Edgar Filing: Orchid Island Capital, Inc.

orc10q20140331.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, 2014

¨ 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 ¨ Non-accelerated filer ¨ Smaller Reporting Company ý

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 May 6, 2014: 9,091,665

ORCHID ISLAND CAPITAL, INC.

TABLE OF CONTENTS


	Page

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements		1
Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013		1
Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013		2
Statement of Stockholders’ Equity (unaudited) for the three months ended March 31, 2014		3
Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013		4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		39
ITEM 4. Controls and Procedures		40

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		41
ITEM 1A. Risk Factors		41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
ITEM 3. Defaults Upon Senior Securities		41
ITEM 4. Mine Safety Disclosures		41
ITEM 5. Other Information		41
ITEM 6. Exhibits		42
SIGNATURES		43

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.
BALANCE SHEETS

	(Unaudited)
	March 31, 2014		December 31, 2013
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties	$	689,163,695	$	335,774,980
Unpledged		58,593,805		15,447,532
Total mortgage-backed securities		747,757,500		351,222,512
Cash and cash equivalents		43,567,673		8,169,402
Restricted cash		4,096,000		2,445,625
Accrued interest receivable		2,875,420		1,559,437
Derivative asset, at fair value		1,548,521		-
Other assets		292,315		179,071
Total Assets	$	800,137,429	$	363,576,047

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Repurchase agreements	$	651,246,345	$	318,557,054
Payable for unsettled securities purchased		39,502,694		-
Accrued interest payable		116,677		91,461
Due to affiliates		132,200		81,925
Other liabilities		1,729,799		80,260
Total Liabilities		692,727,715		318,810,700

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, 2014 and December 31, 2013		-		-
Common Stock, $0.01 par value; 500,000,000 shares authorized, 8,611,665
shares issued and outstanding as of March 31, 2014 and 3,341,665 shares issued
and outstanding as of December 31, 2013		86,117		33,417
Additional paid-in capital		107,323,597		46,115,961
Accumulated deficit		-		(1,384,031	)
Total Stockholders' Equity		107,409,714		44,765,347
Total Liabilities and Stockholders' Equity	$	800,137,429	$	363,576,047
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2014 and 2013

	2014			2013
Interest income	$	3,782,622		$	1,413,258
Interest expense		(410,843	)		(201,420	)
Net interest income		3,371,779			1,211,838
Realized gains on mortgage-backed securities		911,318			99,925
Unrealized gains (losses) on mortgage-backed securities		1,539,988			(29,160	)
Losses on derivative instruments		(1,693,292	)		(483,925	)
Net portfolio income		4,129,793			798,678

Expenses:
Management fees		302,800			125,100
Directors' fees and liability insurance		84,251			41,462
Audit, legal and other professional fees		73,011			144,150
Direct REIT operating expenses		44,820			64,384
Other administrative		29,647			23,224
Total expenses		534,529			398,320

Net income	$	3,595,264		$	400,358

Basic and diluted net income per share	$	0.71		$	0.20

Weighted Average Shares Outstanding		5,093,554			2,004,332

Dividends declared per common share	$	0.540		$	0.135
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2014

			Additional
	Common		Paid-in			Accumulated
	Stock		Capital			Deficit			Total
Balances, January 1, 2014	$	33,417	$	46,115,961		$	(1,384,031	)	$	44,765,347
Net income		-		-			3,595,264			3,595,264
Cash dividends declared, $0.54 per share		-		(1,238,467	)		(2,211,233	)		(3,449,700	)
Issuance of common stock pursuant to public offerings		52,700		62,446,103			-			62,498,803
Balances, March 31, 2014	$	86,117	$	107,323,597		$	-		$	107,409,714
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2014 and 2013

	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,595,264		$	400,358
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Realized and unrealized gains on mortgage-backed securities		(2,451,306	)		(70,765	)
Unrealized loss on interest rate swaption		156,479			-
Changes in operating assets and liabilities:
Accrued interest receivable		(1,315,983	)		(999,530	)
Other assets		(115,291	)		(236,305	)
Accrued interest payable		25,216			9,965
Other liabilities		144,539			(2,132	)
Due to (from) affiliates		50,275			(30,269	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		89,193			(928,678	)

CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases		(506,249,295	)		(308,658,763	)
Sales		141,297,295			57,755,882
Principal repayments		10,373,059			6,092,947
Increase in restricted cash		(1,650,375	)		(1,582,250	)
Purchase of interest rate swaption, net of margin cash received		(200,000	)		-
NET CASH USED IN INVESTING ACTIVITIES		(356,429,316	)		(246,392,184	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements		1,669,241,858			678,889,088
Principal payments on repurchase agreements		(1,336,552,567	)		(466,384,393	)
Cash dividends		(3,449,700	)		(451,124	)
Proceeds from issuance of common stock		62,498,803			35,400,000
NET CASH PROVIDED BY FINANCING ACTIVITIES		391,738,394			247,453,571

NET INCREASE IN CASH AND CASH EQUIVALENTS		35,398,271			132,709
CASH AND CASH EQUIVALENTS, beginning of the period		8,169,402			2,537,257
CASH AND CASH EQUIVALENTS, end of the period	$	43,567,673		$	2,669,966

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	385,627		$	191,455

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY:
Securities acquired settled in later period	$	39,502,694		$	-

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Issuance of common shares to Bimini Capital Management, Inc. pursuant to stock dividend	$	-		$	8,276
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

MARCH 31, 2014 and 2013

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 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 Agency RMBS securities 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.

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 period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014.

The balance sheet at December 31, 2013 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, 2013.

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 and the interest rate swaption.

Statement of Comprehensive Income (Loss)

In accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“FASB 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. Restricted cash, of approximately $3,513,000 and $2,446,000 at March 31, 2014 and December 31, 2013, respectively, represents cash held by a broker as margin on Eurodollar futures contracts. Restricted cash of $583,000 at March 31, 2014 represents cash held on deposit as collateral with a repurchase agreement counterparty.

The Company maintains cash balances at three 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 up to $250,000 per depositor at each financial institution. At March 31, 2014, the Company’s cash deposits exceeded federally insured limits by approximately $43.2 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 uses 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 mortgage-backed loans (collectively, “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 allows 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 the average of third-party broker quotes received and/or independent pricing sources 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 Eurodollar futures contracts and options to enter in interest rate swaps (“interest rate swaptions”), but may enter into other transactions in the future. The Company has elected to not treat any of its derivative financial instruments as hedges. 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 derivative. 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 futures contracts and interest rate swaption are accounted for at fair value in the balance sheet. 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 from/to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities generally approximates their carrying values as of March 31, 2014 and December 31, 2013 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 the 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 “if converted” method 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

Bimini has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Until the closing of its IPO on February 20, 2013, Orchid was a “qualified REIT subsidiary” of Bimini under the Code. Beginning with its short tax period commencing on February 20, 2013 and ended December 31, 2013, Orchid will elect and intends to qualify to be taxed as a REIT. 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 July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The ASU became effective beginning January 1, 2014 on either a prospective or retrospective basis. The guidance represents a change in financial statement presentation only and the adoption of this ASU did not have a material impact on the Company’s financial results.

In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update modify the guidance for determining whether an entity is an investment company, update the measurement requirements for noncontrolling interests in other investment companies and require additional disclosures for investment companies under US GAAP. The amendments in the Update develop a two-tiered approach for the assessment of whether an entity is an investment company which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The amendments in this Update also revise the measurement guidance in Topic 946 such that investment companies must measure noncontrolling ownership interests in other investment companies at fair value, rather than applying the equity method of accounting to such interests. The new guidance became effective beginning January 1, 2014. The adoption of this ASU did not have a material impact on the Company’s financial statements.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ("ASU 2013-04"). The objective of the amendments in this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing GAAP. The amendments in ASU 2013-04 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be retrospectively applied to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU's scope that exist at the beginning of an entity's fiscal year of adoption. The adoption of this ASU did not 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, 2014 and December 31, 2013:

(in thousands)
	March 31, 2014		December 31, 2013
Pass-Through RMBS Certificates:
Hybrid Adjustable-rate Mortgages	$	75,850	$	76,118
Adjustable-rate Mortgages		4,698		5,334
Fixed-rate Mortgages		620,928		245,523
Total Pass-Through Certificates		701,476		326,975
Structured RMBS Certificates:
Interest-Only Securities		35,681		19,206
Inverse Interest-Only Securities		10,600		5,042
Total Structured RMBS Certificates		46,281		24,248
Total	$	747,757	$	351,223

The following table summarizes the Company’s RMBS portfolio as of March 31, 2014 and December 31, 2013, 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, 2014			December 31, 2013
Greater than five years and less than ten years		$	1,330		$	1,521
Greater than or equal to ten years			746,427			349,702
Total		$	747,757		$	351,223

The Company generally pledges its RMBS assets as collateral under repurchase agreements. At March 31, 2014 and December 31, 2013, the Company had unpledged securities totaling $58.6 million and $15.4 million, respectively. The unpledged balance at March 31, 2014 includes unsettled securities purchases with a fair value of approximately $26.0 million that will be pledged as collateral under repurchase agreements on their respective settlement dates in April 2014.

NOTE 3. REPURCHASE AGREEMENTS

As of March 31, 2014, the Company had outstanding repurchase obligations of approximately $651.2 million with a net weighted average borrowing rate of 0.35%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $691.7 million, and cash pledged to the counterparties of approximately $0.6 million. As of December 31, 2013, the Company had outstanding repurchase obligations of approximately $318.6 million with a net weighted average borrowing rate of 0.39%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $337.0 million.

As of March 31, 2014 and December 31, 2013, 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, 2014
Fair market value of securities pledged, including
accrued interest receivable		$	-		$	523,455			$	146,233		$	21,978		$	691,666
Repurchase agreement liabilities associated with
these securities		$	-		$	493,131			$	137,677		$	20,438		$	651,246
Net weighted average borrowing rate			-			0.35	%			0.35	%		0.36	%		0.35	%
December 31, 2013
Fair market value of securities pledged, including
accrued interest receivable		$	-		$	326,348			$	10,650		$	-		$	336,998
Repurchase agreement liabilities associated with
these securities		$	-		$	308,402			$	10,155		$	-		$	318,557
Net weighted average borrowing rate			-			0.39	%			0.37	%		-			0.39	%

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, 2014, 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, including accrued interest on such securities) of approximately $40.9 million. At March 31, 2014, the Company did not have an amount at risk with any repurchase agreement counterparty greater than 10% of the Company’s equity. Summary information regarding the Company’s amounts at risk with individual counterparties greater than 10% of the Company’s equity at December 31, 2013 is as follows:

(in thousands)
		% of	Weighted
		Stockholders'	Average
	Amount	Equity	Maturity
Repurchase Agreement Counterparties	at Risk	at Risk	(in Days)
Citigroup Global Markets, Inc.	$5,487	12.3%	11

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, such as Eurodollar Futures contracts and an interest rate swaption. 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.

As of December 31, 2013, such instruments were comprised entirely of Eurodollar futures contracts. Eurodollar futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company’s account on a daily basis and reflected in earnings as they occur. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. This margin represents the collateral the Company has posted for its open positions and is recorded on the balance sheet as part of restricted cash. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker.

During the three months ended March 31, 2014, the Company entered into an interest rate swaption agreement. The Company’s swaption agreement grants the Company the right but not the obligation to enter into an underlying pay fixed interest rate swap (“payer swaption”). The Company may also enter into swaption agreements that provide the Company the option to enter into receive fixed interest rate swap (“receiver swaption”).

Derivative Assets (Liability), at Fair Value

The table below summarizes fair value information about our derivative assets and liability as of March 31, 2014 and December 31, 2013.

(in thousands)
Derivative Instruments and Related Accounts	Balance Sheet Location	March 31, 2014			December 31, 2013
Assets
Eurodollar futures - Margin posted to counterparty	Restricted cash	$	3,513		$	2,446
Payer swaption	Derivative assets, at fair value		1,549			-
		$	5,062		$	2,446
Liability
Payer swaption - Margin posted by counterparty	Other liabilities	$	(1,505	)	$	-

The tables below presents information related to the Company’s Eurodollar futures positions at March 31, 2014 and December 31, 2013.

	March 31, 2014								December 31, 2013
				Average								Average
	Weighted			Contract					Weighted			Contract
	Average			Notional		Open			Average			Notional		Open
Expiration Year	LIBOR Rate			Amount		Equity(1)			LIBOR Rate			Amount		Equity(1)
2014		0.32	%	$	400,000	$	(211	)		0.40	%	$	262,500	$	(189	)
2015		0.78	%		400,000		(264	)		0.80	%		275,000		(146	)
2016		1.90	%		400,000		1,354			1.90	%		250,000		1,367
2017		2.85	%		400,000		1,777			3.03	%		250,000		2,291
2018		3.44	%		350,000		797			3.77	%		250,000		1,575
Total / Weighted Average		2.01	%	$	390,625	$	3,453			2.02	%	$	257,353	$	4,898

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

The table below presents information related to the Company’s interest rate swaption position at March 31, 2014.

(in thousands)
	Option			Underlying Swap
					Fixed	Receive
		Fair	Months to	Notional	Pay	Rate	Term
Expiration	Cost	Value	Expiration	Amount	Rate	(LIBOR)	(Years)
≤ 1 year	$1,705	$1,549	12	$100,000	2.53%	3 Month	5

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, 2014 and 2013.

(in thousands)
	2014			2013
Eurodollar futures contracts (short positions)	$	(1,537	)	$	(484	)
Payer swaption		(156	)		-
	$	(1,693	)	$	(484	)

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, 2014 and December 31, 2013.

(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, 2014
Derivative assets - Payer swaption		$	1,549		$	-		$	1,549		$	-		$	(1,505	)		$	44
December 31, 2013
Derivative assets		$	-		$	-		$	-		$	-		$	-			$	-

(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, 2014
Repurchase Agreements		$	651,246		$	-		$	651,246		$	(650,663	)		$	(583	)		$	-
December 31, 2013
Repurchase Agreements		$	318,557		$	-		$	318,557		$	(318,557	)		$	-			$	-

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 may exceed the amounts presented.

NOTE 6. CAPITAL STOCK

At December 31, 2012, the Company had the authority to issue 1,000,000 shares of $0.01 par value common stock. In connection with the Company’s IPO in February 2013, the Company’s charter was amended to increase the authorized capital stock to 600,000,000 shares, of which (i) 500,000,000 shares are designated as common stock and (ii) 100,000,000 shares are designated as preferred stock, each with a par value of $0.01 per share. Holders of shares of the common stock generally have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company. Subject to the provisions of our charter regarding restrictions on ownership and transfer of our stock, all holders of shares of the common stock will have equal liquidation and other rights.

Common Stock Issuances

During 2014 and 2013, the Company completed the following public offerings of shares of its common stock.

($ in thousands, except per share amounts)
		Price
		Received				Net
Type of Offering	Month	Per Share(1)		Shares		Proceeds(2)
2014
Secondary Offering	January 2014	$	12.50		2,070,000	$	24,174
Secondary Offering(3)	March 2014		12.55		3,680,000		44,021
					5,750,000	$	68,195
2013
Initial Public Offering	February 2013	$	15.00		2,360,000	$	35,400	(4)
					2,360,000	$	35,400

(1)	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)

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. The net proceeds and shares issued under the exercise of this option are not reflected in the Company’s financial statements as of March 31, 2014.

(4)

Bimini Advisors has paid, or has reimbursed the Company for all offering expenses in connection with the Company’s IPO. The Company has no obligation or intent to reimburse Bimini Advisors, either directly or indirectly, for the offering costs; therefore they are not included in the Company's financial statements.

Stock Dividend

Cash Dividends

The table below presents the cash dividends declared on the Company’s common stock since its IPO.

Declaration Date	Record Date	Payment Date	Per Share Amount		Total
2014
April 8, 2014(1)	April 25, 2014	April 30, 2014	$	0.180	$	1,636,500
March 11, 2014	March 26, 2014	March 31, 2014		0.180		1,550,100
February 11, 2014	February 25, 2014	February 28, 2014		0.180		974,100
January 9, 2014	January 27, 2014	January 31, 2014		0.180		925,500
2013
December 11, 2013	December 26, 2013	December 30, 2013	$	0.180	$	601,500
November 12, 2013	November 25, 2013	November 27, 2013		0.135		451,125
October 10, 2013	October 25, 2013	October 31, 2013		0.135		451,125
September 10, 2013	September 25, 2013	September 30, 2013		0.135		451,125
August 12, 2013	August 26, 2013	August 30, 2013		0.135		451,125
July 9, 2013	July 25, 2013	July 31, 2013		0.135		451,125
June 10, 2013	June 25, 2013	June 28, 2013		0.135		451,125
May 9, 2013	May 28, 2013	May 31, 2013		0.135		451,125
April 10, 2013	April 25, 2013	April 30, 2013		0.135		451,125
March 8, 2013	March 25, 2013	March 27, 2013		0.135		451,125

(1)	The effect of the dividends declared in April 2014 is not reflected in the Company’s financial statements as of March 31, 2014.

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.

On April 25, 2014, our 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 of 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 effect of this grant is not reflected in the Company’s financial statements as of March 31, 2014.

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, 2014.

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 table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2014 and 2013.

(in thousands, except per-share information)
	2014			2013
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per common share:
Net income - Basic and diluted	$	3,595		$	400
Weighted average common shares:
Common shares outstanding at the balance sheet date		8,612			3,342
Effect of weighting		(3,518	)		(1,338	)
Weighted average shares-basic and diluted		5,094			2,004
Income per common share:
Basic and diluted	$	0.71		$	0.20

On February 14, 2013, Orchid’s Board of Directors declared a stock dividend whereby 5.37 shares of common stock were issued for each share of common stock outstanding. The 827,555 shares distributed as the dividend were issued to Bimini on February 20, 2013, immediately prior to Orchid’s IPO. For the three months ended March 31, 2013, the 827,555 shares distributed as a stock dividend were treated as if outstanding for the entire period, as Bimini was the sole stockholder during the entire period prior to Orchid’s IPO.

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 and interest rate swaptions are valued using Level 2 valuations, and such valuations currently are determined by the Company based on the average of third-party broker quotes and/or by independent pricing sources 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 and interest rate swaptions determined by either an independent third-party or do so internally.

RMBS, interest rate swaptions and Eurodollar futures contracts were recorded at fair value on a recurring basis during the three months ended March 31, 2014 and 2013. 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, 2014 and December 31, 2013:

(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, 2014
Mortgage-backed securities	$	747,758	$	-	$	747,758	$	-
Eurodollar futures contracts		3,513		3,513		-		-
Payer swaption		1,549		-		1,549		-
December 31, 2013
Mortgage-backed securities	$	351,223	$	-	$	351,223	$	-
Eurodollar futures contracts		2,446		2,446		-		-

During the three months ended March 31, 2014 and 2013, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

NOTE 12. RELATED PARTY TRANSACTIONS

Management Agreement

The Company entered into a management agreement with Bimini, which provided for an initial term through December 31, 2011 with automatic one-year extension options. The agreement was extended under the option to December 31, 2013, but was terminated at the completion of the Company’s IPO on February 20, 2013. At the completion of the 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 1.25% 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, Bimini Advisors will begin allocating to the Company it’s pro rata portion of certain overhead costs as defined 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.

The Company was obligated to reimburse Bimini for its costs incurred under the original management agreement. In addition, the Company was required to pay Bimini a monthly fee of $7,200, which represents an allocation of overhead expenses for items that include, but are not limited to, occupancy costs, insurance and administrative expenses. These expenses were allocated based on the ratio of the Company’s assets and Bimini’s consolidated assets. Total expenses recorded during the three months ended March 31, 2014 and 2013 for the management fee and costs incurred was approximately $303,000 and $140,000, respectively.

At March 31, 2014 and December 31, 2013, the net amount due to affiliates was approximately $132,000 and $82,000, respectively.

Payment of Certain Offering Expenses

Bimini Advisors has paid, or has reimbursed Orchid, for all offering expenses in connection with the Company’s IPO. During the three months ended March 31, 2013, Bimini Advisors paid expenses related to this offering of approximately $3.0 million. The Company has no obligation or intent to reimburse Bimini Advisors, either directly or indirectly, for the offering costs; therefore, they are not included in the Company's financial statements.

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 and any subsequent Quarterly Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

We are a specialty finance company that invests in Agency RMBS. Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS and (ii) structured Agency RMBS, such as CMOs, IOs, IIOs and POs, among other types of structured Agency RMBS. From inception through the closing of the initial public offering of our common stock, we were managed by Bimini. Upon completion of that offering, we became externally managed by Bimini Advisors, a registered investment adviser with the Securities and Exchange Commission.

We were formed by Bimini in August 2010 and commenced operations on November 24, 2010. At December 31, 2012, Bimini was our sole stockholder. We completed our initial public offering on February 20, 2013. In that offering we raised gross proceeds of $35.4 million from the sale of 2,360,000 shares of our common stock. 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, which was closed in April 2014.

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 intend to qualify and will elect to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013 upon the filing of our federal income tax return for the year. 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.

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, 2014, as compared to the Company’s results of operations for the three months ended March 31, 2013.

Net Income Summary

Net income for the three months ended March 31, 2014 was $3.6 million, or $0.71 per share. Net income for the three months ended March 31, 2013 was $0.4 million, or $0.20 per share. The components of net income for the three months ended March 31, 2014 and 2013, along with the changes in those components are presented in the table below:

(in thousands)
	2014			2013			Change
Interest income	$	3,783		$	1,413		$	2,370
Interest expense		(411	)		(201	)		(210	)
Net interest income		3,372			1,212			2,160
Gains (losses) on RMBS and derivative contracts		758			(414	)		1,172
Net portfolio income		4,130			798			3,332
Expenses		(535	)		(398	)		(137	)
Net income	$	3,595		$	400		$	3,195

GAAP and Non-GAAP Reconciliation

To date, the Company has used derivatives, specifically Eurodollar futures contracts and an interest rate swaption, to hedge the interest rate risk on repurchase agreements in a rising rate environment. Each Eurodollar contract covers a specific three month 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 one interest rate swaption agreement in place, giving us the option to enter into a swap covering future periods.

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, 2014, the Company had Eurodollar futures contracts in place through 2018. Since the Company has taken short positions on these contracts, when interest rates move higher the value of our short position may increase in value. The opposite would be true if interest rates were to decrease. Adjusting our interest expense for the periods presented by the gains on all Eurodollar futures would not accurately reflect our economic interest expense for these periods. As of March 31, 2014, we currently have one interest rate swaption agreement in place, covering periods beginning in 2015 through 2020. As such, the loss reported in the 2014 statement of operations on the interest rate swaption relates to future 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, under ASC 815, because the Company has not elected hedging treatment, 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 each quarter during 2014 and 2013.

Gains (Losses) on Derivative Instruments
(in thousands)
	Recognized in			Attributed to			Attributed to
	Income			Current			Future
	Statement			Period			Periods
	(GAAP)			(Non-GAAP)			(Non-GAAP)
Three Months Ended
March 31, 2014	$	(1,693	)	$	(30	)	$	(1,663	)
December 31, 2013		733			(42	)		775
September 30, 2013		(2,272	)		(28	)		(2,244	)
June 30, 2013		6,852			(4	)		6,856
March 31, 2013		(484	)		(65	)		(419	)

Economic Interest Expense and Economic Net Interest Income
(in thousands)
			Interest Expense on Repurchase Agreements
					Gains (Losses)					Net Interest Income
			GAAP		on Derivative			Economic		GAAP		Economic
	Interest		Interest		Instruments Attributed			Interest		Net Interest		Net Interest
	Income		Expense		to Current Period(1)			Expense(2)		Income		Income(3)
Three Months Ended
March 31, 2014	$	3,783	$	411	$	(30	)	$	441	$	3,372	$	3,342
December 31, 2013		2,806		309		(42	)		351		2,497		2,455
September 30, 2013		2,551		294		(28	)		322		2,257		2,229
June 30, 2013		2,429		322		(4	)		326		2,107		2,103
March 31, 2013		1,413		201		(65	)		266		1,212		1,147

(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, 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. For the comparable period ended March 31, 2013, we generated $1.2 million of net interest income, consisting of $1.4 million of interest income from RMBS assets offset by $0.2 million of interest expense on repurchase liabilities. The $2.4 million increase in interest income and $0.2 million increase in interest expense for the three months ended March 31, 2014 primarily reflects the deployment of the proceeds from our January and March 2014 common stock offerings 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, 2014 and 2013 was $0.4 million and $0.3 million, respectively, resulting in $3.3 million and $1.1 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 2014 and 2013 on both a GAAP and economic basis.

($ in thousands)
	Average				Yield on
	RMBS				Average			Average		Interest Expense				Average Cost of Funds
	Securities		Interest		RMBS			Repurchase		GAAP		Economic		GAAP			Economic
	Held(1)		Income		Securities			Agreements(1)		Basis		Basis(2)		Basis			Basis(3)
Three Months Ended
March 31, 2014	$	549,490	$	3,783		2.75	%	$	484,902	$	411	$	441		0.34	%		0.36	%
December 31, 2013		341,505		2,806		3.29	%		310,107		309		351		0.40	%		0.45	%
September 30, 2013		335,467		2,551		3.04	%		305,196		294		322		0.39	%		0.42	%
June 30, 2013		349,704		2,429		2.78	%		312,591		322		326		0.41	%		0.42	%
March 31, 2013		237,820		1,413		2.38	%		210,194		201		266		0.38	%		0.51	%

($ in thousands)
	Net Interest Income				Net Interest Spread
	GAAP		Economic		GAAP			Economic
	Basis		Basis(2)		Basis			Basis(4)
Three Months Ended
March 31, 2014	$	3,372	$	3,341		2.41	%		2.39	%
December 31, 2013		2,497		2,455		2.89	%		2.84	%
September 30, 2013		2,257		2,229		2.65	%		2.62	%
June 30, 2013		2,107		2,103		2.37	%		2.36	%
March 31, 2013		1,212		1,147		2.00	%		1.87	%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the tables on page 23 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 24 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 Held.

(4)

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

Interest Income and Average Asset Yield

Our interest income for the three months ended March 31, 2014 and 2013 was $3.8 million and $1.4 million, respectively. We had average RMBS holdings of $549.5 million and $237.8 million for the three months ended March 31, 2014 and 2013, respectively. The yield on our portfolio was 2.75% and 2.38% for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, there was a $2.4 million increase in interest income due to a $311.7 million increase in average RMBS, combined with a 37 basis point increase in the yield on average RMBS. The increase in average RMBS during the three months ended March 31, 2014 reflects the deployment of the proceeds of our two common stock offerings during 2014.

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”).

($ 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
Three Months Ended
March 31, 2014	$	514,226	$	35,264	$	549,490	$	4,402	$	(619	)	$	3,783		3.42	%		(7.02	)%		2.75	%
December 31, 2013		318,996		22,509		341,505		2,726		80			2,806		3.42	%		1.42	%		3.29	%
September 30, 2013		314,096		21,371		335,467		2,412		139			2,551		3.07	%		2.60	%		3.04	%
June 30, 2013		326,977		22,727		349,704		2,514		(85	)		2,429		3.08	%		(1.51	)%		2.78	%
March 31, 2013		223,191		14,629		237,820		1,416		(3	)		1,413		2.54	%		(0.06	)%		2.38	%

Interest Expense and the Cost of Funds

We had average outstanding repurchase agreements of $484.9 million and $210.2 million and total interest expense of $0.4 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. Our average cost of funds was 0.34% and 0.38% for three months ended March 31, 2014 and 2013, respectively. There was a 4 basis point decrease in the average cost of funds and a $274.7 million increase in average outstanding repurchase agreements during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase in average outstanding repurchase agreements reflects the leveraging of the proceeds of our two common stock offerings in 2014.

Our economic interest expense was $0.4 million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively. There was a 15 basis point decrease in the average economic cost of funds to 0.36% for the three months ended March 31, 2014 from 0.51% for the three months ended March 31, 2013.

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 18 basis points above the average one-month LIBOR and equal to the average six-month LIBOR for the quarter ended March 31, 2014. Our average economic cost of funds was 20 basis points above the average one-month LIBOR and 2 basis points above the average six-month LIBOR for the quarter ended March 31, 2014. The average term to maturity of the outstanding repurchase agreements increased to 25 days at March 31, 2014 from 15 days at December 31, 2013.

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 2014 and 2013 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
Three Months Ended
March 31, 2014	$	484,902	$	411	$	441		0.34	%		0.36	%
December 31, 2013		310,107		309		351		0.40	%		0.45	%
September 30, 2013		305,196		294		322		0.39	%		0.42	%
June 30, 2013		312,591		322		326		0.41	%		0.42	%
March 31, 2013		210,194		201		266		0.38	%		0.51	%

							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, 2014		0.16	%		0.34	%		0.18	%		0.00	%		0.20	%		0.02	%
December 31, 2013		0.17	%		0.36	%		0.23	%		0.04	%		0.28	%		0.09	%
September 30, 2013		0.19	%		0.40	%		0.20	%		(0.01	)%		0.23	%		0.02	%
June 30, 2013		0.20	%		0.43	%		0.21	%		(0.02	)%		0.22	%		(0.01	)%
March 31, 2013		0.21	%		0.48	%		0.17	%		(0.10	)%		0.30	%		0.03	%

Gains or Losses

The table below presents our gains or losses for the three months ended March 31, 2014 and 2013.

(in thousands)
		2014		2013		Change
Realized gains on sales of RMBS	$	911	$	100	$	811
Unrealized gains (losses) on RMBS		1,540		(29)		1,569
Total gains on RMBS		2,451		71		2,380
Losses on Eurodollar futures		(1,537)		(484)		(1,053)
Loss on payer swaption		(156)		-		(156)

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, 2014 and 2013, we received proceeds of $141.3 million and $57.8 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. The net realized and unrealized gains on RMBS for the three months ended March 31, 2014 and 2013 were the result of sales executed to replace securities which no longer offered attractive risk adjusted returns with those that did. Losses on Eurodollar futures contracts are a result of the declining LIBOR during the three months ended March 31, 2014 and 2013. The table below presents historical interest rate data for each quarter end during 2014 and 2013.

				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, 2014		2.72	%		3.36	%		4.34	%		0.23	%
December 31, 2013		3.03	%		3.48	%		4.46	%		0.24	%
September 30, 2013		2.62	%		3.52	%		4.49	%		0.25	%
June 30, 2013		2.48	%		3.17	%		4.07	%		0.27	%
March 31, 2013		1.85	%		2.76	%		3.57	%		0.28	%

(1)	Historical 10 Year Treasury Rates are obtained from quoted end of day prices on the CBOE.

(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 $0.5 million and $0.4 million for the three months ended March 31, 2014 and 2013, respectively. The table below provides a breakdown of operating expenses for the three months ended March 31, 2014 and 2013.

(in thousands)
	2014		2013		Change
Management fees	$	303	$	125	$	178
Directors fees and liability insurance		84		41		43
Legal fees		13		14		(1	)
Other professional fees		60		130		(70	)
Other direct REIT operating expenses		45		64		(19	)
Other expenses		30		24		6
Total expenses	$	535	$	398	$	137

Under the terms of a management agreement that was in effect until the completion of our initial public offering, we paid Bimini a monthly management fee equal to 1/12 of 1.50% per annum of our Stockholders’ Equity (as defined in the management agreement). In addition, we paid Bimini a monthly fee of $7,200, which represented an allocation of overhead expenses for items that included, but were not limited to, occupancy costs, insurance and administrative expenses. These expenses were allocated based on the ratio of our assets and Bimini’s consolidated assets. At the completion of the 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.

Financial Condition:

Mortgage-Backed Securities

As of March 31, 2014, our RMBS portfolio consisted of $747.8 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.13%. During the three months ended March 31, 2014, we received principal repayments of $10.4 million compared to $6.1 million for the three months ended March 31, 2013. The average prepayment speeds for the quarters ended March 31, 2014 and 2013 were 9.1% and 20.0%, 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.