014 under the symbol “ORC”.

Capital Raising Activities

We completed secondary offerings in January and March 2014, raising aggregate net proceeds of approximately $68.2 million from the sale of 5,750,000 shares of our common stock inclusive of the $5.7 million of net proceeds received from the exercise of the underwriters’ overallotment option granted in the March 2014 offering, which closed in April 2014.

On June 17, 2014, we entered into an equity distribution agreement (the “June 2014 Equity Distribution Agreement”) with two sales agents pursuant to which the we could offer and sell, from time to time, up to an aggregate amount of $35,000,000 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 2,528,416 shares under the June 2014 Equity Distribution Agreement for aggregate proceeds of approximately $34.2 million, net of commissions and fees, prior to its termination.

On September 3, 2014, we entered into a second equity distribution agreement (the “September 2014 Equity Distribution Agreement”) with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $75,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. The September 2014 Equity Distribution Agreement replaced the June 2014 Equity Distribution Agreement. We issued a total of 5,087,646 shares under the September 2014 Equity Distribution Agreement for aggregate proceeds of approximately $69.1 million, net of commissions and fees, prior to its termination.

On March 2, 2015, we entered into a third equity distribution agreement (the “March 2015 Equity Distribution Agreement”) with two sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $100,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. The March 2015 Equity Distribution Agreement replaced the September 2014 Equity Distribution Agreement. Through March 31, 2015, we issued a total of 1,196,572 shares under March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $16.0 million, net of commissions and fees. After March 31, 2015, we issued an additional 393,892 shares under March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $5.1 million, net of commissions and fees.

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 investments in Agency RMBS;
recent actions taken by the Federal Reserve and the U.S. Treasury;
prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates; and
other market developments.

In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:

our degree of leverage;
our access to funding and borrowing capacity;
our borrowing costs;
our hedging activities;
the market value of our investments; and
the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act.

Results of Operations

Described below are the Company’s results of operations for the three months ended March 31, 2015, as compared to the Company’s results of operations for the three months ended March 31, 2014.

Net Income Summary

Net income for the three months ended March 31, 2015 was $5.5 million, or $0.33 per share. Net income for the three months ended March 31, 2014 was $3.6 million, or $0.71 per share. The components of net income for the three months ended March 31, 2015 and 2014, along with the changes in those components are presented in the table below:

(in thousands)
	2015			2014			Change
Interest income	$	14,614		$	3,783		$	10,831
Interest expense		(1,296	)		(411	)		(885	)
Net interest income		13,318			3,372			9,946
(Losses) gains on RMBS and derivative contracts		(6,063	)		758			(6,821	)
Net portfolio income		7,255			4,130			3,125
Expenses		(1,746	)		(535	)		(1,211	)
Net income	$	5,509		$	3,595		$	1,914

GAAP and Non-GAAP Reconciliations

Economic Interest Expense and Economic Net Interest Income

To date, the Company has used derivatives, specifically Eurodollar futures contracts and interest rate swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment. Each interest rate futures contract covers a specific period, but the Company typically has many contracts in place at any point in time—usually covering several years in the aggregate. We currently have interest rate swaption agreements in place, giving us the option to enter into swaps covering future periods. During 2015, we entered into forward settling TBA securities that meet the definition of a derivative under GAAP. We have not entered into these TBA securities as a hedge of our interest rate risk.

The Company has not elected to designate its derivative holdings for hedge accounting treatment under the Financial Accounting Standards Board, (the “FASB”), Accounting Standards Codification, (“ASC”), Topic 815, Derivatives and Hedging. Changes in fair value of these instruments are presented in a separate line item in the Company’s 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. In the future, the Company may use other derivative instruments to hedge its interest expense and/or elect to designate its derivative holdings for hedge accounting treatment.

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 gains or losses on specific derivative instruments that pertain to each period presented. As of March 31, 2015, the Company had Eurodollar futures contracts in place through 2018, and interest rate swaption agreements in place covering periods beginning in 2015 through 2025. Adjusting our interest expense for the periods presented by the gains or losses on all derivative instruments would not accurately reflect our economic interest expense for these periods.

For each period presented, the Company has combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on repurchase agreements to reflect total expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income.

However, because the Company has not elected hedging treatment under ASC 815, the gains or losses on all of the Company’s derivative instruments held during the period are reflected in our statements of operations. 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 believes that economic interest expense and economic net interest income provides meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help the Company to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of its current investment portfolio or operations. The realized and unrealized gains or losses presented in the Company’s statements of operations are not necessarily representative of the total interest rate expense that the Company will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses the Company ultimately realizes, and which will affect the Company’s total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.

The Company’s presentation of the economic value of its hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the Company calculates them. Second, while the Company believes 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 the Company’s 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 the three months ended March 31, 2015 and each quarter during 2014.

Gains (Losses) on Derivative Instruments
(in thousands)
						Funding Hedges
	Recognized in					Attributed to			Attributed to
	Income			TBA		Current			Future
	Statement			Securities		Period			Periods
	(GAAP)			Income		(Non-GAAP)			(Non-GAAP)
Three Months Ended
March 31, 2015	$	(12,351	)	$	57	$	(306	)	$	(12,102	)
December 31, 2014		(9,562	)		-		(145	)	$	(9,417	)
September 30, 2014		3,058			-		(25	)	$	3,083
June 30, 2014		(5,728	)		-		(3	)	$	(5,725	)
March 31, 2014		(1,693	)		-		(30	)	$	(1,663	)

Economic Interest Expense and Economic Net Interest Income
(in thousands)
			Interest Expense on Repurchase Agreements
					Gains
					(Losses) on
					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, 2015	$	14,614	$	1,296	$	(306	)	$	1,602	$	13,318	$	13,012
December 31, 2014		12,146		1,126		(145	)		1,271		11,020		10,875
September 30, 2014		9,286		818		(25	)		843		8,468		8,443
June 30, 2014		6,589		676		(3	)		679		5,913		5,910
March 31, 2014		3,783		411		(30	)		441		3,372		3,342

(1)	Reflects the effect of derivative instrument hedges for only the period presented.

(2)	Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from 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, 2015, we generated $13.3 million of net interest income, consisting of $14.6 million of interest income from RMBS assets offset by $1.3 million of interest expense on repurchase liabilities. For the comparable period ended March 31, 2014, we generated $3.4 million of net interest income, consisting of $3.8 million of interest income from RMBS assets offset by $0.4 million of interest expense on repurchase liabilities. The $10.8 million increase in interest income and $0.9 million increase in interest expense for the three months ended March 31, 2015 primarily reflects the deployment of the proceeds from our capital raising activities into the RMBS portfolio on a leveraged basis.

On an economic basis, our interest expense on repurchase liabilities for the three months ended March 31, 2015 and 2014 was $1.6 million and $0.4 million, respectively, resulting in $13.0 million and $3.3 million of economic net interest income, respectively.

The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2015 and 2014 on both a GAAP and economic basis.

($ in thousands)
	Average				Yield on			Average		Interest Expense				Average Cost of Funds
	RMBS		Interest		Average			Repurchase		GAAP		Economic		GAAP			Economic
	Held(1)		Income		RMBS			Agreements(1)		Basis		Basis(2)		Basis			Basis(3)
Three Months Ended
March 31, 2015	$	1,612,896	$	14,614		3.62	%	$	1,448,071	$	1,296	$	1,602		0.36	%		0.44	%
December 31, 2014		1,362,352		12,146		3.57	%		1,346,314		1,126		1,271		0.33	%		0.38	%
September 30, 2014		1,025,768		9,286		3.62	%		1,019,839		818		843		0.32	%		0.33	%
June 30, 2014		811,881		6,589		3.25	%		717,474		676		679		0.38	%		0.38	%
March 31, 2014		549,490		3,783		2.75	%		484,902		411		441		0.34	%		0.36	%

($ in thousands)
	Net Interest Income				Net Interest Spread
	GAAP		Economic		GAAP			Economic
	Basis		Basis(2)		Basis			Basis(4)
Three Months Ended
March 31, 2015	$	13,318	$	13,011		3.26	%		3.18	%
December 31, 2014		11,020		10,875		3.24	%		3.19	%
September 30, 2014		8,468		8,443		3.30	%		3.29	%
June 30, 2014		5,913		5,910		2.87	%		2.87	%
March 31, 2014		3,372		3,342		2.41	%		2.39	%

(1)

Portfolio yields and costs of borrowings presented in the tables above, the table below and the tables on page 26 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the quarterly 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 26 includes the effect of our derivative instrument hedges for only the periods presented.

(3)	Represents interest cost of our borrowings and effect of derivative instruments hedges attributed to the period divided by Average RMBS.

(4)	Economic Net Interest Spread is calculated by subtracting Average Economic Cost of Funds from Yield on Average RMBS.

Interest Income and Average Asset Yield

Our interest income for the three months ended March 31, 2015 and 2014 was $14.6 million and $3.8 million, respectively. We had average RMBS holdings of $1,612.9 million and $549.5 million for the three months ended March 31, 2015 and 2014, respectively. The yield on our portfolio was 3.62% and 2.75% for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015 as compared to the three months ended March 31, 2014, there was a $10.8 million increase in interest income due to a $1,063.4 million increase in average RMBS, combined with a 87 basis point increase in the yield on average RMBS. The increase in average RMBS during the three months ended March 31, 2015 reflects the deployment of the proceeds of our capital raising activities on, a leveraged basis.

The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and pass-through RMBS (“PT RMBS”) for each quarter in 2015 and 2014.

($ in thousands)
	Average RMBS Held						Interest Income							Realized Yield on Average RMBS
	PT		Structured				PT		Structured					PT			Structured
	RMBS		RMBS		Total		RMBS		RMBS			Total		RMBS			RMBS			Total
March 31, 2015	$	1,541,497	$	71,399	$	1,612,896	$	14,629	$	(15	)	$	14,614		3.80	%		(0.09	)%		3.62	%
December 31, 2014		1,298,967		63,385		1,362,352		12,761		(615	)		12,146		3.93	%		(3.88	)%		3.57	%
September 30, 2014		969,034		56,734		1,025,768		9,482		(196	)		9,286		3.91	%		(1.39	)%		3.62	%
June 30, 2014		764,199		47,682		811,881		7,674		(1,085	)		6,589		4.02	%		(9.10	)%		3.25	%
March 31, 2014		514,226		35,264		549,490		4,402		(619	)		3,783		3.42	%		(7.02	)%		2.75	%

Interest Expense and the Cost of Funds

We had average outstanding repurchase agreements of $1,448.1 million and $484.9 million and total interest expense of $1.3 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively. Our average cost of funds was 0.36% and 0.34% for three months ended March 31, 2015 and 2014, respectively. There was a 2 basis point increase in the average cost of funds and a $963.2 million increase in average outstanding repurchase agreements during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014. The increase in average outstanding repurchase agreements, and the corresponding increase in interest expense, reflects the leveraging of the proceeds of our capital raising activities.

Our economic interest expense was $1.6 million and $0.4 million for the three months ended March 31, 2015 and 2014, respectively. There was a 8 basis point increase in the average economic cost of funds to 0.44% for the three months ended March 31, 2015 from 0.36% for the three months ended March 31, 2014.

Because 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 19 basis points above the average one-month LIBOR and 1 basis point above the average six-month LIBOR for the quarter ended March 31, 2015. Our average economic cost of funds was 27 basis points above the average one-month LIBOR and 9 basis points above the average six-month LIBOR for the quarter ended March 31, 2015. The average term to maturity of the outstanding repurchase agreements was 22 days and 27 days at March 31, 2015 and December 31, 2014, respectively.

The tables below presents the average balance of repurchase agreements outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2015 and 2014 on both a GAAP and economic basis.

($ in thousands)
	Average
	Balance of		Interest Expense				Average Cost of Funds
	Repurchase		GAAP		Economic		GAAP			Economic
	Agreements		Basis		Basis		Basis			Basis
March 31, 2015	$	1,448,071	$	1,296	$	1,602		0.36	%		0.44	%
December 31, 2014		1,346,314		1,126		1,271		0.33	%		0.38	%
September 30, 2014		1,019,839		818		843		0.32	%		0.33	%
June 30, 2014		717,474		676		679		0.38	%		0.38	%
March 31, 2014		484,902		411		441		0.34	%		0.36	%

							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, 2015		0.17	%		0.35	%		0.19	%		0.01	%		0.27	%		0.09	%
December 31, 2014		0.16	%		0.34	%		0.17	%		(0.01	)%		0.22	%		0.04	%
September 30, 2014		0.15	%		0.33	%		0.17	%		(0.01	)%		0.18	%		0.00	%
June 30, 2014		0.15	%		0.33	%		0.23	%		0.05	%		0.23	%		0.05	%
March 31, 2014		0.16	%		0.34	%		0.18	%		0.00	%		0.20	%		0.02	%

Gains or Losses

The table below presents our gains or losses for the three months ended March 31, 2015 and 2014.

(in thousands)
	2015			2014			Change
Realized (losses) gains on sales of RMBS	$	(32	)	$	911		$	(943	)
Unrealized gains on RMBS		6,320			1,540			4,780
Total gains on RMBS		6,288			2,451			3,837
Losses on interest rate futures		(11,317	)		(1,537	)		(9,780	)
Losses on payer swaption		(1,091	)		(156	)		(935	)
Gains on TBA securities		57			-			57

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 purposes 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, 2015 and 2014, we received proceeds of $40.3 million and $141.3 million, respectively, from the sales of RMBS.

The increase in sales volume reflects the repositioning of our portfolio following our two equity offerings in the first quarter of 2014, and our additional capital raising activities in 2014 and 2015. The net realized and unrealized gains (losses) on RMBS for the three months ended March 31, 2015 and 2014 were the result of sales executed to replace securities which no longer offered attractive risk adjusted returns with those that did. Losses on interest rate futures and swaptions are a result of higher / lower short and intermediate term rates, and the resulting impact on implied forward rates, during the three months ended March 31, 2015 and 2014. The table below presents historical interest rate data for each quarter end during 2015 and 2014.

				15 Year			30 Year			Three
	10 Year			Fixed-Rate			Fixed-Rate			Month
	Treasury Rate(1)			Mortgage Rate(2)			Mortgage Rate(2)			LIBOR(3)
March 31, 2015		1.93	%		3.04	%		3.77	%		0.27	%
December 31, 2014		2.17	%		3.13	%		3.86	%		0.25	%
September 30, 2014		2.51	%		3.31	%		4.16	%		0.23	%
June 30, 2014		2.52	%		3.27	%		4.16	%		0.23	%
March 31, 2014		2.72	%		3.36	%		4.34	%		0.23	%

(1)	Historical 10 Year 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 are obtained from the Intercontinental Exchange Benchmark Administration Ltd.

Expenses

Total operating expenses were $1.7 million and $0.5 million for the three months ended March 31, 2015 and 2014, respectively. The table below provides a breakdown of operating expenses for the three months ended March 31, 2015 and 2014.

(in thousands)
	2015		2014		Change
Management fees	$	855	$	303	$	552
Accrued incentive compensation		165		-		165
Directors fees and liability insurance		248		84		164
Audit, legal and other professional fees		160		73		87
Other direct REIT operating expenses		42		45		(3	)
Other expenses		276		30		246
Total expenses	$	1,746	$	535	$	1,211

At the completion of our IPO, we entered into a management agreement with Bimini Advisors, LLC, a wholly owned subsidiary of Bimini, which provides for an initial term through February 20, 2016 with automatic one-year extensions and is subject to certain termination rights. Under the terms of the management agreement, Bimini Advisors is responsible for administering the business activities and day-to-day operations of the Company. Bimini Advisors receives a monthly management fee in the amount of:

One-twelfth of 1.5% of the first $250 million of the Company’s equity, as defined in the management agreement,
One-twelfth of 1.25% of the Company’s 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 equity that is greater than $500 million.

The Company is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf. In addition, beginning July 1, 2014, Bimini Advisors began allocating to the Company its pro rata portion of certain overhead costs in accordance with the management agreement.

Financial Condition:

Mortgage-Backed Securities

As of March 31, 2015, our RMBS portfolio consisted of $1,676.6 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.27%. During the three months ended March 31, 2015, we received principal repayments of $43.0 million compared to $10.4 million for the three months ended March 31, 2014. The average prepayment speeds for the quarters ended March 31, 2015 and 2014 were 9.7% and 9.1%, respectively.

The following table presents the 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, 2015		8.1		14.6		9.7
December 31, 2014		4.0		14.9		7.8
September 30, 2014		8.1		18.8		12.5
June 30, 2014		4.1		15.9		8.1
March 31, 2014		4.2		14.9		9.1

The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS mortgage related securities as of March 31, 2015 and December 31, 2014:

($ in thousands)
					Weighted		Weighted
			Percentage		Average		Average	Weighted	Weighted
			of	Weighted	Maturity		Coupon	Average	Average
		Fair	Entire	Average	in	Longest	Reset in	Lifetime	Periodic
Asset Category		Value	Portfolio	Coupon	Months	Maturity	Months	Cap	Cap
March 31, 2015
Adjustable Rate RMBS	$	3,755	0.2%	3.55%	233	1-Sep-35	2.31	10.05%	2.00%
Fixed Rate RMBS		1,522,833	90.8%	4.36%	313	1-Apr-45	NA	NA	NA
Hybrid Adjustable Rate RMBS		69,619	4.2%	2.54%	335	1-Aug-43	94.75	7.54%	2.00%
Total Mortgage-backed Pass-through		1,596,207	95.2%	4.27%	314	1-Apr-45	NA	NA	NA
Interest-Only Securities		65,232	3.9%	3.67%	256	25-Apr-45	NA	NA	NA
Inverse Interest-Only Securities		15,182	0.9%	6.21%	305	25-Apr-41	NA	6.39%	NA
Total Structured RMBS		80,414	4.8%	4.15%	266	25-Apr-45	NA	NA	NA
Total Mortgage Assets	$	1,676,621	100.0%	4.27%	312	25-Apr-45	NA	NA	NA
December 31, 2014
Adjustable Rate RMBS	$	3,794	0.2%	3.55%	236	1-Sep-35	4.02	10.05%	2.00%
Fixed Rate RMBS		1,412,593	91.2%	4.37%	318	1-Dec-44	NA	NA	NA
Hybrid Adjustable Rate RMBS		70,400	4.6%	2.54%	338	1-Aug-43	97.75	7.54%	2.00%
Total Mortgage-backed Pass-through		1,486,787	96.0%	4.28%	319	1-Dec-44	NA	NA	NA
Interest-Only Securities		46,611	3.0%	3.95%	248	25-Jan-43	NA	NA	NA
Inverse Interest-Only Securities		15,773	1.0%	6.23%	308	25-Apr-41	NA	6.39%	NA
Total Structured RMBS		62,384	4.0%	4.52%	263	25-Jan-43	NA	NA	NA
Total Mortgage Assets	$	1,549,171	100.0%	4.29%	317	1-Dec-44	NA	NA	NA

($ in thousands)
	March 31, 2015					December 31, 2014
			Percentage of					Percentage of
Agency	Fair Value		Entire Portfolio			Fair Value		Entire Portfolio
Fannie Mae	$	1,330,629		79.36	%	$	1,243,923		80.30	%
Freddie Mac		331,574		19.78	%		296,203		19.12	%
Ginnie Mae		14,418		0.86	%		9,045		0.58	%
Total Portfolio	$	1,676,621		100.00	%	$	1,549,171		100.00	%

	March 31, 2015		December 31, 2014
Weighted Average Pass-through Purchase Price	$	107.92	$	107.88
Weighted Average Structured Purchase Price	$	13.07	$	13.67
Weighted Average Pass-through Current Price	$	109.23	$	108.59
Weighted Average Structured Current Price	$	12.54	$	13.65
Effective Duration (1)		1.399		2.291

(1)

Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 1.399 indicates that an interest rate increase of 1.0% would be expected to cause a 1.399% decrease in the value of the RMBS in the Company’s investment portfolio at March 31, 2015. An effective duration of 2.291 indicates that an interest rate increase of 1.0% would be expected to cause a 2.291% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2014. 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, 2015 and 2014.

($ in thousands)
	2015								2014
		Total Cost		Average Price		Weighted Average Yield				Total Cost		Average Price		Weighted Average Yield
Pass-through RMBS		$	180,353	$	108.54		2.18	%		$	521,468	$	107.11		3.07	%
Structured RMBS			24,075		11.14		(2.30	)%			24,284		14.35		(4.70	)%

Repurchase Agreements

As of March 31, 2015, 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 16 of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest rates that are based on a spread to LIBOR.

As of March 31, 2015, we had obligations outstanding under the repurchase agreements of approximately $1,459.5 million with a net weighted average borrowing cost of 0.36%. The remaining maturity of our outstanding repurchase agreements obligations ranged from 2 to 85 days, with a weighted average remaining maturity of 22 days. Securing the repurchase agreement obligations as of March 31, 2015 are RMBS with an estimated fair value, including accrued interest, of approximately $1,552.7 million and a weighted average maturity of 316 months, and cash pledged to counterparties of approximately $2.2 million. In March 2015, the Company purchased assets with a fair value of approximately $79.3 million which settle in April 2015 that are expected to be funded by repurchase agreements. Through April 28, 2015, we have been able to maintain our repurchase facilities with comparable terms to those that existed at March 31, 2015 with maturities through July 27, 2015.

The table below presents information about our period end and average repurchase agreement obligations for each quarter in 2015 and 2014.

($ in thousands)
					Difference Between Ending
	Ending Balance		Average Balance		Repurchase Agreements and
	of Repurchase		of Repurchase		Average Repurchase Agreements
Three Months Ended	Agreements		Agreements		Amount		Percent
March 31, 2015	$	1,459,490	$	1,448,071	$	11,419		0.79	%
December 31, 2014		1,436,651		1,346,314		90,337		6.71	%
September 30, 2014		1,255,978		1,019,839		236,139		23.15	%(1)
June 30, 2014		783,701		717,474		66,227		9.23	%
March 31, 2014		651,246		484,902		166,344		34.30	%(2)

(1)

The higher ending balance relative to the average balance during the quarter ended September 30, 2014 reflects the deployment of the proceeds, on a leveraged basis, of the Company’s share issuances under the at the market equity offerings. During the quarter ended September 30, 2014, the Company’s investment in PT RMBS increased $284.2 million.

(2)

The higher ending balance relative to the average balance during the quarter ended March 31, 2014 reflects the deployment of the proceeds, on a leveraged basis, of the Company’s January and March 2014 equity offerings. During the quarter ended March 31, 2014, the Company’s investment in PT RMBS increased $374.5 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 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.

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, 2015, haircuts on our pledged collateral remained stable and as of March 31, 2015, our weighted average haircut was approximately 5.4% of the value of our collateral.

As discussed earlier, we invest a portion of our capital in structured Agency RMBS. We do not fund the purchase of these investments in the repurchase market but instead purchase directly, thus reducing – but not eliminating - the Company’s reliance on access to repurchase agreement funding. 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 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	$	1,459,490	$	-	$	-	$	-	$	1,459,490
Interest expense on repurchase agreements(1)		688		-		-		-		688
Unsettled securities purchased		79,186		-		-		-		79,186
Totals	$	1,539,364	$	-	$	-	$	-	$	1,539,364

(1)	Interest expense on repurchase agreements is based on current interest rates as of March 31, 2015 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 via repurchase agreements. As of March 31, 2015, we had cash and cash equivalents of $78.1 million. We generated cash flows of $57.0 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $1,448.1 million during the three months ended March 31, 2015.

Stockholders’ Equity

In January 2014, we completed a public offering of 2,070,000 shares of our common stock (including 270,000 shares sold pursuant to the full exercise of the overallotment option granted to the underwriters which closed on January 29, 2014) for aggregate net proceeds of approximately $24.2 million after deducting underwriters’ discounts and commissions and offering expenses.

In March 2014, we completed a public offering of 3,680,000 shares of our common stock (including 480,000 shares sold pursuant to the full exercise of the overallotment option granted to the underwriters which closed on April 11, 2014) for aggregate net proceeds of approximately $44.0 million after deducting underwriters’ discounts and commissions and offering expenses.

Outlook

Regulatory Developments with Respect to Fannie Mae and Freddie Mac and the Dodd-Frank Act

In response to the credit market disruption and the deteriorating financial conditions of Fannie Mae and Freddie Mac, Congress and the U.S. Treasury undertook a series of actions that culminated with putting Fannie Mae and Freddie Mac in conservatorship in September 2008. The Federal Housing Finance Agency (“FHFA”) now operates Fannie Mae and Freddie Mac as conservator, in an effort to stabilize the entities. The FHFA also noted that during the conservatorship period, it would work to enact new regulations for minimum capital standards, prudent safety and soundness standards and portfolio limits of Fannie Mae and Freddie Mac.

Although the U.S. Government has committed significant resources to Fannie Mae and Freddie Mac, Agency RMBS guaranteed by either Fannie Mae or Freddie Mac are not backed by the full faith and credit of the United States. Moreover, the Secretary of the U.S. Treasury noted that the guarantee structure of Fannie Mae and Freddie Mac requires examination and that changes in the structures of the entities were necessary to reduce risk to the financial system. Such changes may involve an explicit U.S. Government backing of Fannie Mae and Freddie Mac Agency RMBS or the express elimination of any implied U.S. Government guarantee and, therefore, creation of credit risk with respect to Fannie Mae and Freddie Mac Agency RMBS. Additionally, on February 11, 2011, the U.S. Treasury issued a White Paper titled “Reforming America’s Housing Finance Market” that lays out, among other things, proposals to limit or potentially wind down the role that Fannie Mae and Freddie Mac play in the mortgage market.

On October 4, 2012, the FHFA released a white paper entitled Building a New Infrastructure for the Secondary Mortgage Market (the “FHFA White Paper”). This release follows up on the FHFA’s February 21, 2012 Strategic Plan for Enterprise Conservatorships, which set forth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships. These three goals are to (i) build a new infrastructure for the secondary mortgage market, (ii) gradually contract Fannie Mae and Freddie Mac’s presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. The FHFA White Paper proposes a new infrastructure for Fannie Mae and Freddie Mac that has two basic goals.

The first such goal is to replace the current, outdated infrastructures of Fannie Mae and Freddie Mac with a common, more efficient infrastructure that aligns the standards and practices of the two entities, beginning with core functions performed by both entities such as issuance, master servicing, bond administration, collateral management and data integration. The second goal is to establish an operating framework for Fannie Mae and Freddie Mac that is consistent with the progress of housing finance reform and encourages and accommodates the increased participation of private capital in assuming credit risk associated with the secondary mortgage market. The FHFA recognizes that there are a number of impediments to their goals which may or may not be surmountable, such as the absence of any significant secondary mortgage market mechanisms beyond Fannie Mae, Freddie Mac and Ginnie Mae. The FHFA provided an update on their progress in this regard at an industry conference on October 20, 2014. The Director of the FHFA, Mel Watt, outlined the progress to date associated with representation and warranty practices associated with eligible loans for securitization by the GSEs, the Common Securitization Platform (“CSP’) and Common Securitization Solutions (“CSC”) – a joint venture to house and operate the CSP, which will be designed to allow Fannie Mae and Freddie Mac to securitize loans off of a single platform. As a result, it is still unclear if the proposals will be enacted. If such proposals are enacted, it is unclear how closely what is enacted will resemble the proposals from the FHFA White Paper or what the effects of the enactment will be on housing finance. As the economy has recovered, home prices have increased off the low levels seen in the aftermath of the financial crisis and a significant portion of the shadow inventory of homes that resulted from foreclosures have been worked off. The combination of recovering home prices, attractive financing levels and decreased liquidations of homes via foreclosures have resulted in an acceleration in lending activity.

Fannie Mae and Freddie Mac reform regained momentum in the first quarter of 2014 when Senators Tim Johnson (D-SD) and Mike Crapo (R-ID), the two most senior members of the Senate Banking Committee, released a proposed bill (the “Johnson-Crapo Bill”), which is generally based on the Corker-Warner Bill. However, this momentum was lost in the second quarter of 2014 when the Johnson-Crapo Bill was approved by the Senate Banking Committee, but failed to secure enough support to be considered by Congress. The final outcome of the Johnson-Crapo Bill remains uncertain, as reports indicate that the House Republican leadership continues to favor a very different approach. As the FHFA and both houses of Congress are each working on separate measures intended to dramatically restructure the U.S. housing finance system and the operations of Fannie Mae and Freddie Mac, we expect debate and discussion on the topic to continue throughout 2015. FHFA Chairman Mel Watt, during testimony before Congress in January of 2015, reiterated that the FHFA continues to work towards achieving these goals, although specific details about the eventual outcome were not provided. It is unclear which, if any, of these measures will be enacted, and, if any are enacted, what the effects would be.

In March 2015, housing and mortgage financial reform legislation, H.R. 1491, was proposed by congressmen John Delaney (D-MD) and James A. Himes (D-CT), each of whom is a member of the House Financial Services Committee. The bill is called The Partnership to Strengthen Homeownership Act, and is similar to one introduced by the same congressmen in the last Congress (H.R. 5055), which never made it out of committee. H.R. 1491 was assigned to a congressional committee on March 19, 2015. Under the proposed program, all government guaranteed single-family and multi-family mortgage-backed securities would be supported by a minimum of 5% private sector capital, which would stand in a first loss position. The remaining 95% of the risk would be shared between Ginnie Mae and a private reinsurer on a pari passu basis.

Under the bill, Freddie Mac and Fannie Mae would be wound down over a five-year period, and their multifamily businesses will be spun out as separate entities. Ginnie Mae would be required to create and implement a multifamily guarantee that utilizes private sector pricing consistent with the single family model. The GSEs’ current multifamily businesses would continue to function within the multifamily housing market as purely private organizations with an explicit government guarantee provided by Ginnie Mae and a private sector reinsurer. We expect debate and discussion on residential housing and mortgage reform to continue in 2015. However, we cannot be certain if H.R. 1491, or any housing- or mortgage-related bill will emerge from committee or be approved by Congress and, if so, what the effect will be.

The effect of the actions taken and to be taken by the U.S. Treasury, Congress or FHFA remains uncertain. New and recently enacted laws, regulations and programs related to Fannie Mae and Freddie Mac may adversely affect the pricing, supply, liquidity and value of Agency RMBS and otherwise materially harm our business and operations.

The Dodd-Frank Act provides for new regulations on financial institutions and creates new supervisory and advisory bodies, including the new Consumer Financial Protection Bureau. The Dodd-Frank Act tasks many agencies with issuing a variety of new regulations, including rules related to mortgage origination and servicing, securitization and derivatives. Because a significant number of regulations under the Dodd-Frank Act have either not yet been proposed or not yet been adopted in final form, it is not possible for us to predict how the Dodd-Frank Act will impact our business.

Interest Rates

The Federal Reserve has taken a number of steps over the last few years to lower both short and long-term interest rates. In August 2011, the Federal Reserve announced that it expected to maintain the Federal Funds Rate at a low level at least through mid-2013, and on January 25, 2012 it extended that outlook through late 2014. Additionally, on September 21, 2011, the Federal Reserve announced the extension of the maturities of its U.S. Treasury securities portfolio by selling approximately $400 billion in short-term U.S. Treasury securities and purchasing an equivalent amount of longer-term U.S. Treasury securities. This program, known as “Operation Twist,” lasted through December 2012. The goal of Operation Twist was to lower the yields on longer-term U.S. Treasury securities, which the Federal Reserve believed would lower interest rates tied to such yields, such as mortgage rates and interest rates on commercial loans.

In September 2012, the Federal Reserve announced an open-ended program to expand its holdings of long-term securities by purchasing an additional $40 billion of Agency RMBS per month until key economic indicators, such as the unemployment rate, showed signs of improvement. This program, known as “QE3”, when combined with other programs to extend the average maturity of the Federal Reserve’s holdings of securities and reinvest principal payments from the Federal Reserve’s holdings of agency debt and Agency RMBS into Agency RMBS, was expected to increase the Federal Reserve’s holdings of long-term securities by $85 billion each month. The Federal Reserve also announced that it would keep the target range for the Federal Funds Rate between zero and 0.25% through at least mid-2015, which was six months longer than previously expected.

The Federal Reserve provided further guidance to the market in December 2012 by stating that it intended to keep the Federal Funds Rate close to zero while the unemployment rate is above 6.5% and as long as inflation does not rise above 2.5%. In December 2012, the Federal Reserve also announced that it would initially begin buying $45 billion of long-term Treasury bonds each month and noted that such amount may increase in the future. This bond purchase program replaced Operation Twist.

The Federal Reserve Open Market Committee (the “FOMC”) meeting minutes released on April 10, 2013 revealed that the FOMC had begun considering when the Federal Reserve should begin tapering the pace of Agency RMBS purchases set in September 2012. The FOMC meeting minutes released on May 22, 2013 announced that the Federal Reserve was considering beginning to taper such purchase as early as June 2013. In minutes released on June 25, 2013, the FOMC stated that the Federal Reserve would begin to scale back Agency RMBS purchases later in 2013 and that such purchases would cease entirely when the unemployment rate reached 7%. On October 30, 2013, the FOMC announced that it would continue reinvesting principal payments from its holdings of agency debt and Agency RMBS into Agency RMBS and U.S. Treasury securities at the current pace indefinitely. The FOMC believed that these actions would maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help control the rate of inflation. The October 30, 2013 announcement provided no additional guidance as to when tapering might begin.

At its December 18, 2013 meeting, the FOMC indicated that it saw improvement in economic activity and labor market conditions. As a result, the FOMC announced that, beginning in January 2014, it would reduce its monthly purchases of Agency RMBS from $40 billion to $35 billion and U.S. Treasury securities from $45 billion to $40 billion. The FOMC further stated that it would continue reinvesting principal payments from its holdings of these securities in Agency RMBS and rolling over maturing Treasury bonds at auction. Subsequently, the FOMC announced additional $5 billion reductions to its monthly purchases of both Agency RMBS and Treasury bonds. The FOMC ended its bond buying program in October 2014. The FOMC announced they would continue to reinvest principal and interest payments received from their RMBS portfolio in additional RMBS.

On March 18, 2015, the FOMC concluded their two day meeting and issued a statement, followed by a press conference with Chair Yellen. As expected, the statement removed the word “patient” in their forward guidance language, implying the first rate hike was as soon as two meetings away, in June of 2015. However, the committee’s statement also implied the FOMC expected lower levels of growth, unemployment and inflation over the next two years. The statement also acknowledged the Committee recognized the effect of the strong dollar on the economy. Accordingly, the Committee’s dots, or projections for the Federal Funds target going forward, as expressed by the members, have moved lower from the last projections published in December of 2014. The market reacted to the news by pricing in future rate hikes further out in time and at a more gradual pace than was the case before the news and even below the projections of the Federal Reserve itself. The Federal Reserve statement went on to describe the pre-conditions they expected to see met before initiating rate hikes, so now the market can closely monitor economic developments to gauge the likely timing of rate hikes.

Although historically correlated with movements in the Federal Funds Rate, European inter-bank lending rates, specifically LIBOR, are independently affected by the fiscal and budgetary problems of the member countries of the European Union. In recent years, the European Central Bank, International Monetary Fund and member countries have provided emergency funding mechanisms to support members facing the inability to raise new debt at acceptable levels (such as Greece, Ireland, Portugal and Spain). To the extent this crisis reemerges, LIBOR may increase substantially.

Effect on Us

Regulatory developments, movements in interest rates and prepayment rates as well as loan modification programs 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 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.

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, such as short-term fixed and floating rate CMOs. 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 pass-through Agency RMBS, particularly pass-through Agency RMBS backed by fixed-rate mortgages.

We do not believe our investment portfolio will be materially affected by loan modification programs because Agency RMBS backed by loans that would qualify for such programs (e.g., seriously delinquent loans) will be purchased by Fannie Mae and Freddie Mac at their par value prior to the implementation of such programs. However, if Fannie Mae and Freddie Mac were to modify or end their repurchase programs or if the U.S. Government modified its loan modification programs to modify non-delinquent mortgage loans, our investment portfolio could be negatively impacted.

Effects on our borrowing costs

We leverage our pass-through Agency 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 market levels of both the Federal Funds Rate and LIBOR. An increase in the U.S. Federal 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 effectively convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar futures contracts or interest rate swaptions.

Summary

The relatively large spread between short and long-term interest rates has positively affected our net interest margin. However, if prepayment rates remain elevated or accelerate further they could negatively affect our net interest margin and the value of our assets. Furthermore, increases in the Federal Funds Rate and LIBOR could significant increase our financing costs, which could lower our net interest margin.

Critical Accounting Policies

Our 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 policies involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policies as discussed in our annual report on Form 10-K for the year ended December 31, 2014.

Capital Expenditures

At March 31, 2015, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At March 31, 2015, we did not have any off-balance sheet arrangements.

Dividends

In addition to other requirements, 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. We intend to pay regular monthly dividends to our stockholders and have declared the following dividends during 2015 and 2014.

(in thousands, except per share amounts)
Declaration Date	Record Date	Payment Date	Per Share Amount		Total
2015
April 9, 2015	April 27, 2015	April 30, 2015	$	0.180	$	3,303
March 10, 2015	March 27, 2015	March 31, 2015		0.180		3,205
February 10, 2015	February 25, 2015	February 27, 2015		0.180		3,017
January 13, 2015	January 26, 2015	January 30, 2015		0.180		3,017
Totals			$	0.720	$	12,542
2014
December 9, 2014	December 26, 2014	December 30, 2014		0.180		3,004
November 12, 2014	November 25, 2014	November 28, 2014		0.180		2,737
October 9, 2014	October 28, 2014	October 31, 2014		0.180		2,358
September 9, 2014	September 25, 2014	September 30, 2014		0.180		2,348
August 12, 2014	August 26, 2014	August 29, 2014		0.180		1,999
July 10, 2014	July 28, 2014	July 31, 2014		0.180		1,759
June 11, 2014	June 25, 2014	June 30, 2014		0.180		1,712
May 8, 2014	May 27, 2014	May 30, 2014		0.180		1,641
April 8, 2014	April 25, 2014	April 30, 2014		0.180		1,636
March 11, 2014	March 26, 2014	March 31, 2014		0.180		1,550
February 11, 2014	February 25, 2014	February 28, 2014		0.180		974
January 9, 2014	January 27, 2014	January 31, 2014		0.180		925
Totals			$	2.160	$	22,643

(1)	The effect of the dividend declared in April 2015 is not reflected in the Company’s financial statements as of March 31, 2015

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.

Jumpstart Our Business Startups Act of 2012

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will be required to comply with new or revised accounting standards as required when they are adopted. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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 and ability to realize gains from the sale of these assets and impacts our 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 and options to enter into interest rate swaps. These instruments are intended to serve as a hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will 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, 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 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.

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) cause their price movements, and model duration, to be affected by changes in both prepayments and one month LIBOR, both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.

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

We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various third party models may produce different duration numbers for the same securities.

The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of March 31, 2015 and December 31, 2014, assuming rates instantaneously fall 100 basis points (“bps”), fall 50 bps, rise 50 bps and rise 100 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, 2015 and December 31, 2014. We apply a floor of 0% for the down rate scenarios on our interest bearing liabilities and hedge positions, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of our overall management of our investment portfolio.

Interest Rate Sensitivity(1)
	Portfolio
	Market			Book
Change in Interest Rate	Value(2)(3)			Value(3)(4)
As of March 31, 2015
-100 Basis Points		(0.96	)%		(6.97	)%
-50 Basis Points		(0.35	)%		(2.54	)%
+50 Basis Points		(0.00	)%		(0.01	)%
+100 Basis Points		(0.44	)%		(3.16	)%
As of December 31, 2014
-100 Basis Points		(0.79	)%		(5.63	)%
-50 Basis Points		(0.13	)%		(0.89	)%
+50 Basis Points		(0.30	)%		(2.10	)%
+100 Basis Points		(0.94	)%		(6.64	)%

(1)	Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.

(2)	Includes the effect of derivatives and other securities used for hedging purposes.

(3)	Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.

(4)	Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date.

In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to GSE 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 securities fall 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 Federal Reserve, 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, 2015, we had unrestricted cash and cash equivalents of $78.1 million and unpledged securities of approximately $129.7 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 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 securities 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 major financial institutions with acceptable credit ratings. However, there is no guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if unsuccessful.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information we must disclose in its periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on February 24, 2015.

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

The Company did not issue or sell equity securities that were not registered under the Securities Act during the three months ended March 31, 2015.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

3.1	Articles of Amendment and Restatement of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of Orchid Island Capital, Inc. (filed as Exhibit 3.2 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference).
10.1	Equity Distribution Agreement, dated March 2, 2015, by and between Orchid Island Capital, Inc., Bimini Advisors, LLC, Ladenburg Thalmann & Co., Inc. and Mitsubishi UFJ Securities (USA), Inc. (incorporated by reference to Exhibit 1.1 to the Registrant’s Form 8-K filed with the Securities Exchange Commission on March 2, 2015).
31.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of G. Hunter Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of G. Hunter Haas, IV, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Exhibit 101.INS XBRL		Instance Document ***
Exhibit 101.SCH XBRL		Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL		Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL		Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document ***

*	Filed herewith.

**	Furnished herewith.

***	Submitted electronically herewith.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Orchid Island Capital, Inc.
		Registrant


Date: April 28, 2015	By:	/s/ Robert E. Cauley
		Robert E. Cauley Chief Executive Officer, President and Chairman of the Board

Date: April 28, 2015	By:	/s/ G. Hunter Haas, IV
		G. Hunter Haas, IV Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit No.

3.1	Articles of Amendment and Restatement of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of Orchid Island Capital, Inc. (filed as Exhibit 3.2 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference).
10.1	Equity Distribution Agreement, dated March 2, 2015, by and between Orchid Island Capital, Inc., Bimini Advisors, LLC, Ladenburg Thalmann & Co., Inc. and Mitsubishi UFJ Securities (USA), Inc. (incorporated by reference to Exhibit 1.1 to the Registrant’s Form 8-K filed with the Securities Exchange Commission on March 2, 2015).
31.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of G. Hunter Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of G. Hunter Haas, IV, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Exhibit 101.INS XBRL		Instance Document ***
Exhibit 101.SCH XBRL		Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL		Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL		Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL		Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL		Taxonomy Extension Presentation Linkbase Document ***

*	Filed herewith.

**	Furnished herewith.

***	Submitted electronically herewith.