Orchid Island Capital, Inc. (ORC, NYSE)
Industry: REIT - Mortgage
Annual report, fiscal year 2015


# ORCHID ISLAND CAPITAL, INC.

FORM 10-K
(Annual Report)

# Filed 02/25/16 for the Period Ending 12/31/15

Address 3305 FLAMINGO DRIVE

VERO BEACH, FL 32963

Telephone 772-23-1400

CIK 0001518621

Symbol ORC

SIC Code 6798 - Real Estate Investment Trusts

Industry Misc. Financial Services

Sector Financial

Fiscal Year 12/31



# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

Commission File Number : 001-35236



Orchid Island Capital, Inc.

(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization)

27-3269228
(I.R.S. Employer Identification No.)

3305 Flamingo Drive, Vero Beach, Florida 32963
(Address of principal executive offices) (Zip Code)

(772) 231-1400
(Registrant’s telephone number, including area code)

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

Title of Each Class
Common Stock, $0.01 par value

Name of Each Exchange on Which Registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 ☑ 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 ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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 ☐

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



As of June 30, 2015 the aggregate market value of the common stock held by nonaffiliates was $245,314,035

Number of shares outstanding at February 25, 2016: 21,752,510



## DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive Proxy Statement, to be issued in connection with the 2016 Annual Meeting of Stockholders of the Registrant, are incorporated by reference into Part III of this Annual Report on Form 10-K.



## ORCHID ISLAND CAPITAL, INC.

## INDEX

PART I
ITEM 1. Business. 1
ITEM 1A. Risk Factors 10
ITEM 1B. Unresolved Staff Comments. 38
ITEM 2. Properties. 38
ITEM 3. Legal Proceedings. 38
ITEM 4. Mine Safety Disclosures. 38
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 39
ITEM 6. Selected Financial Data. 43
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 44
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. 68
ITEM 8. Financial Statements and Supplementary Data. 73
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 100
ITEM 9A. Controls and Procedures. 100
ITEM 9B. Other Information. 101
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance. 106
ITEM 11. Executive Compensation. 106
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 106
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. 106
ITEM 14. Principal Accountant Fees and Services. 106
PART IV
ITEM 15. Exhibits, Financial Statement Schedules. 107



# SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this annual report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "intend," "should," "may," "plans," "projects," "will," or similar expressions, or the negative of these words, we intend to identify forward-looking statements. Statements regarding the following subjects are forward-looking by their nature:

• our business and investment strategy;

• our expected operating results;

• our ability to acquire investments on attractive terms;

• the effect of actual or proposed actions of the U.S. Federal Reserve with respect to monetary policy or interest rates;

• the effect of rising interest rates on unemployment, inflation and mortgage supply and demand;

• the effect of increased prepayment rates on the value of our assets;

• our ability to access the capital markets;

• our ability to obtain future financing arrangements;

• our ability to successfully hedge the interest rate risk and prepayment risk associated with our portfolio;

- the federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government;

• our ability to make distributions to our stockholders in the future;

• mortgage loan modification programs and future legislative action;

• our understanding of our competition and our ability to compete effectively;

• our ability to quantify risk based on historical experience;

• our ability to qualify and maintain our qualification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;

• our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act;

• our ability to maintain the listing of our common stock on the New York Stock Exchange, or NYSE;

• market trends;

• expected capital expenditures; and

• the impact of technology on our operations and business.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the caption “Risk Factors” in this Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



## PART I

## ITEM 1. BUSINESS

## Our Company

Orchid Island Capital, Inc., a Maryland corporation (“Orchid,” the “Company,” “we” or “us”), is a specialty finance company that invests in residential mortgage-backed securities (“RMBS”). The principal and interest payments of these RMBS are guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation, (“Freddie Mac”) or the Government National Mortgage Association (“Ginnie Mae” and, collectively with Fannie Mae and Freddie Mac, “GSES”) and are backed primarily by single-family residential mortgage loans. We refer to these types of RMBS as 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 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. Our website is located at http://www.orchidislandcapital.com. Information on our website is not part of this Annual Report on Form 10-K.

We were formed by Bimini Capital Management, Inc. (sometimes referred to herein as “Bimini”) in August 2010, commenced operations on November 24, 2010 and completed our initial public offering on February 20, 2013. On October 8, 2014, we transferred the listing of our common stock from the NYSE MKT to the New York Stock Exchange (“NYSE”) and trade under the symbol “ORC.”

Bimini managed our portfolio from our inception through the completion of our initial public offering on February 20, 2013. Upon completion of the offering, we became externally managed by Bimini Advisors, LLC (“Bimini Advisors,” or our “Manager”). Our Manager is an investment advisor registered with the Securities and Exchange Commission (“SEC”). Additionally, our Manager is a wholly-owned subsidiary of Bimini, which has a long track record of managing investments in Agency RMBS.

We are organized and conduct our operations to qualify to be taxed as a real estate investment trust, or “REIT,” for federal income tax purposes. As such, we are required to distribute 90% of our taxable net income annually. We generally will not be subject to income taxes on our net taxable income to the extent we currently distribute our net taxable income to our stockholders and maintain our REIT qualification. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code of 1986, as amended (the “Code”), which may extend into the subsequent taxable year.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and as such, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Although we are an emerging growth company under the JOBS Act, we have elected to opt out of the extended transition period for complying with new or revised accounting standards, and such election is irrevocable.



## Our Manager

Upon completion of our initial public offering, we became externally managed and advised by Bimini Advisors and its experienced RMBS investment team pursuant to the terms of a management agreement. Our Manager is a Maryland limited liability company that is a wholly-owned subsidiary of Bimini. We believe our relationship with our Manager enables us to leverage our Manager's established portfolio management resources for each of our targeted asset classes and its infrastructure supporting those resources. Additionally, we have benefitted and expect to continue to benefit from our Manager's finance and administration functions, which address legal, compliance, investor relations and operational matters, including portfolio management, trade allocation and execution, securities valuation, risk management and information technologies in connection with the performance of its duties. Our Manager's parent, Bimini commenced active investment management operations in 2003, as it self-manages its own portfolio.

Our Manager is responsible for administering our business activities and day-to-day operations. Pursuant to the terms of the management agreement, our Manager provides us with our management team, including our officers, along with appropriate support personnel. Our Manager is at all times subject to the supervision and oversight of our board of directors (the "Board of Directors") and has only such functions and authority as we delegate to it.

## Our Investment and Capital Allocation Strategy

## Investment Strategy

Our business objective is to provide attractive risk-adjusted total returns to our investors 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 pass-through Agency RMBS and structured Agency RMBS. 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 also seek to minimize the volatility of both the net asset value of, and income from, our portfolio through a process which emphasizes capital allocation, asset selection, liquidity and active interest rate risk management.

We fund our pass-through Agency RMBS and certain of our structured Agency RMBS, such as fixed and floating rate tranches of CMOs and POs, through repurchase agreements. However, we generally do not employ leverage on our structured Agency RMBS that have no principal balance, such as IOs and IOs. We may pledge a portion of these assets to increase our cash balance, but we do not intend to invest the cash derived from pledging the assets. Otherwise, we do not use leverage in these instances because the securities contain structural leverage.

Our target asset categories and principal assets in which we intend to invest are as follows:

## Pass-through Agency RMBS

We invest in pass-through securities, which are securities secured by residential real property in which payments of both interest and principal on the securities are generally made monthly. In effect, these securities pass through the monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer or guarantor of the securities. Pass-through certificates can be divided into various categories based on the characteristics of the underlying mortgages, such as the term or whether the interest rate is fixed or variable.

The payment of principal and interest on mortgage pass-through securities issued by Ginnie Mae, but not the market value, is guaranteed by the full faith and credit of the federal government. Payment of principal and interest on mortgage pass-through certificates issued by Fannie Mae and Freddie Mac, but not the market value, is guaranteed by the respective agency issuing the security.



A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than scheduled. This is called a prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing or foreclosure. Prepayments result in a return of principal to pass-through certificate holders. This may result in a lower or higher rate of return upon reinvestment of principal. This is generally referred to as prepayment uncertainty. If a security purchased at a premium prepays at a higher-than-expected rate, then the value of the premium would be eroded at a faster-than-expected rate. Similarly, if a discount mortgage prepays at a lower-than-expected rate, the amortization towards par would be accumulated at a slower-than-expected rate. The possibility of these undesirable effects is sometimes referred to as “prepayment risk.”

In general, declining interest rates tend to increase prepayments, and rising interest rates tend to slow prepayments. Like other fixed-income securities, when interest rates rise, the value of Agency RMBS generally declines. The rate of prepayments on underlying mortgages will affect the price and volatility of Agency RMBS and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If interest rates rise, our holdings of Agency RMBS may experience reduced spreads over our funding costs if the borrowers of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as “extension risk.”

The mortgage loans underlying pass-through certificates can generally be classified into the following three categories:

- Fixed-Rate Mortgages. Fixed-rate mortgages are those where the borrower pays an interest rate that is constant throughout the term of the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also referred to as “final maturity dates”) have become common in recent years. Because the interest rate on the loan never changes, even when market interest rates change, there can be a divergence between the interest rate on the loan and current market interest rates over time. This in turn can make fixed-rate mortgages price-sensitive to market fluctuations in interest rates. In general, the longer the remaining term on the mortgage loan, the greater the price sensitivity to movements in interest rates and, therefore, the likelihood for greater price variability.

- ARMs. ARMs are mortgages for which the borrower pays an interest rate that varies over the term of the loan. The interest rate usually resets based on market interest rates, although the adjustment of such an interest rate may be subject to certain limitations. Traditionally, interest rate resets occur at regular intervals (for example, once per year). We refer to such ARMs as “traditional” ARMs. Because the interest rates on ARMs fluctuate based on market conditions, ARMs tend to have interest rates that do not deviate from current market rates by a large amount. This in turn can mean that ARMs have less price sensitivity to interest rates and, consequently, are less likely to experience significant price volatility.

- Hybrid Adjustable-Rate Mortgages. Hybrid ARMs have a fixed-rate for the first few years of the loan, often three, five, seven or ten years, and thereafter reset periodically like a traditional ARM. Effectively, such mortgages are hybrids, combining the features of a pure fixed-rate mortgage and a traditional ARM. Hybrid ARMs have price sensitivity to interest rates similar to that of a fixed-rate mortgage during the period when the interest rate is fixed and similar to that of an ARM when the interest rate is in its periodic reset stage. However, because many hybrid ARMs are structured with a relatively short initial time span during which the interest rate is fixed, even during that segment of its existence, the price sensitivity may be high.

## Structured Agency RMBS

We also invest in structured Agency RMBS, which include CMOs, IOs, IIDs and POs. The payment of principal and interest, as appropriate, on structured Agency RMBS issued by Ginnie Mae, but not the market value, is guaranteed by the full faith and credit of the federal government. Payment of principal and interest, as appropriate, on structured Agency RMBS issued by Fannie Mae and Freddie Mac, but not the market value, is guaranteed by the respective agency issuing the security. The types of structured Agency RMBS in which we invest are described below.



- CMOs. CMOs are a type of RMBS the principal and interest of which are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities issued directly by or under the auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. Generally, fixed-rate mortgages are used to collateralize CMOs. However, the CMO tranches need not all have fixed-rate coupons. Some CMO tranches have floating rate coupons that adjust based on market interest rates, subject to some limitations. Such tranches, often called “CMO floaters,” can have relatively low price sensitivity to interest rates.

- IOs. IOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim to any principal payments. The value of IOs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments going forward, hence IOs are highly sensitive to prepayment rates. IOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments.

- IIOs. IIOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IIOs have no claim to any principal payments. The value of IIOs depends primarily on three factors, which are prepayments, London Interbank Offered Rate (“LIBOR”) and term interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments, making IIOs highly sensitive to prepayment rates. The coupon on IIOs is derived from both the coupon interest rate on the underlying pool of mortgages and 30-day LIBOR. IIOs are typically created in conjunction with a floating rate CMO that has a principal balance and which is entitled to receive all of the principal payments on the underlying pool of mortgages. The coupon on the floating rate CMO is also based on 30-day LIBOR. Typically, the coupon on the floating rate CMO and the IIO, when combined, equal the coupon on the pool of underlying mortgages. The coupon on the pool of underlying mortgages typically represents a cap or ceiling on the combined coupons of the floating rate CMO and the IIO. Accordingly, when the value of 30-day LIBOR increases, the coupon of the floating rate CMO will increase and the coupon on the IIO will decrease. When the value of 30-day LIBOR falls, the opposite is true. Accordingly, the value of IIOs are sensitive to the level of 30-day LIBOR and expectations by market participants of future movements in the level of 30-day LIBOR. IIOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments.

- POs. POs represent the stream of principal payments on a pool of mortgages. Holders of POs have no claim to any interest payments, although the ultimate amount of principal to be received over time is known, equaling the principal balance of the underlying pool of mortgages. The timing of the receipt of the principal payments is not known. The value of POs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages accelerate the stream of principal repayments, making POs highly sensitive to the rate at which the mortgages in the pool are prepaid. POs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future principal payments on a pool of mortgages. Further, an increase in interest rates has a tendency to reduce prepayments, which decelerates, or pushes further out in time, the ultimate receipt of the principal payments. The opposite is true when interest rates decline.

Our investment strategy consists of the following components:

- investing in pass-through Agency RMBS and certain structured Agency RMBS, such as fixed and floating rate tranches of CMOs and POs, on a leveraged basis to increase returns on the capital allocated to this portfolio;



- investing in certain structured Agency RMBS, such as IOs and IIOs, generally on an unleveraged basis in order to (i) increase returns due to the structural leverage contained in such securities, (ii) enhance liquidity due to the fact that these securities will be unencumbered or, when encumbered, retain the cash from such borrowings and (iii) diversify portfolio interest rate risk due to the different interest rate sensitivity these securities have compared to pass-through Agency RMBS;

• investing in Agency RMBS in order to minimize credit risk;

• investing in assets that will cause us to maintain our exclusion from regulation as an investment company under the Investment Company Act; and

• investing in assets that will allow us to qualify and maintain our qualification as a REIT.

We rely on our Manager’s expertise in identifying assets within our target asset class. Our Manager makes investment decisions based on various factors, including, but not limited to, relative value, expected cash yield, supply and demand, costs of hedging, costs of financing, liquidity requirements, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. We do not attribute any particular quantitative significance to any of these factors, and the weight we give to these factors depends on market conditions and economic trends.

Over time, we will modify our investment strategy as market conditions change to seek to maximize the returns from our investment portfolio. We believe that this strategy, combined with our Manager’s experience, will enable us to provide attractive long-term returns to our stockholders.

## Capital Allocation Strategy

The percentage of capital invested in our two asset categories will vary and will be 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. Typically, pass-through Agency RMBS and structured Agency RMBS exhibit materially different sensitivities to movements in interest rates. Declines in the value of one portfolio may be offset by appreciation in the other, although we cannot assure you that this will be the case. Additionally, our Manager will seek to maintain adequate liquidity as it allocates capital.

We allocate our capital to assist our interest rate risk management efforts. The unleveraged portfolio does not require unencumbered cash or cash equivalents to be maintained in anticipation of possible margin calls. To the extent more capital is deployed in the unleveraged portfolio, our liquidity needs will generally be less.

During periods of rising interest rates, refinancing opportunities available to borrowers typically decrease because borrowers are not able to refinance their current mortgage loans with new mortgage loans at lower interest rates. In such instances, securities that are highly sensitive to refinancing activity, such as IOs and IIOs, typically increase in value. Our capital allocation strategy allows us to redeploy our capital into such securities when and if we believe interest rates will be higher in the future, thereby allowing us to hold securities the value of which we believe is likely to increase as interest rates rise. Also, by being able to re-allocate capital into structured Agency RMBS, such as IOs, during periods of rising interest rates, we may be able to offset the likely decline in the value of our pass-through Agency RMBS, which are negatively impacted by rising interest rates.

We intend to operate in a manner that will not subject us to regulation under the Investment Company Act. In order to rely on the exemption provided by Section 3(c)(5)(C) under the Investment Company Act, we must maintain at least 55% of our assets in qualifying real estate assets. For purposes of this test, structured Agency RMBS are non-qualifying real estate assets. Accordingly, while we have no explicit limitation on the amount of our capital that we will deploy to the unleveraged structured Agency RMBS portfolio, we will deploy our capital in such a way so as to maintain our exemption from registration under the Investment Company Act.



## Financing Strategy

We borrow against our Agency RMBS using short term repurchase agreements. We may use other sources of leverage, such as secured or unsecured debt or issuances of preferred stock. We do not have a policy limiting the amount of leverage we may incur. However, we generally expect that the ratio of our total liabilities compared to our equity, which we refer to as our leverage ratio, will be less than 12 to 1. Our amount of leverage may vary depending on market conditions and other factors that we deem relevant.

We allocate our capital between two sub-portfolios. The pass-through Agency RMBS portfolio will be leveraged generally through repurchase agreement funding. The structured Agency RMBS portfolio generally will not be leveraged. The leverage ratio is calculated by dividing our total liabilities by total stockholders' equity at the end of each period. The amount of leverage will be a function of the capital allocated to the pass-through Agency RMBS portfolio and the amount of haircuts required by our lenders on our borrowings. When the capital allocation to the pass-through Agency RMBS portfolio is high, the leverage ratio will be high since more capital is being explicitly leveraged and less capital is un-leveraged. If the haircuts required by our lenders on our borrowings are higher, all else being equal, our leverage will be lower since our lenders will lend less against the value of the capital deployed to the pass-through Agency RMBS portfolio. The allocation of capital between the two portfolios will be a function of several factors:

- The relative durations of the respective portfolios — We generally seek to have a combined duration at or near zero. If our pass-through securities have a longer duration, we will allocate more capital to the structured security portfolio to achieve a combined duration close to zero.

- The relative attractiveness of pass-through securities versus structured securities — To the extent we believe the expected returns of one type of security are higher than the other, we will allocate more capital to the more attractive securities, subject to the caveat that its combined duration remains at or near zero.

- Liquidity — We seek to maintain adequate cash and unencumbered securities relative to our repurchase agreement borrowings to ensure we can meet any price or prepayment related margin calls from our lenders. To the extent we feel price or prepayment related margin calls will be higher/lower, we will allocate less/more capital to the pass-through Agency RMBS portfolio. Our pass-through Agency RMBS portfolio likely will be our only source of price or prepayment related margin calls because we generally will not apply leverage to our structured Agency RMBS portfolio. From time to time we may pledge a portion of our structured securities and retain the cash derived so it can be used to enhance our liquidity.

## Risk Management

We invest in Agency RMBS to mitigate credit risk. Additionally, our Agency RMBS are backed by a diversified base of mortgage loans to mitigate geographic, loan originator and other types of concentration risks.

## Interest Rate Risk Management

We believe that the risk of adverse interest rate movements represents the most significant risk to our portfolio. This risk arises because (i) the interest rate indices used to calculate the interest rates on the mortgages underlying our assets may be different from the interest rate indices used to calculate the interest rates on the related borrowings and (ii) interest rate movements affecting our borrowings may not be reasonably correlated with interest rate movements affecting our assets. We attempt to mitigate our interest rate risk by using the techniques described below:

Agency RMBS Backed by ARMs. We seek to minimize the differences between interest rate indices and interest rate adjustment periods of our Agency RMBS backed by ARMs and related borrowings. At the time of funding, we typically align (i) the underlying interest rate index used to calculate interest rates for our Agency RMBS backed by ARMs and the related borrowings and (ii) the interest rate adjustment periods for our Agency RMBS backed by ARMs and the interest rate adjustment periods for our related borrowings. As our borrowings mature or are renewed, we may adjust the index used to calculate interest expense, the duration of the reset periods and the maturities of our borrowings.



Agency RMBS Backed by Fixed-Rate Mortgages . As interest rates rise, our borrowing costs increase; however, the income on our Agency RMBS backed by fixed-rate mortgages remains unchanged. Subject to qualifying and maintaining a qualification as a REIT, we may seek to limit increases to our borrowing costs through the use of interest rate swap or cap agreements, options, put or call agreements, futures contracts, forward rate agreements or similar financial instruments to effectively convert our floating-rate borrowings into fixed-rate borrowings.

Agency RMBS Backed by Hybrid ARMs . During the fixed-rate period of our Agency RMBS backed by hybrid ARMs, the security is similar to Agency RMBS backed by fixed-rate mortgages. During this period, subject to qualifying and maintaining a qualification as a REIT, we may employ the same hedging strategy that we employ for our Agency RMBS backed by fixed-rate mortgages. Once our Agency RMBS backed by hybrid ARMs convert to floating rate securities, we may employ the same hedging strategy as we employ for our Agency RMBS backed by ARMs.

Derivative Instruments. We enter into derivative instruments to economically hedge against the possibility that rising rates may adversely impact our repurchase agreement liabilities. The principal instruments that the Company has used to date are Eurodollar and Treasury Note (“T-Note”) futures contracts and options to enter into interest rate swaps (“interest rate swaptions”), but may enter into other transactions in the future.

Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. We may enter into swaption agreements that provide us the option to enter into a pay fixed rate interest rate swap ("payer swaption"), or swaption agreements that provide us the option to enter into a receive fixed interest rate swap ("receiver swaptions").

Additionally, our structured Agency RMBS generally exhibit sensitivities to movements in interest rates different than our pass-through Agency RMBS. To the extent they do so, our structured Agency RMBS may protect us against declines in the market value of our combined portfolio that result from adverse interest rate movements, although we cannot assure you that this will be the case.

We purchase a portion of our Agency RMBS through forward settling transactions, including “to-be-announced” (“TBA”) securities transactions. We account for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if we cannot assert that it is probable at the inception of the TBA transaction, and throughout its term, that we will take physical delivery of the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade. However, we have not entered into these TBA securities transactions as a hedge of our interest rate risk.

## Prepayment Risk Management

The risk of mortgage prepayments is another significant risk to our portfolio. When prevailing interest rates fall below the coupon rate of a mortgage, mortgage prepayments are likely to increase. Conversely, when prevailing interest rates increase above the coupon rate of a mortgage, mortgage prepayments are likely to decrease.

When prepayment rates increase, we may not be able to reinvest the money received from prepayments at yields comparable to those of the securities prepaid. Also, some ARMs and hybrid ARMs which back our Agency RMBS may bear initial “teaser” interest rates that are lower than their fully-indexed interest rates. If these mortgages are prepaid during this “teaser” period, we may lose the opportunity to receive interest payments at the higher, fully-indexed rate over the expected life of the security. Additionally, some of our structured Agency RMBS, such as IOs and IIOs, may be negatively affected by an increase in prepayment rates because their value is wholly contingent on the underlying mortgage loans having an outstanding principal balance.



A decrease in prepayment rates may also have an adverse effect on our portfolio. For example, if we invest in POs, the purchase price of such securities will be based, in part, on an assumed level of prepayments on the underlying mortgage loan. Because the returns on POs decrease the longer it takes the principal payments on the underlying loans to be paid, a decrease in prepayment rates could decrease our returns on these securities.

Prepayment risk also affects our hedging activities. When an Agency RMBS backed by a fixed-rate mortgage or hybrid ARM is acquired with borrowings, we may cap or fix our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related Agency RMBS. If prepayment rates are different than our projections, the term of the related hedging instrument may not match the fixed-rate portion of the security, which could cause us to incur losses.

Because our business may be adversely affected if prepayment rates are different than our projections, we seek to invest in Agency RMBS backed by mortgages with well-documented and predictable prepayment histories. To protect against increases in prepayment rates, we invest in Agency RMBS backed by mortgages that we believe are less likely to be prepaid. For example, we invest in Agency RMBS backed by mortgages (i) with loan balances low enough such that a borrower would likely have little incentive to refinance, (ii) extended to borrowers with credit histories weak enough to not be eligible to refinance their mortgage loans, (iii) that are newly originated fixed-rate or hybrid ARMs or (iv) that have interest rates low enough such that a borrower would likely have little incentive to refinance. To protect against decreases in prepayment rates, we may also invest in Agency RMBS backed by mortgages with characteristics opposite to those described above, which would typically be more likely to be refinanced. We may also invest in certain types of structured Agency RMBS as a means of mitigating our portfolio-wide prepayment risks. For example, certain tranches of CMOs are less sensitive to increases in prepayment rates, and we may invest in those tranches as a means of hedging against increases in prepayment rates.

## Liquidity Management Strategy

Because of our use of leverage, we manage liquidity to meet our lenders’ margin calls by maintaining cash balances or unencumbered assets well in excess of anticipated margin calls and making margin calls on our lenders when we have an excess of collateral pledged against our borrowings.

We also attempt to minimize the number of margin calls we receive by:

• Deploying capital from our leveraged Agency RMBS portfolio to our unleveraged Agency RMBS portfolio;

• Investing in Agency RMBS backed by mortgages that we believe are less likely to be prepaid to decrease the risk of excessive margin calls when monthly prepayments are announced. Prepayments are declared, and the market value of the related security declines, before the receipt of the related cash flows. Prepayment declarations give rise to a temporary collateral deficiency and generally results in margin calls by lenders;

- Obtaining funding arrangements which defer or waive prepayment-related margin requirements in exchange for payments to the lender tied to the dollar amount of the collateral deficiency and a predetermined interest rate; and

• Reducing our overall amount of leverage.

To the extent we are unable to adequately manage our interest rate exposure and are subjected to substantial margin calls, we may be forced to sell assets at an inopportune time which in turn could impair our liquidity and reduce our borrowing capacity and book value.



## Tax Structure

We have elected to be taxed as a REIT for U.S federal income tax purposes. Our qualification as a REIT, and the maintenance of such qualification, will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Code, and we intend to continue to operate in a manner that will enable us to continue to meet the requirements for qualification and taxation as a REIT.

As a REIT, we generally will not be subject to U.S. federal income tax on the REIT taxable income that we currently distribute to our stockholders. Taxable income generated by any taxable REIT subsidiary ("TRS") that we may form or acquire will be subject to U.S. federal, state and local income tax. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute annually at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify as a REIT in any calendar year and do not qualify for certain statutory relief provisions, our income would be subject to U.S. federal income tax, and we would likely be precluded from qualifying for treatment as a REIT until the fifth calendar year following the year in which we failed to qualify. Even if we continue to qualify as a REIT, we may still be subject to certain U.S. federal, state and local taxes on our income and assets and to U.S. federal income and excise taxes on our undistributed income.

## Investment Company Act Exemption

We operate our business so that we are exempt from registration under the Investment Company Act. We rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act, which applies to companies in the business of purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. In order to rely on the exemption provided by Section 3(c)(5)(C), we must maintain at least 55% of our assets in qualifying real estate assets. For the purposes of this test, structured Agency RMBS are non-qualifying real estate assets. We monitor our portfolio periodically and prior to each investment to confirm that we continue to qualify for the exemption. To qualify for the exemption, we make investments so that at least 55% of the assets we own consist of qualifying mortgages and other liens on and interests in real estate, which we refer to as qualifying real estate assets, and so that at least 80% of the assets we own consist of real estate-related assets, including our qualifying real estate assets.

We treat whole-pool pass-through Agency RMBS as qualifying real estate assets based on no-action letters issued by the staff of the SEC. In August 2011, the SEC, through a concept release, requested comments on interpretations of Section 3(c)(5)(C). To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may fail to qualify for this exemption. Our Manager manages our pass-through Agency RMBS portfolio such that we have sufficient whole-pool pass-through Agency RMBS to ensure we maintain our exemption from registration under the Investment Company Act. At present, we generally do not expect that our investments in structured Agency RMBS will constitute qualifying real estate assets but will constitute real estate-related assets for purposes of the Investment Company Act.

## Employees

We have no employees. We are externally managed and advised by our Manager pursuant to a management agreement as discussed below.



## Competition

Our net income largely depends on our ability to acquire Agency RMBS at favorable spreads over our borrowing costs. When we invest in Agency RMBS and other investment assets, we compete with a variety of institutional investors, including other REITs, insurance companies, mutual funds, pension funds, investment banking firms, banks and other financial institutions that invest in the same types of assets, the Federal Reserve Bank and other governmental entities or government-sponsored entities. Many of these investors have greater financial resources and access to lower costs of capital than we do. The existence of these competitive entities, as well as the possibility of additional entities forming in the future, may increase the competition for the acquisition of mortgage related securities, resulting in higher prices and lower yields on assets.

## Distributions

To maintain a qualification as a REIT, we must distribute substantially all of our REIT taxable income (as defined in the Code) to our stockholders for each year. We plan to continue to declare and pay regular monthly dividends to our stockholders.

## Available Information

Our investor relations website is www.orchidislandcapital.com. We make available on the website under "Financial Information/SEC filings," free of charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any other reports (including any amendments to such reports) as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. Information on our website, however, is not part of this Annual Report on Form 10-K. All reports filed with the SEC may also be read and copied at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Further information regarding the operation of the public reference room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC's website at www.sec.gov.

## ITEM 1A. RISK FACTORS

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and related notes thereto, before making an investment decision regarding our common stock. Our business, financial condition or results of operations could be harmed by any of these risks. Similarly, these risks could cause the market price of our common stock to decline and you might lose all or part of your investment. Our forward-looking statements in this annual report are subject to the following risks and uncertainties. Our actual results could differ materially from those anticipated by our forward-looking statements as a result of the risk factors below.

## Risks Related to Our Business

Increases in interest rates may negatively affect the value of our investments and increase the cost of our borrowings, which could result in reduced earnings or losses and materially adversely affect our ability to pay distributions to our stockholders.

Under a normal yield curve, an investment in Agency RMBS will decline in value if interest rates increase. In addition, net interest income could decrease if the yield curve becomes inverted or flat. While Fannie Mae, Freddie Mac or Ginnie Mae guarantees the principal and interest payments related to the Agency RMBS we own, this guarantee does not protect us from declines in market value caused by changes in interest rates. Declines in the market value of our investments may ultimately result in losses to us, which may reduce earnings and negatively affect our ability to pay distributions to our stockholders.



Significant increases in both long-term and short-term interest rates poses a substantial risk associated with our investment in Agency RMBS. If long-term rates were to increase significantly, the market value of our Agency RMBS would decline, and the duration and weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our repurchase agreements used to finance the purchase of Agency RMBS, which would decrease cash available for distribution to our stockholders. Using this business model, we are particularly susceptible to the effects of an inverted yield curve, where short-term rates are higher than long-term rates. Although rare in a historical context, many countries in Europe have experienced inverted yield curves in recent months. Given the volatile nature of the U.S. economy since the end of the third round of quantitative easing (“QE3”), and the Federal Reserve’s recent increase in short-term interest rates, there can be no guarantee that the yield curve will not become and/or remain inverted. If this occurs, it could result in a decline in the value of our Agency RMBS, our business, financial position and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

An increase in interest rates may also cause a decrease in the volume of newly issued, or investor demand for, Agency RMBS, which could materially adversely affect our ability to acquire assets that satisfy our investment objectives and our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Rising interest rates generally reduce the demand for consumer credit, including mortgage loans, due to the higher cost of borrowing. A reduction in the volume of mortgage loans may affect the volume of Agency RMBS available to us, which could affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause Agency RMBS that were issued prior to an interest rate increase to provide yields that exceed prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency RMBS or Agency RMBS with a yield that exceeds our borrowing costs, our ability to satisfy our investment objectives and to generate income and pay dividends, our business, financial condition and results of operations and our ability to pay distributions to our stockholders may be materially adversely affected.

Interest rate mismatches between our Agency RMBS and our borrowings may reduce our net interest margin during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Our portfolio includes Agency RMBS backed by ARMs, hybrid ARMs and fixed-rate mortgages, and the mix of these securities in the portfolio may be increased or decreased over time. Additionally, the interest rates on ARMs and hybrid ARMs may vary over time based on changes in a short-term interest rate index, of which there are many.

We finance our acquisitions of pass-through Agency RMBS with short-term financing. During periods of rising short-term interest rates, the income we earn on these securities will not change (with respect to Agency RMBS backed by fixed-rate mortgage loans) or will not increase at the same rate (with respect to Agency RMBS backed by ARMs and hybrid ARMs) as our related financing costs, which may reduce our net interest margin or result in losses.

Adverse developments in the broader residential mortgage market may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

The residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns over the past several years. In addition, certain commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These losses have reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate-related assets, including Agency RMBS. As a result, values for RMBS, including some Agency RMBS and other AAA-rated RMBS assets, have been negatively impacted at times. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of the Agency RMBS in which we invest.



We rely on our Agency RMBS as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all or maintain our compliance with terms of any financing arrangements already in place. Additionally, we have elected to account for our investment in RMBS under the fair value option and, therefore, such investment will be reported on our consolidated financial statements at fair value with unrealized gains or losses included in earnings. If market conditions result in a decline in the value of our Agency RMBS, our business, financial position and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

We invest in structured Agency RMBS, including CMOs, IOs, IOs and POs. Although structured Agency RMBS are generally subject to the same risks as our pass-through Agency RMBS, certain types of risks may be enhanced depending on the type of structured Agency RMBS in which we invest.

The structured Agency RMBS in which we invest are securitizations (i) issued by Fannie Mae, Freddie Mac or Ginnie Mae, (ii) collateralized by Agency RMBS and (iii) divided into various tranches that have different characteristics (such as different maturities or different coupon payments). These securities may carry greater risk than an investment in pass-through Agency RMBS. For example, certain types of structured Agency RMBS, such as IOs, IOs and POs, are more sensitive to prepayment risks than pass-through Agency RMBS. If we were to invest in structured Agency RMBS that were more sensitive to prepayment risks relative to other types of structured Agency RMBS or pass-through Agency RMBS, we may increase our portfolio-wide prepayment risk.

Separate legislation has been introduced in both houses of the U.S. Congress, which would, among other things, revoke the charters of Fannie Mae and Freddie Mac, which could materially adversely affect us if these proposed laws were enacted. We cannot predict the impact, if any, on our earnings or cash available for distribution to our stockholders of the Federal Housing Finance Agency’s (the “FHFA”) proposed revisions to Fannie Mae’s, Freddie Mac’s and Ginnie Mae’s existing infrastructures to align the standards and practices of the three entities.

While the two bills that have been introduced are distinguishable in many respects, they have some notable commonalities. Both bills call for the revocation of the charters of Fannie Mae and Freddie Mac and seek to increase the opportunities for private capital to participate in, and consequently bear the risk of loss in connection with, government-guaranteed mortgage back securities. Both bills also have considerable support in their respective houses of Congress, which suggests that efforts to reform and possibly eliminate Fannie Mae and Freddie Mac may be gaining momentum.

The passage of any new legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by the U.S. government through a new or existing successor entity to Fannie Mae and Freddie Mac. If the charters of Fannie Mae and Freddie Mac were revoked, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac Agency RMBS. It is also possible that the above-referenced proposed legislation, if made law, could adversely impact the market for securities issued or guaranteed by the U.S. government and the spreads at which they trade. The foregoing could materially adversely affect the pricing, supply, liquidity and value of our target assets and otherwise materially adversely affect our business, operations and financial condition.

On May 13, 2014, the FHFA released its updated whitepaper titled 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, which set forth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships. These three goals are to (i) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages, (ii) reduce taxpayer risk through increasing the role of private capital in the mortgage market, and (iii) build a new single-family securitization infrastructure for use by Fannie Mae and Freddie Mac and adaptable for use by other participants in the secondary market in the future. The FHFA refers to such an infrastructure as a common securitization platform, or CSP.



In September 2015, the FHFA released an update on the CSP, detailing progress made in the development of a new infrastructure for the securitization of single-family mortgages by Fannie Mae and Freddie Mac. The update includes details on the organizational structure of Common Securitization Solutions, LLC, a joint venture company that was established by Fannie Mae and Freddie Mac to lead the work on this project. In addition, the update looks ahead to the anticipated announcement in 2016 of an implementation date for the initial software release that will allow use of the CSP by Freddie Mac, followed by the second software release that will enable both Freddie Mac and Fannie Mae to use the CSP to issue single mortgage-backed securities.

Furthermore, in October 2014, FHFA director Watt announced a number of general policy initiatives by the FHFA, including restoring a program that allows Fannie Mae and Freddie Mac to guarantee loans with down payments as low as 3%. Director Watt also said that the FHFA was taking steps to bring certainty to the circumstances under which Fannie Mae and Freddie Mac will require originators to repurchase defaulted mortgages that were later discovered to have underlying defects. We cannot predict the prospects for the enactment, timing or final content of housing reform legislation.

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, and that their proposals are in the formative stages. As a result, it is 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 or what the effects of the enactment will be in terms of our net asset value, earnings or cash available for distribution to our stockholders.

Increased levels of prepayments on the mortgages underlying our Agency RMBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

In the case of residential mortgages, there are seldom any restrictions on borrowers' ability to prepay their loans. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, governmental action, general economic conditions and the relative interest rates on ARMs, hybrid ARMs and fixed-rate mortgage loans. With respect to pass-through Agency RMBS, faster-than-expected prepayments could also materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders in various ways, including the following:

- A portion of our pass-through Agency RMBS backed by ARMs and hybrid ARMs may initially bear interest at rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If a pass-through Agency RMBS backed by ARMs or hybrid ARMs is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that Agency RMBS while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the remainder of its expected life.

- If we are unable to acquire new Agency RMBS to replace the prepaid Agency RMBS, our returns on capital may be lower than if we were able to quickly acquire new Agency RMBS.

When we acquire structured Agency RMBS, we anticipate that the underlying mortgages will prepay at a projected rate, generating an expected yield. When the prepayment rates on the mortgages underlying our structured Agency RMBS are higher than expected, our returns on those securities may be materially adversely affected. For example, the value of our IOs and IIOs are extremely sensitive to prepayments because holders of these securities do not have the right to receive any principal payments on the underlying mortgages. Therefore, if the mortgage loans underlying our IOs and IIOs are prepaid, such securities would cease to have any value, which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment or other such risks.



A decrease in prepayment rates on the mortgages underlying our Agency RMBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Certain of our structured Agency RMBS may be adversely affected by a decrease in prepayment rates. For example, because POs are similar to zero-coupon bonds, our expected returns on such securities will be contingent on our receiving the principal payments of the underlying mortgage loans at expected intervals that assume a certain prepayment rate. If prepayment rates are lower than expected, we will not receive principal payments as quickly as we anticipated and, therefore, our expected returns on these securities will be adversely affected, which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment or other such risks.

Interest rate caps on the ARMs and hybrid ARMs backing our Agency RMBS may reduce our net interest margin during periods of rising interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan. Our borrowings typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, our financing costs could increase without limitation while caps could limit the interest we earn on the ARMs and hybrid ARMs backing our Agency RMBS. This problem is magnified for ARMs and hybrid ARMs that are not fully indexed because such periodic interest rate caps prevent the coupon on the security from fully reaching the specified rate in one reset. Further, some ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on Agency RMBS backed by ARMs and hybrid ARMs than necessary to pay interest on our related borrowings. Interest rate caps on Agency RMBS backed by ARMs and hybrid ARMs could reduce our net interest margin if interest rates were to increase beyond the level of the caps, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Failure to procure adequate repurchase agreement financing, or to renew or replace existing repurchase agreement financing as it matures, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We intend to maintain master repurchase agreements with several counterparties. We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us in the future on terms that are acceptable to us. Any decline in the value of Agency RMBS, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with the terms of any financing arrangements already in place. We may be unable to diversify the credit risk associated with our lenders. In the event that we cannot obtain sufficient funding on acceptable terms, our business, financial condition and results of operations and our ability to pay distributions to our stockholders may be materially adversely affected.



Furthermore, because we intend to rely primarily on short-term borrowings to fund our acquisition of Agency RMBS, our ability to achieve our investment objective will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are not able to renew or replace maturing borrowings, we will have to sell some or all of our assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk.

Adverse market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Adverse market developments, including a sharp or prolonged rise in interest rates, a change in prepayment rates or increasing market concern about the value or liquidity of one or more types of Agency RMBS, might reduce the market value of our portfolio, which might cause our lenders to initiate margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and not determined until we engage in a repurchase transaction under these agreements. Our fixed-rate Agency RMBS generally are more susceptible to margin calls as increases in interest rates tend to more negatively affect the market value of fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat or occurrence of a margin call could force us to sell either directly or through a foreclosure our Agency RMBS under adverse market conditions. Because of the significant leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. Additionally, the liquidation of collateral may jeopardize our ability to maintain our qualification as a REIT, as we must comply with requirements regarding our assets and our sources of gross income. Our failure to maintain our qualification as a REIT would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our net taxable income.

Hedging against interest rate exposure may not completely insulate us from interest rate risk and could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

To the extent consistent with maintaining our qualification as a REIT, we may enter into interest rate cap or swap agreements or pursue other hedging strategies, including the purchase of puts, calls or other options and futures contracts in order to hedge the interest rate risk of our portfolio. In general, our hedging strategy depends on our view of our entire portfolio consisting of assets, liabilities and derivative instruments, in light of prevailing market conditions. We could misjudge the condition of our investment portfolio or the market. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal prepayments, the type of Agency RMBS we hold and other changing market conditions. Hedging may fail to protect or could adversely affect us because, among other things:

• hedging can be expensive, particularly during periods of rising and volatile interest rates;

● available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

• the duration of the hedge may not match the duration of the related liability;

• certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge;

- the amount of gross income that a REIT may earn from hedging transactions, other than hedging transactions that satisfy certain requirements of the Code, is limited by federal income tax provisions governing REITs;

- the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

- the counterparty in the hedging transaction may default on its obligation to pay.



There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Alternatively, we may fail to properly assess a risk to our investment portfolio or may fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedging activities. The derivative financial instruments we select may not have the effect of reducing our interest rate risk. The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging activities could result in losses if the event against which we hedge does not occur.

Because of the foregoing risks, our hedging activity could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Our use of certain hedging techniques may expose us to counterparty risks.

To the extent that our hedging instruments are not traded on regulated exchanges, guaranteed by an exchange or its clearinghouse, or regulated by any U.S. or foreign governmental authorities, there may not be requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if any of these issues causes a counterparty to fail to perform under a derivative agreement we could incur a significant loss.

For example, if a swap counterparty under an interest rate swap agreement that we enter into as part of our hedging strategy cannot perform under the terms of the interest rate swap agreement, we may not receive payments due under that agreement, and, thus, we may lose any potential benefit associated with the interest rate swap. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under these swap agreements if the counterparty becomes insolvent or files for bankruptcy. Similarly, if an interest rate swap counterparty fails to perform under the terms of the interest rate swap agreement, in addition to not being able to exercise or otherwise cash settle the agreement, we could also incur a loss for the premium paid for that swap.

We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy.

We rely on analytical models, and information and other data supplied by third parties. These models and data may be used to value assets or potential asset acquisitions and dispositions and in connection with our asset management activities. If our models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon could expose us to potential risks.

Our reliance on models and data may induce us to purchase certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.

Some models, such as prepayment models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the predictive models used by us may differ substantially from those models used by other market participants, resulting in valuations based on these predictive models that may be substantially higher or lower for certain assets than actual market prices. Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation and are therefore more speculative and less reliable.



All valuation models rely on correct market data input. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is inputted correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose values are particularly sensitive to various factors. If our market data inputs are incorrect or our model prices differ substantially from market prices, our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially adversely affected.

Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed. As a result, the values of some of our assets are uncertain.

While in many cases our determination of the fair value of our assets is based on valuations provided by third-party dealers and pricing services, we can and do value assets based upon our judgment, and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. The valuation process during times of market distress can be particularly difficult and unpredictable and during such time the disparity of valuations provided by third-party dealers can widen.

Our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially adversely affected if our fair value determinations of these assets were materially higher than the values that would exist if a ready market existed for these assets.

Because the assets that we acquire might experience periods of illiquidity, we might be prevented from selling our Agency RMBS at favorable times and prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Agency RMBS might experience periods of illiquidity. Such conditions are more likely to occur for structured Agency RMBS because such securities are generally traded in markets much less liquid than the pass-through Agency RMBS market. As a result, we may be unable to dispose of our Agency RMBS at advantageous times and prices or in a timely manner. The lack of liquidity might result from the absence of a willing buyer or an established market for these assets as well as legal or contractual restrictions on resale. The illiquidity of Agency RMBS could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Our use of leverage could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We calculate our leverage ratio by dividing our total liabilities by total equity at the end of each period. Under normal market conditions, we generally expect our leverage ratio to be less than 12 to 1, although at times our borrowings may be above or below this level. We incur this indebtedness by borrowing against a substantial portion of the market value of our pass-through Agency RMBS and a portion of our structured Agency RMBS. Our total indebtedness, however, is not expressly limited by our policies and will depend on our prospective lenders' estimates of the stability of our portfolio's cash flow. As a result, there is no limit on the amount of leverage that we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender's margin requirements from our income and, to the extent we cannot, we might be forced to liquidate some of our Agency RMBS at unfavorable prices. Our use of leverage could materially adversely affect our business, financial condition and results of operation and our ability to pay distributions to our stockholders. For example:



- our borrowings are secured by our pass-through Agency RMBS and a portion of our structured Agency RMBS under repurchase agreements. A decline in the market value of the pass-through Agency RMBS or structured Agency RMBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency RMBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency RMBS, we would experience losses.

- to the extent we are compelled to liquidate qualifying real estate assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of gross income could be negatively affected, which could jeopardize our qualification as a REIT. Losing our REIT qualification would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and would decrease profitability and cash available for distributions to stockholders.

If we experience losses as a result of our use of leverage, such losses could materially adversely affect our business, results of operations and financial condition and our ability to make distributions to our stockholders.

Our use of repurchase agreements may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.

Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any of our lenders files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either our lenders or us. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our investment under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes.

If we fail to maintain our relationship with AVM, L.P. or if we do not establish relationships with other repurchase agreement trading, clearing and administrative service providers, our business, financial condition and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

We have engaged AVM, L.P. to provide us with certain repurchase agreement trading, clearing and administrative services. If we are unable to maintain our relationship with AVM, L.P. or we are unable to establish successful relationships with other repurchase agreement trading, clearing and administrative service providers, our business, financial condition and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

If our lenders default on their obligations to resell the Agency RMBS back to us at the end of the repurchase transaction term, or if the value of the Agency RMBS has declined by the end of the repurchase transaction term or if we default on our obligations under the repurchase transaction, we will lose money on these transactions, which, in turn, may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.



When we engage in a repurchase transaction, we initially sell securities to the financial institution under one of our master repurchase agreements in exchange for cash, and our counterparty is obligated to resell the securities to us at the end of the term of the transaction, which is typically from 24 to 90 days but may be up to 364 days or more. The cash we receive when we initially sell the securities is less than the value of those securities, which is referred to as the haircut. Many financial institutions from which we may obtain repurchase agreement financing have increased their haircuts in the past and may do so again in the future. If these haircuts are increased, we will be required to post additional cash or securities as collateral for our Agency RMBS. If our counterparty defaults on its obligation to resell the securities to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities had declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we incur on our repurchase transactions could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our portfolio and carry out our investment strategy. There is no assurance we would be able to establish a suitable replacement facility on acceptable terms or at all.

Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments.

In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing facilities or exchanges upon which some of our hedging instruments, such as Eurodollar futures contracts and interest rate swaps, are traded may require us to post additional collateral against our hedging instruments. In the event that future adverse economic developments or market uncertainty result in increased margin requirements for our hedging instruments, it could materially adversely affect our liquidity position, business, financial condition and results of operations.

Our ability to achieve our investment objectives will depend on our ability to manage future growth effectively.

Our ability to achieve our investment objectives will depend on our ability to grow, which will depend, in turn, on our Manager’s ability to identify and invest in securities that meet our investment criteria. Accomplishing this result on a cost-effective basis largely will be a function of our Manager’s structuring and implementation of the investment process, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. Our Manager has substantial responsibilities, and, in order to grow, needs to hire, train, supervise and manage new employees successfully. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments. In addition, our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders.

Our Board of Directors has the authority to change our investment strategy or asset allocation at any time without notice to or consent from our stockholders. To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this annual report. A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than as described in this annual report.



In addition, our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interests to qualify as a REIT. These changes could materially adversely affect our business, financial condition, results of operations, the market value of our common stock and our ability to make distributions to our stockholders.

Competition might prevent us from acquiring Agency RMBS at favorable yields, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to acquire Agency RMBS at favorable spreads over our borrowing costs. In acquiring Agency RMBS, we compete with a variety of institutional investors, including other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders, other entities that purchase Agency RMBS, the Federal Reserve, other governmental entities and government-sponsored entities, many of which have greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government. Additionally, many of our competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments. Furthermore, competition for investments in Agency RMBS may lead the price of such investments to increase, which may further limit our ability to generate desired returns. As a result, we may not be able to acquire sufficient Agency RMBS at favorable spreads over our borrowing costs, which would materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and as such, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are exempt from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Although we are an emerging growth company under the JOBS Act, we have elected to opt out of the extended transition period for complying with new or revised accounting standards, and such election is irrevocable. We cannot predict if investors will find our shares of common stock less attractive because we may rely on these provisions. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares and our share price may be more volatile.

Our obligation to comply with the requirements of the Sarbanes-Oxley Act of 2002 will increase.

As long as we remain an emerging growth company, as that term is defined in the JOBS Act, we will be permitted to gradually comply with certain of the on-going reporting and disclosure obligations of public companies pursuant to the Sarbanes-Oxley Act. We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.



Management is required to deliver a report that assesses the effectiveness of our internal controls over financial reporting pursuant to Section 302 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act may require our auditors to deliver an attestation report on the effectiveness of our internal controls over financial reporting in conjunction with their opinion on our audited financial statements in future years. Substantial work on our part is required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process is expected to be both costly and challenging. We cannot give any assurances that material weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 302 and 404 of the Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weakness in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could lead to a decline in the trading price of our common stock.

We are highly dependent on communications and information systems operated by third parties, and systems failures could significantly disrupt our business, which may, in turn, adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell, finance and hedge our investments. These systems are operated by third parties and, as a result, we have limited ability to ensure their continued operation. In the event of a systems failure or interruption, we will have limited ability to affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including Agency RMBS trading activities, which could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

If we issue debt securities, our operations may be restricted and we will be exposed to additional risk.

If we decide to issue debt securities in the future, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating restrictions could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.



Adoption of the Basel III standards and other proposed supplementary regulatory standards may negatively impact our access to financing or affect the terms of our future financing arrangements.

In response to various financial crises and the volatility of financial markets, the Basel Committee on Banking Supervision, an international body comprised of senior representatives of bank supervisory authorities and central banks from 27 countries, including the United States, adopted the Basel III standards several years ago. The final package of Basel III reforms was approved by the G20 leaders in November 2010. In January 2013, the Basel Committee agreed to delay implementation of the Basel III standards and expanded the scope of assets permitted to be included in a bank's liquidity measurement. In 2014, the Basel Committee announced that it would propose additional changes to capital requirements for banks over the next few years. U.S. regulators have elected to implement substantially all of the Basel III standards. These new standards, including the Supplementary Leverage Ratio imposed by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which will be fully phased in by 2019, will require banks to hold more capital, predominantly in the form of common equity, than under the current capital framework. These increased bank capital requirements may constrain our ability to obtain attractive future financings and increase the cost of such financings if they are obtained.

In April 2014, U.S. regulators adopted rules requiring enhanced supplementary leverage ratio standards beginning in January 2018, which would impose capital requirements more stringent than those of the Basel III standards for the most systematically significant banking organizations in the U.S. Adoption and implementation of the Basel III standards and the supplemental regulatory standards adopted by U.S. regulators may negatively impact our access to financing or affect the terms of our future financing arrangements.

## Risks Related to Conflicts of Interest in Our Relationship with Our Manager and Bimini

The management agreement with our Manager was not negotiated on an arm’s-length basis and the terms, including fees payable and our inability to terminate, or our election not to renew, the management agreement based on our Manager’s poor performance without paying our Manager a significant termination fee, except for a termination of the Manager with cause, may not be as favorable to us as if it were negotiated with an unaffiliated third party.

The management agreement with our Manager was negotiated between related parties, and we did not have the benefit of arm’s-length negotiations of the type normally conducted with an unaffiliated third party. The terms of the management agreement with our Manager, including fees payable and our inability to terminate, or our election not to renew, the management agreement based on our Manager’s poor performance without paying our Manager a significant termination fee, except for a termination of the Manager with cause, may not reflect the terms we may have received if it was negotiated with an unrelated third party. In addition, as a result of the relationship with our Manager, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationship with our Manager.



We have no employees, and our Manager is responsible for making all of our investment decisions. None of our or our Manager’s officers are required to devote any specific amount of time to our business, and each of them may provide their services to Bimini, which could result in conflicts of interest.

Our Manager is responsible for making all of our investments. We do not have any employees, and we are completely reliant on our Manager to provide us with investment advisory services. Each of our and our Manager’s officers is an employee of Bimini and none of them will devote their time to us exclusively. Each of Messrs. Cauley and Haas, who will be the initial members of our Manager’s investment committee, is an officer of Bimini and has significant responsibilities to Bimini. Due to the fact that each of our officers is responsible for providing services to Bimini, they may not devote sufficient time to the management of our business operations. At times when there are turbulent conditions in the mortgage markets or distress in the credit markets or other times when we will need focused support and assistance from our executive officers and our Manager, Bimini and its affiliates will likewise require greater focus and attention from them. In such situations, we may not receive the level of support and assistance that we otherwise would likely have received if we were internally managed or if such executives were not otherwise committed to provide support to Bimini.

Our Board of Directors has adopted investment guidelines that require that any investment transaction between us and Bimini or any affiliate of Bimini receive the prior approval of a majority of our independent directors. However, this policy will not eliminate the conflicts of interest that our officers will face in making investment decisions on behalf of Bimini and us. Further, we do not have any agreement or understanding with Bimini that would give us any priority over Bimini or any of its affiliates. Accordingly, we may compete for access to the benefits that we expect our relationship with our Manager and Bimini to provide.

We are completely dependent upon our Manager and certain key personnel of Bimini who provide services to us through the management agreement, and we may not find suitable replacements for our Manager and these personnel if the management agreement is terminated or such key personnel are no longer available to us.

We are completely dependent on our Manager to conduct our operations pursuant to the management agreement. Because we do not have any employees or separate facilities, we are reliant on our Manager to provide us with the personnel, services and resources necessary to carry out our day-to-day operations. Our management agreement does not require our Manager to dedicate specific personnel to our operations or a specific amount of time to our business. Additionally, because we are affiliated with Bimini, we may be negatively impacted by an event or factors, including ongoing and potential legal proceedings against Bimini and its subsidiaries, that negatively impacts or could negatively impact Bimini’s business or financial condition.

The initial term of our management agreement was automatically renewed in accordance with the terms of the agreement on February 20, 2016. Upon the expiration of any automatic renewal term, our Manager may elect not to renew the management agreement without cause, and without penalty, on 180-days' prior written notice to us. If we elect not to renew the management agreement without cause, we would have to pay a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed calendar quarter prior to the effective date of termination. During the term of the management agreement and for two years after its expiration or termination, we may not, without the consent of our Manager, employ any employee of the Manager or any of its affiliates or any person who has been employed by our Manager or any of its affiliates at any time within the two-year period immediately preceding the date on which the person commences employment with us. We do not have retention agreements with any of our officers. We believe that the successful implementation of our investment and financing strategies depends to a significant extent upon the experience of Bimini’s executive officers. None of these individuals’ continued service is guaranteed. If the management agreement is terminated or these individuals leave Bimini, we may be unable to execute our business plan.



Legal proceedings involving Bimini and certain of its subsidiaries may materially adversely affect Bimini’s and our Manager’s ability to effectively manage our business and could materially adversely affect our reputation, business, operations, financial condition and results of operations and our ability to pay distributions to our stockholders.

We are externally managed and advised by our Manager pursuant to the terms of a management agreement. Because our officers are also officers of Bimini and our Manager, any legal proceedings or regulatory inquiries involving Bimini or our Manager, whether meritorious or not, may divert the time and attention of our Manager and certain of its key personnel from us and our investment strategy and may negatively affect Bimini’s business, operations and financial condition. In addition, due to our relationship with Bimini and our Manager, such events could result in a material adverse effect on our reputation, business, financial condition and results of operations and our ability to pay distributions to our stockholders. Furthermore, if these legal proceedings were to result in a bankruptcy of Bimini or our Manager, we would not be able to terminate the management agreement until 30 days after we provide written notice of termination to our Manager and could experience difficulty in finding another manager or hiring personnel to conduct our business. Alternatively, a bankruptcy court could prevent us from exercising such termination rights, regardless of the provisions of the management agreement.

We, Bimini and other accounts managed by our Manager may compete for opportunities to acquire assets, which are allocated in accordance with the Investment Allocation Agreement by and among Bimini, our Manager and us.

From time to time Bimini may seek to purchase for itself the same or similar assets that our Manager seeks to purchase for us, or our Manager may seek to purchase the same or similar assets for us as it does for other accounts that may be managed by our Manager in the future. In such an instance, our Manager has no duty to allocate such opportunities in a manner that preferentially favors us. Bimini and our Manager make available to us opportunities to acquire assets that they determine, in their reasonable and good faith judgment, based on our objectives, policies and strategies, and other relevant factors, are appropriate for us in accordance with the Investment Allocation Agreement.

Because many of our targeted assets are typically available only in specified quantities and because many of our targeted assets are also targeted assets for Bimini and may be targeted assets for other accounts our Manager may manage in the future, neither Bimini nor our Manager may be able to buy as much of any given asset as required to satisfy the needs of Bimini, us and any other account our Manager may manage in the future. In these cases, the Investment Allocation Agreement will require the allocation of such assets to multiple accounts in proportion to their needs and available capital. The Investment Allocation Agreement will permit departure from such proportional allocation when (i) allocating purchases of whole-pool Agency RMBS, because those securities cannot be divided into multiple parts to be allocated among various accounts, and (ii) such allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the Investment Allocation Agreement allows for a protocol of allocating assets so that, on an overall basis, each account is treated equitably.

There are conflicts of interest in our relationships with our Manager and Bimini, which could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationships with Bimini and our Manager. All of our executive officers are employees of Bimini. As a result, our officers may have conflicts between their duties to us and their duties to Bimini or our Manager.

We may acquire or sell assets in which Bimini or its affiliates have or may have an interest. Similarly, Bimini or its affiliates may acquire or sell assets in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, we may engage in transactions directly with Bimini or its affiliates, including the purchase and sale of all or a portion of a portfolio asset.



Acquisitions made for entities with similar objectives may be different from those made on our behalf. Bimini may have economic interests in or other relationships with others whose obligations or securities we may acquire. In particular, such persons may make and/or hold an investment in securities that we acquire that may be pari passu, senior or junior in ranking to our interest in the securities or in which partners, security holders, officers, directors, agents or employees of such persons serve on the board of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in securities laws restrictions on transactions in such securities and otherwise create conflicts of interest. In such instances, our Manager may, in its sole discretion, make recommendations and decisions regarding such securities for other entities that may be the same as or different from those made for us with respect to such securities and may take actions (or omit to take actions) in the context of these other economic interests or relationships that may have consequences adverse to our interests.

The officers of Bimini and our Manager devote as much time to us as our Manager deems appropriate. However, these officers may have conflicts in allocating their time and services among us, Bimini and our Manager. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager’s officers and Bimini’s employees, Bimini and other entities for which our Manager may serve as a manager in the future will likewise require greater focus and attention, placing our Manager’s and Bimini’s resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed.

We, directly or through Bimini or our Manager, may obtain confidential information about the companies or securities in which we have invested or may invest. If we possess confidential information about such companies or securities, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to the securities of such companies. Our Manager’s management of other accounts could create a conflict of interest to the extent our Manager or Bimini is aware of material non-public information concerning potential investment decisions. We have implemented compliance procedures and practices designed to ensure that investment decisions are not made while in possession of material non-public information. We cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of our Manager to make potentially profitable investments, which could have an adverse effect on our operations. These limitations imposed by access to confidential information could therefore materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

John B. Van Heuvelen, one of our independent directors, owns shares of common stock of Bimini. Mr. 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. Mr. 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. Accordingly, Messrs. Van Heuvelen, Cauley and Haas may have a conflict of interest with respect to actions by our Board of Directors that relate to Bimini or our Manager.

As of February 25, 2016, Bimini owned approximately 6.4% of our outstanding shares of common stock. In evaluating opportunities for us and other management strategies, this may lead our Manager to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks or decrease the returns of your investment.



If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly.

Electing not to renew the management agreement without cause would be difficult and costly for us. The initial term of our management agreement was automatically renewed in accordance with the terms of the agreement on February 20, 2016, however, with the consent of the majority of our independent directors, we may elect not to renew our management agreement in subsequent years upon 180-days' prior written notice. If we elect to not renew the agreement because of a decision by our Board of Directors that the management fee is unfair, our Manager has the right to renegotiate a mutually agreeable management fee. If we elect to not renew the management agreement without cause, we are required to pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed calendar quarter prior to the effective date of termination. These provisions may increase the effective cost to us of electing to not renew the management agreement, thereby adversely affecting our inclination to end our relationship with our Manager even if we believe our Manager's performance is unsatisfactory.

Our Manager’s management fee is payable regardless of our performance.

Our Manager is entitled to receive a management fee from us that is based on the amount of our equity (as defined in the management agreement), regardless of the performance of our investment portfolio. For example, we would pay our Manager a management fee for a specific period even if we experienced a net loss during the same period. Our Manager’s entitlement to substantial nonperformance-based compensation may reduce its incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Our Manager will not be liable to us for any acts or omissions performed in accordance with the management agreement, including with respect to the performance of our investments.

Our Manager has not assumed any responsibility other than to render the services called for under the management agreement in good faith and is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations, including as set forth in the investment guidelines. Our Manager and its affiliates, and the directors, officers, employees, members and stockholders of our Manager and its affiliates, will not be liable to us, our Board of Directors or our stockholders for any acts or omissions performed in accordance with and pursuant to the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their respective duties under the management agreement. We have agreed to indemnify our Manager and its affiliates, and the directors, officers, employees, members and stockholders of our Manager and its affiliates, with respect to all expenses, losses, damages, liabilities, demands, charges and claims in respect of or arising from any acts or omissions of our Manager, its affiliates, and the directors, officers, employees, members and stockholders of our Manager and its affiliates, performed in good faith under the management agreement and not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their respective duties. Therefore, our stockholders have no recourse against our Manager with respect to the performance of investments made in accordance with the management agreement.

## Risks Related to Our Common Stock

Investing in our common stock may involve a high degree of risk.

The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.



There may not be an active market for our common stock, which may cause our common stock to trade at a discount and make it difficult to sell the common stock you purchase.

Our common stock is listed on the NYSE under the symbol “ORC.” Trading on the NYSE does not ensure that there is or will be an actual market for our common stock. Accordingly, no assurance can be given as to:

• the likelihood that an actual market for our common stock will develop, or be continued once developed;

• the liquidity of any such market;

• the ability of any holder to sell shares of our common stock; or

• the prices that may be obtained for our common stock.

We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future.

We intend to continue to make monthly distributions to our stockholders in amounts such that we distribute all or substantially all of our REIT taxable income in each year, subject to certain adjustments. We have not established a minimum distribution payment level, and our ability to make distributions might be harmed by the risk factors described in this prospectus. All distributions will be made at the discretion of our Board of Directors out of funds legally available therefor and will depend on our earnings, our financial condition, maintaining our qualification as a REIT and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will have the ability to make distributions to our stockholders in the future. To the extent that we decide to pay distributions from the proceeds of a securities offerings, such distributions would generally be considered a return of capital for U.S. federal income tax purposes. A return of capital reduces the basis of a stockholder's investment in our common stock to the extent of such basis and is treated as capital gain thereafter.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, as well as warrants to purchase shares of common stock or convertible preferred stock. Upon the liquidation of the Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Our preferred stock, if issued, would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Furthermore, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue, and to classify or reclassify any unissued shares of common stock or preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Our stockholders are therefore subject to the risk of our future securities offerings reducing the market price of our common stock and diluting their common stock.



The market value of our common stock may be volatile.

The market value of shares of our common stock may be based primarily upon current and expected future cash dividends, and the market price of shares of our common stock will be influenced by the dividends on those shares relative to market interest rates. Rising interest rates may lead potential buyers of our common stock to expect a higher dividend rate, which could adversely affect the market price of shares of our common stock. As a result, the market price of our common stock may be highly volatile and subject to wide price fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the share price or trading volume of our common stock include:

• actual or anticipated variations in our operating results or distributions;

• changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;

• increases in market interest rates that lead purchasers of our common stock to expect a higher dividend yield;

• changes in market valuations of similar companies;

• adverse market reaction to any increased indebtedness we incur in the future;

• a change in our Manager or additions or departures of key management personnel;

• actions by institutional stockholders;

• speculation in the press or investment community; and

• general market and economic conditions.

We cannot make any assurances that the market price of our common stock will not fluctuate or decline significantly in the future.

Shares of our common stock eligible for future sale may harm our share price.

We cannot predict the effect, if any, of future sales of shares of our common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of these shares of our common stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock. The 2012 Equity Incentive Plan provides for grants 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 award, subject to a maximum aggregate number of shares of common stock that may be issued under the 2012 Equity Incentive Plan of 4,000,000 shares of common stock. Bimini currently owns 1,395,036 shares of our common stock. If Bimini sells a large number of our securities in the public market, the sale could reduce the market price of our common stock and could impede our ability to raise future capital.

An increase in market interest rates may cause a material decrease in the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and returns that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions are likely to adversely affect the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby reducing cash flow and our ability to service our indebtedness and pay distributions.



# Risks Related to Our Organization and Structure

Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock and our ability to pay distributions to our stockholders.

We have operated and intend to continue to operate our business so as to be exempt from registration under the Investment Company Act, because we are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Specifically, we invest and intend to continue to invest so that at least 55% of the assets that we own on an unconsolidated basis consist of qualifying mortgages and other liens and interests in real estate, which are collectively referred to as “qualifying real estate assets,” and so that at least 80% of the assets we own on an unconsolidated basis consist of real estate-related assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential mortgage pass-through securities issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets based on no-action letters issued by the SEC. To the extent that the SEC publishes new or different guidance with respect to these matters, we may fail to qualify for this exemption.

If we fail to qualify for this exemption, we could be required to restructure our activities in a manner that, or at a time when, we would not otherwise choose to do so, which could negatively affect the value of shares of our common stock and our ability to distribute dividends. For example, if the market value of our investments in CMOs or structured Agency RMBS, neither of which are qualifying real estate assets for Investment Company Act purposes, were to increase by an amount that resulted in less than 55% of our assets being invested in pass-through Agency RMBS, we might have to sell CMOs or structured Agency RMBS in order to maintain our exemption from the Investment Company Act. The sale could occur during adverse market conditions, and we could be forced to accept a price below that which we believe is acceptable.

Alternatively, if we fail to qualify for this exemption, we may have to register under the Investment Company Act and we could become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters.

We may be required at times to adopt less efficient methods of financing certain of our securities, and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus. Our business will be materially and adversely affected if we fail to qualify for and maintain an exemption from regulation pursuant to the Investment Company Act.



Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition.

The Dodd-Frank Act established a comprehensive new regulatory framework for derivative contracts commonly referred to as “swaps.” As a result, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its operators (in some cases the fund’s directors) to be regulated as “commodity pool operators” (“CPOs”). Under new rules adopted by the U.S. Commodity Futures Trading Commission, (the “CFTC”), those funds that become commodity pools solely because of their use of swaps must register with the National Futures Association (the “NFA”). Registration requires compliance with the CFTC’s regulations and the NFA’s rules with respect to capital raising, disclosure, reporting, recordkeeping and other business conduct. However, the CFTC’s Division of Swap Dealer and Intermediary Oversight recently issued a no-action letter saying, although it believes that mortgage REITs are properly considered commodity pools, it would not recommend that the CFTC take enforcement action against the operator of a mortgage REIT who does not register as a CPO if, among other things, the mortgage REIT limits the initial margin and premiums required to establish its swaps, futures and other commodity interest positions to not more than five percent (5%) of its total assets, the mortgage REIT limits the net income derived annually from those commodity interest positions which are not qualifying hedging transactions to less than five percent (5%) of its gross income and interests in the mortgage REIT are not marketed to the public as or in a commodity pool or otherwise as or in a vehicle for trading in the commodity futures, commodity options or swaps markets.

We use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associated with changes in interest rates, mortgage spreads, yield curve shapes and market volatility. These hedging instruments may include interest rate swaps, interest rate futures and options on interest rate futures. We do not currently engage in any speculative derivatives activities or other non-hedging transactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading in commodity interests, and we do not consider the Company or its operations to be a commodity pool as to which CPO registration or compliance is required. We have claimed the relief afforded by the above-described no-action letter. Consequently, we will be restricted to operating within the parameters discussed in the no-action letter and will not enter into hedging transactions covered by the no-action letter if they would cause us to exceed the limits set forth in the no-action letter. However, there can be no assurance that the CFTC will agree that we are entitled to the no-action letter relief claimed.

The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including their anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend or revoke the registration of or the no-action relief afforded to a person who fails to comply with commodities laws and regulations, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that the CFTC asserts that we are not entitled to the no-action letter relief claimed, we may be obligated to furnish additional disclosures and reports, among other things. Further, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event that we fail to comply with statutory requirements relating to derivatives or with the CFTC’s rules thereunder, including the no-action letter described above, we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial condition and results of operations.



Our ownership limitations and certain other provisions of applicable law and our charter and bylaws may restrict business combination opportunities that would otherwise be favorable to our stockholders.

Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders, including business combination provisions, supermajority vote and cause requirements for removal of directors, provisions that vacancies on our Board of Directors may be filled only by the remaining directors, for the full term of the directorship in which the vacancy occurred, the power of our Board of Directors to increase or decrease the aggregate number of authorized shares of stock or the number of shares of any class or series of stock, to cause us to issue additional shares of stock of any class or series and to fix the terms of one or more classes or series of stock without stockholder approval, the restrictions on ownership and transfer of our stock and advance notice requirements for director nominations and stockholder proposals.

To assist us in qualifying as a REIT, among other purposes, ownership of our stock by any person will generally be limited to 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our stock. Additionally, our charter will prohibit beneficial or constructive ownership of our stock that would otherwise result in our failure to qualify as a REIT. The ownership rules in our charter are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be owned by one individual or entity. As a result, these ownership rules could cause an individual or entity to unintentionally own shares beneficially or constructively in excess of our ownership limits. Any attempt to own or transfer shares of our common stock or preferred stock in excess of our ownership limits without the consent of our Board of Directors will result in such shares being transferred to a charitable trust. These provisions may inhibit market activity and the resulting opportunity for our stockholders to receive a premium for their stock that might otherwise exist if any person were to attempt to assemble a block of shares of our stock in excess of the number of shares permitted under our charter and that may be in the best interests of our security holders.

Our Board of Directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of common stock or preferred stock, and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may take actions with respect to our common stock or preferred stock that may have the effect of delaying or preventing a change in control, including transactions at a premium over the market price of our shares, even if stockholders believe that a change in control is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

• actual receipt of an improper benefit or profit in money, property or services; or

- a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.



We have entered into indemnification agreements with our directors and executive officers that obligate us to indemnify them to the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present and former director or officer in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the provisions in our charter, bylaws and indemnification agreements or that might exist with other companies.

## Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law (the “MGCL”), may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

- "business combination" provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and

- “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have elected to opt-out of these provisions of the MGCL, in the case of the business combination provisions, by resolution of our Board of Directors (provided that such business combination is first approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person), and in the case of the control share provisions, pursuant to a provision in our bylaws. However, our Board of Directors may by resolution elect to repeal the foregoing opt-out from the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt-in to the control share provisions of the MGCL in the future.

We may be subject to adverse legislative or regulatory changes that could reduce the market price of our common stock.

At any time, laws or regulations, or the administrative interpretations of those laws or regulations, which impact our business and Maryland corporations may be amended. In addition, the markets for RMBS and derivatives, including interest rate swaps, have been the subject of intense scrutiny in recent months. We cannot predict when or if any new law, regulation or administrative interpretation, or any amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, revisions to these laws, regulations or administrative interpretations could cause us to change our investments. We could be materially adversely affected by any such change to any existing, or any new, law, regulation or administrative interpretation, which could reduce the market price of our common stock.



# U.S. Federal Income Tax Risks

Your investment has various U.S. federal income tax risks.

This summary of certain tax risks is limited to the federal tax risks addressed below. Additional risks or issues may exist that are not addressed in this Form 10-K and that could affect the federal tax treatment of us or our stockholders. This is not intended to be used and cannot be used by any stockholder to avoid penalties that may be imposed on stockholders under the Code. We strongly urge you to seek advice based on your particular circumstances from an independent tax advisor concerning the effects of federal, state and local income tax law on an investment in common stock and on your individual tax situation.

Our failure to maintain our qualification as a REIT would subject us to U.S. federal income tax, which could adversely affect the value of the shares of our common stock and would substantially reduce the cash available for distribution to our stockholders.

We believe that commencing with our short taxable year ended December 31, 2013, we have been organized and have operated in conformity with the requirements for qualification as a REIT under the Code, and we intend to operate in a manner that will enable us to continue to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will remain qualified as a REIT. Moreover, our qualification and taxation as a REIT will depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the U.S. federal tax laws. Accordingly, given the complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the potential tax treatment of investments we make, and the possibility of future changes in our circumstances, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

If we fail to qualify as a REIT in any calendar year, we would be required to pay U.S. federal income tax (and any applicable state and local tax), including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Further, if we fail to qualify as a REIT, we might need to borrow money or sell assets in order to pay any resulting tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required under U.S. federal tax laws to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT was subject to relief under U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.

If Bimini failed to qualify as a REIT in its 2009 through 2013 taxable years, we would be prevented from electing to qualify as a REIT under applicable Treasury Regulations.

We were formed by Bimini in August 2010. We believe that from the time of our formation until the closing of the public offering of our common stock, we were a “qualified REIT subsidiary” of Bimini. However, under applicable Treasury Regulations, if Bimini failed to qualify as a REIT in its 2009 through 2013 taxable years, unless Bimini’s failure to qualify as a REIT was subject to relief under U.S. federal tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Bimini failed to qualify.

Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.

To qualify as a REIT, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our investment performance.



In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government securities and qualified REIT real estate assets, including Agency RMBS. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, TRS securities, and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more TRSs and no more than 25% of the value of our assets can be represented by debt of “publicly offered REITs” that is not secured by real property or interests in real property. Generally, if we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and becoming subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income. As a result, we may be required to liquidate from our portfolio otherwise attractive investments or contribute such investments to a TRS. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.

To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:

• 85% of our REIT ordinary income for that year;

• 95% of our REIT capital gain net income for that year; and

• any undistributed taxable income from prior years

We intend to distribute our REIT taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax.

Our taxable income may be substantially different than our net income as determined based on generally accepted accounting principles in the United States (“GAAP”), because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, unrealized portfolio gains and losses are included in GAAP net income, but are not included in REIT taxable income. Also, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. To the extent that we generate such non-cash taxable income in a taxable year, we may incur corporate income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to stockholders in that year. In that event, we may be required to use cash reserves, incur debt, sell assets, make taxable distributions of our stock or debt securities or liquidate non-cash assets at rates or at times that we regard as unfavorable to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, any TRSs we form will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.



The failure of Agency RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.

We have entered and intend to continue to enter into repurchase agreements under which we will nominally sell certain of our Agency RMBS to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that for U.S. federal income tax purposes these transactions will be treated as secured debt and we will be treated as the owner of the Agency RMBS that are the subject of any such agreement notwithstanding that such agreement may transfer record ownership of such assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we do not own the Agency RMBS during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.

Our ability to invest in and dispose of forward settling contracts, including TBA securities, could be limited by the requirements necessary to qualify as a REIT, and we could fail to qualify as a REIT as a result of these investments.

We may purchase Agency RMBS through forward settling contracts, including TBA securities transactions. We may recognize income or gains on the disposition of forward settling contracts. For example, rather than take delivery of the Agency RMBS subject to a TBA, we may dispose of the TBA through a "roll" transaction in which we agree to purchase similar securities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. The law is unclear regarding whether forward settling contracts will be qualifying assets for the 75% asset test and whether income and gains from dispositions of forward settling contracts will be qualifying income for the 75% gross income test.

Until we receive a favorable private letter ruling from the IRS or we are advised by counsel that forward settling contracts should be treated as qualifying assets for purposes of the 75% asset test, we will limit our investment in forward settling contracts and any non-qualifying assets to no more than 25% of our total gross assets at the end of any calendar quarter and will limit the forward settling contracts issued by any one issuer to no more than 5% of our total gross assets at the end of any calendar quarter. Further, until we receive a favorable private letter ruling from the IRS or we are advised by counsel that income and gains from the disposition of forward settling contracts should be treated as qualifying income for purposes of the 75% gross income test, we will limit our income and gains from dispositions of forward settling contracts and any non-qualifying income to no more than 25% of our gross income for each calendar year. Accordingly, our ability to purchase Agency RMBS through forward settling contracts and to dispose of forward settling contracts through roll transactions or otherwise, could be limited.

Moreover, even if we are advised by counsel that forward settling contracts should be treated as qualifying assets or that income and gains from dispositions of forward settling contracts should be treated as qualifying income, it is possible that the IRS could successfully take the position that such assets are not qualifying assets and such income is not qualifying income. In that event, we could be subject to a penalty tax or we could fail to qualify as a REIT if (i) the value of our forward settling contracts together with our non-qualifying assets for the 75% asset test, exceeded 25% of our total gross assets at the end of any calendar quarter, (ii) the value of our forward settling contracts, including TBAs, issued by any one issuer exceeds 5% of our total assets at the end of any calendar quarter, or (iii) our income and gains from the disposition of forward settling contracts together with our non-qualifying income for the 75% gross income test, exceeded 25% of our gross income for any taxable year.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code substantially limit our ability to hedge. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.



Our ownership of and relationship with any TRSs that we form will be limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation (other than a REIT) of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of a REIT’s total assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s length basis. Any domestic TRS that we may form will pay U.S. federal, state and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but is not required to be distributed to us unless necessary to maintain our REIT qualification.

We may pay taxable dividends in cash and our common stock, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We may make taxable dividends that are payable partly in cash and partly in our common stock. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by the taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS previously issued a revenue procedure authorizing publicly traded REITs to make elective cash/stock dividends, but that revenue procedure has expired. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock. Although we have no current intention of paying dividends in our own stock, if in the future we choose to pay dividends in our common stock, our stockholders may be required to pay tax in excess of the cash that they receive. If a U.S. stockholder sells the shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we pay dividends in our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Our ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their stock.

In order for us to qualify as a REIT for each taxable year after 2013, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to assist us in qualifying as a REIT, among other purposes, ownership of our stock by any person is generally limited to 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our stock.

These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their common stock over the then-prevailing market price or which holders might believe to be otherwise in their best interests.



Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is lower than ordinary income tax rates. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders.

We currently do not intend to enter into any transactions that could result in our, or a portion of our assets, being treated as a taxable mortgage pool for U.S. federal income tax purposes. If we enter into such a transaction in the future, we will be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as “excess inclusion income,” that is allocable to the percentage of our stock held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans, charitable remainder trusts and government entities). In that case, under our charter, we will reduce distributions to such stockholders by the amount of tax paid by us that is attributable to such stockholder’s ownership.

If we were to realize excess inclusion income, IRS guidance indicates that the excess inclusion income would be allocated among our stockholders in proportion to our dividends paid. Excess inclusion income cannot be offset by losses of our stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a foreign person, it would be subject to U.S. federal income tax at the maximum tax rate and withholding will be required on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty.

Our recognition of “phantom” income may reduce a stockholder’s after-tax return on an investment in our common stock.

We may recognize taxable income in excess of our economic income, known as phantom income, in the first years that we hold certain investments, and experience an offsetting excess of economic income over our taxable income in later years. As a result, stockholders at times may be required to pay U.S. federal income tax on distributions that economically represent a return of capital rather than a dividend. These distributions would be offset in later years by distributions representing economic income that would be treated as returns of capital for U.S. federal income tax purposes. Taking into account the time value of money, this acceleration of U.S. federal income tax liabilities may reduce a stockholder’s after-tax return on his or her investment to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate phantom income.



Liquidation of our assets may jeopardize our REIT qualification.

To qualify and maintain our qualification as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements, thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.

Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, the value of such securities, and also to what extent those securities constitute qualified real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% gross income test. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

## ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

## ITEM 2. PROPERTIES

We do not own any real property. Our offices are owned by Bimini, the parent of our Manager, and are located at 3305 Flamingo Drive, Vero Beach, Florida 32963. We consider this property to be adequate for our business as currently conducted. Our telephone number is (772) 231-1400.

## ITEM 3. LEGAL PROCEEDINGS

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

## ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.



## ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

## Market Information

Our common stock began trading publicly on the NYSE MKT under the trading symbol "ORC" on February 14, 2013. There was no established public market for our common stock prior to February 14, 2013. Effective as of October 8, 2014, our common stock began trading on the NYSE under the symbol "ORC." As of February 18, 2016, we had 21,752,510 shares of common stock issued and outstanding which were held by 6 shareholders of record and 13,051 beneficial owners whose shares were held in "street name" by brokers and depository institutions.

The following table is a summary of historical price information and dividends declared and paid per common share.

<table><tr><td></td><td>High</td><td>Low</td><td>Close</td><td>Dividends Declared</td></tr><tr><td>2015</td><td></td><td></td><td></td><td></td></tr><tr><td>First quarter</td><td>$ 14.25</td><td>$ 12.75</td><td>$ 13.24</td><td>$ 0.54</td></tr><tr><td>Second quarter</td><td>14.18</td><td>11.01</td><td>11.21</td><td>0.54</td></tr><tr><td>Third quarter</td><td>11.63</td><td>7.13</td><td>9.25</td><td>0.42</td></tr><tr><td>Fourth quarter</td><td>10.21</td><td>8.30</td><td>9.93</td><td>0.42</td></tr><tr><td>2014</td><td></td><td></td><td></td><td></td></tr><tr><td>First quarter</td><td>$ 14.40</td><td>$ 11.70</td><td>$ 11.88</td><td>$ 0.54</td></tr><tr><td>Second quarter</td><td>13.30</td><td>11.88</td><td>13.06</td><td>0.54</td></tr><tr><td>Third quarter</td><td>14.45</td><td>13.01</td><td>13.27</td><td>0.54</td></tr><tr><td>Fourth quarter</td><td>14.99</td><td>12.50</td><td>13.05</td><td>0.54</td></tr></table>

## Dividend Distribution Policy

We intend to continue to make regular monthly cash distributions to our stockholders, as more fully described below. To qualify as a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes pursuant to GAAP.

Any additional distributions we make will be authorized by and at the discretion of our Board of Directors based upon a variety of factors deemed relevant by our directors, which may include:

• actual results of operations;

• our financial condition;

• our level of retained cash flows;

• our capital requirements;

• any debt service requirements;

• our taxable income;

• the annual distribution requirements under the REIT provisions of the Code;

• applicable provisions of Maryland law; and

• other factors that our Board of Directors may deem relevant.



We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future.

Our charter authorizes us to issue preferred stock that could have a preference over our common stock with respect to distributions. We currently have no intention to issue any preferred stock, but if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock.

Our ability to make distributions to our stockholders will depend upon the performance of our investment portfolio, and, in turn, upon our Manager’s management of our business. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including selling certain of our assets, borrowing funds or using a portion of the net proceeds we receive in this offering or future offerings (and thus all or a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes). We also may elect to pay all or a portion of any distribution in the form of a taxable distribution of our stock or debt securities. In addition, our Board of Directors may change our distribution policy in the future.

## Performance Graph

Set forth below is a graph comparing the yearly percentage change in the cumulative total return on our common stock, with the cumulative total return of the S&P 500 Total Return Index, the FTSE NAREIT Mortgage REIT Index and an index of selected issuers in our Agency REIT Peer group (composed of American Capital Agency Corp., Annaly Capital Management, Inc., Anworth Mortgage Asset Corporation, Armour Residential REIT, Inc., Capstead Mortgage Corporation, CYS Investments, Inc. and Hatteras Financial Corp.) for the period beginning February 13, 2013 (the date of our IPO) and ending December 31, 2015 assuming the investment of $100 on February 13, 2013 and the reinvestment of dividends. The information in the performance chart and the table below has been obtained from sources believed to be reliable, but its accuracy nor its completeness can be guaranteed. The historical information set forth below is not necessarily indicative of future performance.



<table><tr><td></td><td>February 13, 2013</td><td>December 31, 2013</td><td>December 31, 2014</td><td>December 31, 2015</td></tr><tr><td>Orchid Island Capital, Inc.</td><td>100.00</td><td>96.94</td><td>114.56</td><td>103.34</td></tr><tr><td>Agency REIT Peer Group</td><td>100.00</td><td>75.33</td><td>92.85</td><td>82.30</td></tr><tr><td>NAREIT Mortgage REIT TRR Index</td><td>100.00</td><td>87.97</td><td>103.71</td><td>94.50</td></tr><tr><td>S&amp;P 500 Total Return Index</td><td>100.00</td><td>123.87</td><td>140.83</td><td>142.78</td></tr></table>



## Securities Authorized for Issuance under Equity Compensation Plans

In October 2012, our Board of Directors adopted and Bimini, then our sole stockholder, approved, our 2012 Equity Incentive Plan (the "Incentive Plan"). 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 our Board of Directors except that our Board of Directors will administer awards made to directors who are not employees of us or our 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 our common stock that may be issued under the Incentive Plan.

The following table provides information as of December 31, 2015 regarding the number of shares of common stock that may be issued under our Incentive Plan.

<table><tr><td>Plan Category</td><td>Total number of securities to be issued upon exercise of outstanding options, warrants and rights (a)</td><td>Weighted average exercise price of outstanding options, warrants and rights (b)</td><td>Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))</td></tr><tr><td>Equity compensation plans approved by security holders</td><td>23,508</td><td>-</td><td>3,932,113(2)</td></tr><tr><td>Equity compensation plans not approved by security holders (1)</td><td>-</td><td>-</td><td>-</td></tr><tr><td>Total</td><td>23,508</td><td>-</td><td>3,932,113</td></tr></table>

(1) We do not have any equity compensation plans that have not been approved by our stockholders.

(2) Represents the maximum number of shares remaining available for future issuance under the terms of the Incentive Plan.

## Unregistered Sales of Equity Securities

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



## Issuer Purchases of Equity Securities

The following table shows the Company’s repurchases of its common stock for each calendar month in the quarter ended December 31, 2015.

<table><tr><td></td><td>Total Number</td><td>Weighted Average</td><td>Maximum Number of Shares That May Yet Be Repurchased Under the Authorization</td></tr><tr><td></td><td>of Shares Repurchased (1)</td><td>Price Paid Per Share</td><td></td></tr><tr><td>October</td><td>127,823</td><td>$ 9.20</td><td>802,457</td></tr><tr><td>November</td><td>-</td><td>-</td><td>802,457</td></tr><tr><td>December</td><td>18,700</td><td>8.70</td><td>783,757</td></tr><tr><td>Totals / Weighted Average</td><td>146,523</td><td>$ 9.14</td><td></td></tr></table>

(1) All shares were purchased under an authorization covering up to 2,000,000 shares of common stock approved by the Board of Directors on July 29, 2015. Unless modified or revoked by the Board, the authorization does not expire.



## ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from our audited financial statements for the four years ended December 31, 2015. The selected financial data should be read in conjunction with the more detailed information contained in the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.

($ in thousands, except per share data)

<table><tr><td rowspan="2"></td><td colspan="5">December 31,</td></tr><tr><td>2015</td><td>2014</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Balance Sheet Data:</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$ 2,158,010</td><td>$ 1,549,171</td><td>$ 351,223</td><td>$ 115,380</td><td></td></tr><tr><td>Total assets</td><td>$ 2,241,837</td><td>$ 1,657,808</td><td>$ 363,576</td><td>$ 118,861</td><td></td></tr><tr><td>Borrowings</td><td>$ 1,986,313</td><td>$ 1,436,651</td><td>$ 318,557</td><td>$ 103,941</td><td></td></tr><tr><td>Total liabilities</td><td>$ 1,988,582</td><td>$ 1,439,730</td><td>$ 318,811</td><td>$ 104,136</td><td></td></tr><tr><td>Total stockholders&#x27; equity</td><td>$ 253,255</td><td>$ 218,078</td><td>$ 44,765</td><td>$ 14,725</td><td></td></tr><tr><td>Book value per common share</td><td>$ 11.64</td><td>$ 13.06</td><td>$ 13.40</td><td>$ 95.55</td><td></td></tr><tr><td></td><td colspan="5">Year Ended December 31,</td></tr><tr><td></td><td>2015</td><td>2014</td><td>2013</td><td>2012</td><td></td></tr><tr><td>Income Statement Data</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Interest income</td><td>$ 68,811</td><td>$ 31,804</td><td>$ 9,199</td><td>$ 2,698</td><td></td></tr><tr><td>Interest expense</td><td>(7,271)</td><td>(3,031)</td><td>(1,126)</td><td>(277)</td><td></td></tr><tr><td>Net interest income</td><td>61,540</td><td>28,773</td><td>8,073</td><td>2,421</td><td></td></tr><tr><td>(Losses) gains</td><td>(52,575)</td><td>234</td><td>(7,103)</td><td>(1,154)</td><td></td></tr><tr><td>Expenses</td><td>7,894</td><td>4,488</td><td>1,668</td><td>733</td><td></td></tr><tr><td>Net income</td><td>$ 1,071</td><td>$ 24,519</td><td>$ (698)</td><td>$ 534</td><td></td></tr><tr><td>Weighted average shares outstanding</td><td>20,266,706</td><td>9,890,058</td><td>3,011,912</td><td>981,665</td><td></td></tr><tr><td>Basic and diluted net income per share</td><td>$ 0.05</td><td>$ 2.48</td><td>$ (0.23)</td><td>$ 0.54</td><td></td></tr><tr><td>Dividends declared per share</td><td>$ 1.92</td><td>$ 2.16</td><td>$ 1.40</td><td>$ -</td><td></td></tr><tr><td>Other Data (unaudited)</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Average RMBS (1)</td><td>$ 1,955,673</td><td>$ 937,373</td><td>$ 316,124</td><td>$ 74,904</td><td></td></tr><tr><td>Average borrowings (1)</td><td>$ 1,782,086</td><td>$ 892,132</td><td>$ 284,522</td><td>$ 63,880</td><td></td></tr><tr><td>Average stockholders&#x27; equity (1)</td><td>$ 251,607</td><td>$ 134,327</td><td>$ 42,955</td><td>$ 14,419</td><td></td></tr><tr><td>Leverage ratio (at period end) (2)</td><td>7.9:1</td><td>6.6:1</td><td>7.1:1</td><td>7.1:1</td><td></td></tr><tr><td>Average yield on RMBS (3)</td><td>3.52%</td><td>3.39%</td><td>2.91%</td><td>3.60%</td><td></td></tr><tr><td>Average cost of funds (3)</td><td>0.41%</td><td>0.34%</td><td>0.40%</td><td>0.43%</td><td></td></tr><tr><td>Average economic cost of funds (4)</td><td>0.58%</td><td>0.36%</td><td>0.44%</td><td>0.60%</td><td></td></tr><tr><td>Average interest rate spread (5)</td><td>3.11%</td><td>3.05%</td><td>2.51%</td><td>3.17%</td><td></td></tr><tr><td>Average economic interest rate spread (6)</td><td>2.94%</td><td>3.03%</td><td>2.47%</td><td>3.00%</td><td></td></tr></table>

(1) Average RMBS, borrowings and stockholders' equity balances are calculated as the average of the quarterly averages.

(2) The leverage ratio is calculated by dividing total ending liabilities by ending stockholders' equity.

(3) Portfolio yields and costs of funds are calculated based on the average balances of the underlying investment portfolio/borrowing balances and are annualized for the quarterly periods presented.

(4) Represents interest cost of our borrowings and the effect of Eurodollar and T-Note futures contracts and options to enter into interest rate swaps (“interest rate swaptions”) attributed to the period related to hedging activities, divided by average borrowings.

(5) Average interest rate spread is calculated by subtracting average cost of funds from average yield on RMBS.

(6) Average economic interest rate spread is calculated by subtracting average economic cost of funds from average yield on RMBS.



## ITEM 7. 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 consolidated financial statements and notes to those statements included in Item 8 of this Form 10-K. 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 this 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 (as defined in the Code) to our stockholders and maintain our REIT qualification.

The Company’s common stock trades on the New York Stock Exchange (“NYSE”) 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 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 December 31, 2015, we had issued a total of 6,221,102 shares under the March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $83.1 million, net of commissions and fees.

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice. Through December 31, 2015, we repurchased a total of 1,216,243 shares at an aggregate cost of approximately $10.8 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; and

• prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates;

• 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 year ended December 31, 2015, as compared to the Company’s results of operations for the years ended December 31, 2014 and 2013.



## Net Income (Loss) Summary

Net income for the year ended December 31, 2015 was $1.1 million, or $0.05 per share. Net income for the year ended December 31, 2014 was $24.5 million, or $2.48 per share. Net loss for the year ended December 31, 2013 was $0.7 million, or $0.23 per share. The components of net income (loss) for the years ended December 31, 2015, 2014 and 2013 are presented in the table below:

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Interest income</td><td>$ 68,811</td><td>$ 31,804</td><td>$ 9,199</td></tr><tr><td>Interest expense</td><td>(7,271)</td><td>(3,031)</td><td>(1,126)</td></tr><tr><td>Net interest income</td><td>61,540</td><td>28,773</td><td>8,073</td></tr><tr><td>(Losses) gains on RMBS and derivative contracts</td><td>(52,575)</td><td>234</td><td>(7,103)</td></tr><tr><td>Net portfolio income</td><td>8,965</td><td>29,007</td><td>970</td></tr><tr><td>Expenses</td><td>(7,894)</td><td>(4,488)</td><td>(1,668)</td></tr><tr><td>Net income (loss)</td><td>$ 1,071</td><td>$ 24,519</td><td>$ (698)</td></tr></table>

## GAAP and Non-GAAP Reconciliation

## Economic Interest Expense and Economic Net Interest Income

To date, the Company has used derivatives, specifically Eurodollar and Treasury Note (“T-Note”) 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 Eurodollar and T-Note futures contracts in place. We previously entered into interest rate swaption agreements that gave us the option to enter into swaps covering future periods. During 2015, we entered into forward settling “to-be-announced” (“TBA”) securities transactions, which is a to-be-issued Agency RMBS with certain terms, that meet the definition of a derivative under GAAP. We have not entered into these TBA securities transactions 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 consolidated 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 December 31, 2015, the Company had Eurodollar and T-Note futures contracts in place through 2019 and 2026, respectively, and an interest rate swaption agreement in place covering periods beginning in 2016 through 2021. 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 borrowings 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 consolidated 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 consolidated 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 years ended December 31, 2015, 2014 and 2013 and for each quarter during 2015, 2014 and 2013.

Gains (Losses) on Derivative Instruments

<table><tr><td rowspan="2">(in thousands)</td><td colspan="5">Recognized in Income Statement (GAAP)</td><td colspan="2">TBA Securities Income</td><td colspan="2">Funding Hedges</td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td><td>Attributed to Current Period (Non-GAAP)</td><td>Attributed to Future Periods (Non-GAAP)</td><td></td></tr><tr><td>Three Months Ended</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td></td><td>$ 12,770</td><td>$ 362</td><td>$ (1,196)</td><td>$ 13,604</td><td></td><td></td><td></td><td></td></tr><tr><td>September 30, 2015</td><td></td><td>(22,506)</td><td>55</td><td>(881)</td><td>(21,680)</td><td></td><td></td><td></td><td></td></tr><tr><td>June 30, 2015</td><td></td><td>(803)</td><td>(88)</td><td>(595)</td><td>(120)</td><td></td><td></td><td></td><td></td></tr><tr><td>March 31, 2015</td><td></td><td>(12,351)</td><td>57</td><td>(306)</td><td>(12,102)</td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2014</td><td></td><td>(9,562)</td><td>-</td><td>(145)</td><td>(9,417)</td><td></td><td></td><td></td><td></td></tr><tr><td>September 30, 2014</td><td></td><td>3,057</td><td>-</td><td>(25)</td><td>3,082</td><td></td><td></td><td></td><td></td></tr><tr><td>June 30, 2014</td><td></td><td>(5,728)</td><td>-</td><td>(3)</td><td>(5,725)</td><td></td><td></td><td></td><td></td></tr><tr><td>March 31, 2014</td><td></td><td>(1,693)</td><td>-</td><td>(30)</td><td>(1,663)</td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2013</td><td></td><td>732</td><td>-</td><td>(42)</td><td>774</td><td></td><td></td><td></td><td></td></tr><tr><td>September 30, 2013</td><td></td><td>(2,272)</td><td>-</td><td>(28)</td><td>(2,244)</td><td></td><td></td><td></td><td></td></tr><tr><td>June 30, 2013</td><td></td><td>6,852</td><td>-</td><td>(4)</td><td>6,856</td><td></td><td></td><td></td><td></td></tr><tr><td>March 31, 2013</td><td></td><td>(484)</td><td>-</td><td>(65)</td><td>(419)</td><td></td><td></td><td></td><td></td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td></td><td>$ (22,890)</td><td>$ 386</td><td>$ (2,978)</td><td>$ (20,298)</td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2014</td><td></td><td>(13,926)</td><td>-</td><td>(203)</td><td>(13,723)</td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2013</td><td></td><td>4,828</td><td>-</td><td>(139)</td><td>4,967</td><td></td><td></td><td></td><td></td></tr></table>



Economic Interest Expense and Economic Net Interest Income

<table><tr><td rowspan="2">(in thousands)</td><td rowspan="2"></td><td colspan="6">Interest Expense on Borrowings</td></tr><tr><td rowspan="2">GAAP Interest Expense</td><td rowspan="2">Gains (Losses) on Derivative Instruments Attributed to Current Period (1)</td><td rowspan="2">Economic Interest Expense (2)</td><td colspan="3">Net Interest Income</td></tr><tr><td>Three Months Ended</td><td>Interest Income</td><td>Economic Net Interest Income</td><td>Three Months Ended</td></tr><tr><td>December 31, 2015</td><td>$ 19,092</td><td>$ 2,371</td><td>$ (1,196)</td><td>$ 3,567</td><td>$ 16,721</td><td>$ 15,525</td><td></td></tr><tr><td>September 30, 2015</td><td>18,352</td><td>2,037</td><td>(881)</td><td>2,918</td><td>16,315</td><td>15,434</td><td></td></tr><tr><td>June 30, 2015</td><td>16,753</td><td>1,567</td><td>(595)</td><td>2,162</td><td>15,186</td><td>14,591</td><td></td></tr><tr><td>March 31, 2015</td><td>14,614</td><td>1,296</td><td>(306)</td><td>1,602</td><td>13,318</td><td>13,012</td><td></td></tr><tr><td>December 31, 2014</td><td>12,146</td><td>1,126</td><td>(145)</td><td>1,271</td><td>11,020</td><td>10,875</td><td></td></tr><tr><td>September 30, 2014</td><td>9,286</td><td>818</td><td>(25)</td><td>843</td><td>8,468</td><td>8,443</td><td></td></tr><tr><td>June 30, 2014</td><td>6,589</td><td>676</td><td>(3)</td><td>679</td><td>5,913</td><td>5,910</td><td></td></tr><tr><td>March 31, 2014</td><td>3,783</td><td>411</td><td>(30)</td><td>441</td><td>3,372</td><td>3,342</td><td></td></tr><tr><td>December 31, 2013</td><td>2,806</td><td>309</td><td>(42)</td><td>351</td><td>2,497</td><td>2,455</td><td></td></tr><tr><td>September 30, 2013</td><td>2,551</td><td>294</td><td>(28)</td><td>322</td><td>2,257</td><td>2,229</td><td></td></tr><tr><td>June 30, 2013</td><td>2,429</td><td>322</td><td>(4)</td><td>326</td><td>2,107</td><td>2,103</td><td></td></tr><tr><td>March 31, 2013</td><td>1,413</td><td>201</td><td>(65)</td><td>266</td><td>1,212</td><td>1,147</td><td></td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$ 68,811</td><td>$ 7,271</td><td>$ (2,978)</td><td>$ 10,249</td><td>$ 61,540</td><td>$ 58,562</td><td></td></tr><tr><td>December 31, 2014</td><td>31,804</td><td>3,031</td><td>(203)</td><td>3,234</td><td>28,773</td><td>28,570</td><td></td></tr><tr><td>December 31, 2013</td><td>9,199</td><td>1,126</td><td>(139)</td><td>1,265</td><td>8,073</td><td>7,934</td><td></td></tr></table>

(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 year ended December 31, 2015, we generated $61.5 million of net interest income, consisting of $68.8 million of interest income from RMBS assets offset by $7.3 million of interest expense on borrowings. For the year ended December 31, 2014, we generated $28.8 million of net interest income, consisting of $31.8 million of interest income from RMBS assets offset by $3.0 million of interest expense on borrowings. The $37.0 million increase in interest income and $4.2 million increase in interest expense for the year ended December 31, 2015 primarily reflects the continued growth of our portfolio fueled by our capital raising activities throughout 2014 and through the first six months of 2015.

For the year ended December 31, 2013, we generated $8.1 million of net interest income, consisting of $9.2 million of interest income from RMBS assets offset by $1.1 million of interest expense on borrowings. The $22.6 million increase in interest income and $1.9 million increase in interest expense for the year ended December 31, 2014 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 borrowings for the years ended December 31, 2015, 2014 and 2013 was $10.2 million, $3.2 million and $1.3 million, respectively, resulting in $58.6 million, $28.6 million and $7.9 million of economic net interest income, respectively.



The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2015, 2014 and 2013 and for the years ended December 31, 2015, 2014 and 2013 on both a GAAP and economic basis.

<table><tr><td rowspan="3">(\( in thousands)</td><td colspan="9">Average</td></tr><tr><td colspan="2">Average</td><td colspan="2">Yield on</td><td rowspan="2">Average</td><td colspan="2">Interest Expense</td><td colspan="2">Average Cost of Funds</td></tr><tr><td>RMBS</td><td colspan="2">Interest</td><td>Average</td><td>Repurchase</td><td>GAAP</td><td>Economic</td><td>GAAP</td></tr><tr><td></td><td>Held (1)</td><td>Income</td><td>RMBS</td><td>RMBS</td><td>Agreements</td><td>(1)</td><td>Basis</td><td>Basis (2)</td><td>Basis (3)</td></tr><tr><td>Three Months Ended</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$ 2,137,810</td><td>$ 19,092</td><td>3.57%</td><td>$ 1,964,806</td><td>$ 2,371</td><td>$ 3,567</td><td>0.48%</td><td>0.73%</td><td></td></tr><tr><td>September 30, 2015</td><td>2,146,240</td><td>18,352</td><td>3.42%</td><td>1,978,685</td><td>2,037</td><td>2,918</td><td>0.41%</td><td>0.59%</td><td></td></tr><tr><td>June 30, 2015</td><td>1,925,746</td><td>16,753</td><td>3.48%</td><td>1,736,781</td><td>1,567</td><td>2,162</td><td>0.36%</td><td>0.50%</td><td></td></tr><tr><td>March 31, 2015</td><td>1,612,896</td><td>14,614</td><td>3.62%</td><td>1,448,071</td><td>1,296</td><td>1,602</td><td>0.36%</td><td>0.44%</td><td></td></tr><tr><td>December 31, 2014</td><td>1,362,352</td><td>12,146</td><td>3.57%</td><td>1,346,314</td><td>1,126</td><td>1,271</td><td>0.33%</td><td>0.38%</td><td></td></tr><tr><td>September 30, 2014</td><td>1,025,768</td><td>9,286</td><td>3.62%</td><td>1,019,839</td><td>818</td><td>843</td><td>0.32%</td><td>0.33%</td><td></td></tr><tr><td>June 30, 2014</td><td>811,881</td><td>6,589</td><td>3.25%</td><td>717,474</td><td>676</td><td>679</td><td>0.38%</td><td>0.38%</td><td></td></tr><tr><td>March 31, 2014</td><td>549,490</td><td>3,783</td><td>2.75%</td><td>484,902</td><td>411</td><td>441</td><td>0.34%</td><td>0.36%</td><td></td></tr><tr><td>December 31, 2013</td><td>341,505</td><td>2,806</td><td>3.29%</td><td>310,107</td><td>309</td><td>351</td><td>0.40%</td><td>0.45%</td><td></td></tr><tr><td>September 30, 2013</td><td>335,467</td><td>2,551</td><td>3.04%</td><td>305,196</td><td>294</td><td>322</td><td>0.39%</td><td>0.42%</td><td></td></tr><tr><td>June 30, 2013</td><td>349,704</td><td>2,429</td><td>2.78%</td><td>312,591</td><td>322</td><td>326</td><td>0.41%</td><td>0.42%</td><td></td></tr><tr><td>March 31, 2013</td><td>237,820</td><td>1,413</td><td>2.38%</td><td>210,194</td><td>201</td><td>266</td><td>0.38%</td><td>0.51%</td><td></td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$ 1,955,673</td><td>$ 68,811</td><td>3.52%</td><td>$ 1,782,086</td><td>$ 7,271</td><td>$ 10,249</td><td>0.41%</td><td>0.58%</td><td></td></tr><tr><td>December 31, 2014</td><td>937,373</td><td>31,804</td><td>3.39%</td><td>892,132</td><td>3,031</td><td>3,234</td><td>0.34%</td><td>0.36%</td><td></td></tr><tr><td>December 31, 2013</td><td>316,124</td><td>9,199</td><td>2.91%</td><td>284,522</td><td>1,126</td><td>1,265</td><td>0.40%</td><td>0.44%</td><td></td></tr></table>

<table><tr><td rowspan="3">Three Months Ended</td><td colspan="2">Net Interest Income</td><td colspan="2">Net Interest Spread</td></tr><tr><td>GAAP</td><td>Economic</td><td>GAAP</td><td>Economic</td></tr><tr><td>Basis</td><td>Basis (2)</td><td>Basis</td><td>Basis (4)</td></tr><tr><td>December 31, 2015</td><td>$</td><td>16,721</td><td>$</td><td>15,525</td></tr><tr><td>September 30, 2015</td><td></td><td>16,316</td><td></td><td>15,434</td></tr><tr><td>June 30, 2015</td><td></td><td>15,185</td><td></td><td>14,591</td></tr><tr><td>March 31, 2015</td><td></td><td>13,318</td><td></td><td>13,012</td></tr><tr><td>December 31, 2014</td><td></td><td>11,020</td><td></td><td>10,875</td></tr><tr><td>September 30, 2014</td><td></td><td>8,467</td><td></td><td>8,443</td></tr><tr><td>June 30, 2014</td><td></td><td>5,914</td><td></td><td>5,910</td></tr><tr><td>March 31, 2014</td><td></td><td>3,372</td><td></td><td>3,342</td></tr><tr><td>December 31, 2013</td><td></td><td>2,497</td><td></td><td>2,455</td></tr><tr><td>September 30, 2013</td><td></td><td>2,257</td><td></td><td>2,229</td></tr><tr><td>June 30, 2013</td><td></td><td>2,107</td><td></td><td>2,103</td></tr><tr><td>March 31, 2013</td><td></td><td>1,212</td><td></td><td>1,147</td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$</td><td>61,540</td><td>$</td><td>58,562</td></tr><tr><td>December 31, 2014</td><td></td><td>28,773</td><td></td><td>28,570</td></tr><tr><td>December 31, 2013</td><td></td><td>8,073</td><td></td><td>7,934</td></tr></table>

(1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 51-53 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. Average balances for the year to date periods are calculated as the average of the average quarterly periods.

(2) Economic interest expense and economic net interest income presented in the table above and the tables on page 51 includes the effect of our derivative instrument hedges for only the periods presented.

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

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



## Interest Expense and the Cost of Funds

We had average outstanding borrowings of $1,782.1 million and $892.1 million and total interest expense of $7.3 million and $3.0 million for the years ended December 31, 2015 and 2014, respectively. Our average cost of funds was 0.41% and 0.34% for years ended December 31, 2015 and 2014, respectively. There was a 7 basis point increase in the average cost of funds and a $890.0 million increase in average outstanding borrowings during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase in average outstanding borrowings, and the corresponding increase in interest expense, reflects the leveraging of the proceeds of our capital raising activities.

For the year ended December 31, 2013, we had average outstanding borrowings of $284.5 million and total interest expense of $1.1 million, resulting in an average cost of funds of 0.40%. There was a 6 basis point decrease in the average cost of funds and a $607.6 million increase in average outstanding borrowings during the year ended December 31, 2014 as compared to the year ended December 31, 2013. The increase in average outstanding borrowings, and the corresponding increase in interest expense, reflects the leveraging of the proceeds of our capital raising activities.

Our economic interest expense was $10.2 million, $3.2 million and $1.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. There was a 22 basis point increase in the average economic cost of funds to 0.58% for the year ended December 31, 2015 from 0.36% for the year ended December 31, 2014. There was an 8 basis point decrease in the average economic cost of funds to 0.36% for the year ended December 31, 2014 from 0.44% for the year ended December 31, 2013.

Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 20 basis points above average one-month LIBOR and 17 basis points below average six-month LIBOR for the quarter ended December 31, 2015. Our average economic cost of funds was 45 basis points above average one-month LIBOR and 8 basis points above average six-month LIBOR for the quarter ended December 31, 2015. The average term to maturity of the outstanding repurchase agreements was 15 days and 27 days at December 31, 2015 and 2014, respectively.

The tables below presents the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2015, 2014 and 2013 and for the years ended December 31, 2015, 2014 and 2013 on both a GAAP and economic basis.

<table><tr><td rowspan="3">(\( in thousands)</td><td rowspan="3">Average Balance of Borrowings</td><td colspan="3">Interest Expense</td><td colspan="2">Average Cost of Funds</td></tr><tr><td colspan="2">GAAP</td><td rowspan="2">Economic Basis</td><td rowspan="2">GAAP Basis</td><td rowspan="2">Economic Basis</td></tr><tr><td>GAAP</td><td>Economic Basis</td></tr><tr><td>Three Months Ended</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$ 1,964,806</td><td>$ 2,371</td><td>$ 3,567</td><td>0.48%</td><td>0.73%</td><td></td></tr><tr><td>September 30, 2015</td><td>1,978,685</td><td>2,037</td><td>2,918</td><td>0.41%</td><td>0.59%</td><td></td></tr><tr><td>June 30, 2015</td><td>1,736,781</td><td>1,567</td><td>2,162</td><td>0.36%</td><td>0.50%</td><td></td></tr><tr><td>March 31, 2015</td><td>1,448,071</td><td>1,296</td><td>1,602</td><td>0.36%</td><td>0.44%</td><td></td></tr><tr><td>December 31, 2014</td><td>1,346,314</td><td>1,126</td><td>1,271</td><td>0.33%</td><td>0.38%</td><td></td></tr><tr><td>September 30, 2014</td><td>1,019,839</td><td>818</td><td>843</td><td>0.32%</td><td>0.33%</td><td></td></tr><tr><td>June 30, 2014</td><td>717,474</td><td>676</td><td>679</td><td>0.38%</td><td>0.38%</td><td></td></tr><tr><td>March 31, 2014</td><td>484,902</td><td>411</td><td>441</td><td>0.34%</td><td>0.36%</td><td></td></tr><tr><td>December 31, 2013</td><td>310,107</td><td>309</td><td>351</td><td>0.40%</td><td>0.45%</td><td></td></tr><tr><td>September 30, 2013</td><td>305,196</td><td>294</td><td>322</td><td>0.39%</td><td>0.42%</td><td></td></tr><tr><td>June 30, 2013</td><td>312,591</td><td>322</td><td>326</td><td>0.41%</td><td>0.42%</td><td></td></tr><tr><td>March 31, 2013</td><td>210,194</td><td>201</td><td>266</td><td>0.38%</td><td>0.51%</td><td></td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>$ 1,782,086</td><td>$ 7,271</td><td>$ 10,249</td><td>0.41%</td><td>0.58%</td><td></td></tr><tr><td>December 31, 2014</td><td>892,132</td><td>3,031</td><td>3,234</td><td>0.34%</td><td>0.36%</td><td></td></tr><tr><td>December 31, 2013</td><td>284,522</td><td>1,126</td><td>1,265</td><td>0.40%</td><td>0.44%</td><td></td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="2">Average LIBOR</td><td colspan="2">Average GAAP Cost of Funds Relative to Average</td><td colspan="2">Average Economic Cost of Funds Relative to Average</td></tr><tr><td>One-Month</td><td>Six-Month</td><td>One-Month LIBOR</td><td>Six-Month LIBOR</td><td>One-Month LIBOR</td><td>Six-Month LIBOR</td></tr><tr><td>Three Months Ended,</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>0.28%</td><td>0.65%</td><td>0.20%</td><td>(0.17)%</td><td>0.45%</td><td>0.08%</td></tr><tr><td>September 30, 2015</td><td>0.19%</td><td>0.49%</td><td>0.22%</td><td>(0.08)%</td><td>0.40%</td><td>0.10%</td></tr><tr><td>June 30, 2015</td><td>0.18%</td><td>0.40%</td><td>0.18%</td><td>(0.04)%</td><td>0.32%</td><td>0.10%</td></tr><tr><td>March 31, 2015</td><td>0.17%</td><td>0.35%</td><td>0.19%</td><td>0.01%</td><td>0.27%</td><td>0.09%</td></tr><tr><td>December 31, 2014</td><td>0.16%</td><td>0.34%</td><td>0.17%</td><td>(0.01)%</td><td>0.22%</td><td>0.04%</td></tr><tr><td>September 30, 2014</td><td>0.15%</td><td>0.33%</td><td>0.17%</td><td>(0.01)%</td><td>0.18%</td><td>0.00%</td></tr><tr><td>June 30, 2014</td><td>0.15%</td><td>0.33%</td><td>0.23%</td><td>0.05%</td><td>0.23%</td><td>0.05%</td></tr><tr><td>March 31, 2014</td><td>0.16%</td><td>0.34%</td><td>0.18%</td><td>0.00%</td><td>0.20%</td><td>0.02%</td></tr><tr><td>December 31, 2013</td><td>0.17%</td><td>0.36%</td><td>0.23%</td><td>0.04%</td><td>0.28%</td><td>0.09%</td></tr><tr><td>September 30, 2013</td><td>0.19%</td><td>0.40%</td><td>0.20%</td><td>(0.01)%</td><td>0.23%</td><td>0.02%</td></tr><tr><td>June 30, 2013</td><td>0.20%</td><td>0.43%</td><td>0.21%</td><td>(0.02)%</td><td>0.22%</td><td>(0.01)%</td></tr><tr><td>March 31, 2013</td><td>0.21%</td><td>0.48%</td><td>0.17%</td><td>(0.10)%</td><td>0.30%</td><td>0.03%</td></tr><tr><td>Years Ended</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 31, 2015</td><td>0.21%</td><td>0.47%</td><td>0.20%</td><td>(0.06)%</td><td>0.37%</td><td>0.11%</td></tr><tr><td>December 31, 2014</td><td>0.16%</td><td>0.33%</td><td>0.18%</td><td>0.01%</td><td>0.20%</td><td>0.03%</td></tr><tr><td>December 31, 2013</td><td>0.19%</td><td>0.42%</td><td>0.21%</td><td>(0.02)%</td><td>0.25%</td><td>0.02%</td></tr></table>

## Gains or Losses

The table below presents our gains or losses for the years ended December 31, 2015, 2014 and 2013.

<table><tr><td>(in thousands)</td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Realized (losses) gains on sales of RMBS</td><td>$ (1,411)</td><td>$ 2,791</td><td>$ (1,198)</td></tr><tr><td>Unrealized (losses) gains on RMBS</td><td>(28,274)</td><td>11,368</td><td>(10,733)</td></tr><tr><td>Total (losses) gains on RMBS</td><td>(29,685)</td><td>14,159</td><td>(11,931)</td></tr><tr><td>(Losses) gains on interest rate futures</td><td>(21,628)</td><td>(9,486)</td><td>4,828</td></tr><tr><td>Losses on receiver swaptions</td><td>(431)</td><td>-</td><td>-</td></tr><tr><td>Losses on payer swaptions</td><td>(1,217)</td><td>(4,439)</td><td>-</td></tr><tr><td>Gains (losses) on TBA securities</td><td>386</td><td>-</td><td>-</td></tr></table>

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 years ended December 31, 2015, 2014 and 2013, the Company received proceeds of $1,832.2 million, $928.0 million and $409.0 million, respectively, from the sales of RMBS.



The table below presents historical interest rate data for each quarter end during 2015, 2014 and 2013.

<table><tr><td rowspan="2"></td><td>5 Year</td><td>10 Year</td><td>15 Year</td><td>30 Year</td><td>Three Month</td></tr><tr><td>Treasury Rate (1)</td><td>Treasury Rate (1)</td><td>Fixed-Rate Mortgage Rate (2)</td><td>Fixed-Rate Mortgage Rate (2)</td><td>LIBOR (3)</td></tr><tr><td>December 31, 2015</td><td>1.76%</td><td>2.27%</td><td>3.21%</td><td>3.96%</td><td>0.54%</td></tr><tr><td>September 30, 2015</td><td>1.38%</td><td>2.06%</td><td>3.10%</td><td>3.89%</td><td>0.33%</td></tr><tr><td>June 30, 2015</td><td>1.63%</td><td>2.34%</td><td>3.19%</td><td>3.98%</td><td>0.28%</td></tr><tr><td>March 31, 2015</td><td>1.38%</td><td>1.93%</td><td>3.04%</td><td>3.77%</td><td>0.27%</td></tr><tr><td>December 31, 2014</td><td>1.65%</td><td>2.17%</td><td>3.13%</td><td>3.86%</td><td>0.25%</td></tr><tr><td>September 30, 2014</td><td>1.78%</td><td>2.51%</td><td>3.31%</td><td>4.16%</td><td>0.23%</td></tr><tr><td>June 30, 2014</td><td>1.63%</td><td>2.52%</td><td>3.27%</td><td>4.16%</td><td>0.23%</td></tr><tr><td>March 31, 2014</td><td>1.73%</td><td>2.72%</td><td>3.36%</td><td>4.34%</td><td>0.23%</td></tr><tr><td>December 31, 2013</td><td>1.75%</td><td>3.03%</td><td>3.48%</td><td>4.46%</td><td>0.24%</td></tr><tr><td>September 30, 2013</td><td>0.00%</td><td>2.62%</td><td>3.52%</td><td>4.49%</td><td>0.25%</td></tr><tr><td>June 30, 2013</td><td>0.00%</td><td>2.48%</td><td>3.17%</td><td>4.07%</td><td>0.27%</td></tr><tr><td>March 31, 2013</td><td>0.00%</td><td>1.85%</td><td>2.76%</td><td>3.57%</td><td>0.28%</td></tr></table>

(1) Historical 5 and 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 $7.9 million, $4.5 million and $1.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2015, 2014 and 2013.

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Management fees</td><td>$ 3,978</td><td>$ 2,013</td><td>$ 664</td></tr><tr><td>Overhead allocation</td><td>1,064</td><td>390</td><td>14</td></tr><tr><td>Accrued incentive compensation</td><td>646</td><td>500</td><td>-</td></tr><tr><td>Directors fees and liability insurance</td><td>983</td><td>569</td><td>290</td></tr><tr><td>Audit, legal and other professional fees</td><td>706</td><td>588</td><td>420</td></tr><tr><td>Other direct REIT operating expenses</td><td>241</td><td>182</td><td>164</td></tr><tr><td>Other expenses</td><td>276</td><td>246</td><td>116</td></tr><tr><td>Total expenses</td><td>$ 7,894</td><td>$ 4,488</td><td>$ 1,668</td></tr></table>

Under the terms of a management agreement that was in effect until the completion of our IPO, 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 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. During the years ended December 31, 2015 and 2014, the Company recorded overhead allocations of approximately $1.1 million and $0.4 million, respectively.

## Financial Condition:

## Mortgage-Backed Securities

As of December 31, 2015, our RMBS portfolio consisted of $2,158.0 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.19%. During the year ended December 31, 2015, we received principal repayments of $215.7 million compared to $80.5 million for the year ended December 31, 2014. The average prepayment speeds for the quarters ended December 31, 2015 and 2014 were 9.0% and 7.8%, 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.

<table><tr><td rowspan="2">Three Months Ended</td><td colspan="2">Structured</td></tr><tr><td>PT RMBS Portfolio (%)</td><td>RMBS Portfolio (%)</td></tr><tr><td>December 31, 2015</td><td>6.8</td><td>13.4</td></tr><tr><td>September 30, 2015</td><td>6.1</td><td>16.2</td></tr><tr><td>June 30, 2015</td><td>13.8</td><td>17.9</td></tr><tr><td>March 31, 2015</td><td>8.1</td><td>14.6</td></tr><tr><td>December 31, 2014</td><td>4.0</td><td>14.9</td></tr><tr><td>September 30, 2014</td><td>8.1</td><td>18.8</td></tr><tr><td>June 30, 2014</td><td>4.1</td><td>15.9</td></tr><tr><td>March 31, 2014</td><td>4.2</td><td>14.9</td></tr></table>



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

($ in thousands)

<table><tr><td>Asset Category</td><td>Fair Value</td><td>Percentage of Entire Portfolio</td><td>Weighted Average Coupon</td><td>Weighted Average Maturity in Months</td><td>Longest Maturity</td><td>Weighted Average Coupon Reset in Months</td><td>Weighted Average Lifetime Cap</td><td>Weighted Average Periodic Cap</td></tr><tr><td>December 31, 2015</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Adjustable Rate RMBS</td><td>$ 2,976</td><td>0.1%</td><td>3.63%</td><td>224</td><td>1-Sep-35</td><td>4.1</td><td>10.04%</td><td>2.00%</td></tr><tr><td>Fixed Rate RMBS</td><td>2,000,623</td><td>92.7%</td><td>4.22%</td><td>315</td><td>1-Dec-45</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>Hybrid Adjustable Rate RMBS</td><td>52,238</td><td>2.5%</td><td>2.55%</td><td>325</td><td>1-Aug-43</td><td>84.93</td><td>7.55%</td><td>2.00%</td></tr><tr><td>Total Mortgage-backed Pass-through</td><td>2,055,837</td><td>95.3%</td><td>4.18%</td><td>315</td><td>1-Dec-45</td><td>80.57</td><td>7.68%</td><td>2.00%</td></tr><tr><td>Interest-Only Securities</td><td>61,574</td><td>2.9%</td><td>3.58%</td><td>250</td><td>25-Apr-45</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>Inverse Interest-Only Securities</td><td>40,599</td><td>1.8%</td><td>5.97%</td><td>320</td><td>15-Apr-45</td><td>NA</td><td>6.36%</td><td>NA</td></tr><tr><td>Total Structured RMBS</td><td>102,173</td><td>4.7%</td><td>4.53%</td><td>278</td><td>25-Apr-45</td><td>NA</td><td>6.36%</td><td>NA</td></tr><tr><td>Total Mortgage Assets</td><td>$ 2,158,010</td><td>100.0%</td><td>4.19%</td><td>313</td><td>1-Dec-45</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>December 31, 2014</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Adjustable Rate RMBS</td><td>$ 3,794</td><td>0.2%</td><td>3.55%</td><td>236</td><td>1-Sep-35</td><td>4.02</td><td>10.05%</td><td>2.00%</td></tr><tr><td>Fixed Rate RMBS</td><td>1,412,593</td><td>91.2%</td><td>4.37%</td><td>318</td><td>1-Dec-44</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>Hybrid Adjustable Rate RMBS</td><td>70,400</td><td>4.6%</td><td>2.54%</td><td>338</td><td>1-Aug-43</td><td>97.75</td><td>7.54%</td><td>2.00%</td></tr><tr><td>Total Mortgage-backed Pass-through</td><td>1,486,787</td><td>96.0%</td><td>4.28%</td><td>319</td><td>1-Dec-44</td><td>92.96</td><td>7.67%</td><td>2.00%</td></tr><tr><td>Interest-Only Securities</td><td>46,611</td><td>3.0%</td><td>3.95%</td><td>248</td><td>25-Jan-43</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>Inverse Interest-Only Securities</td><td>15,773</td><td>1.0%</td><td>6.23%</td><td>308</td><td>25-Apr-41</td><td>NA</td><td>6.39%</td><td>NA</td></tr><tr><td>Total Structured RMBS</td><td>62,384</td><td>4.0%</td><td>4.52%</td><td>263</td><td>25-Jan-43</td><td>NA</td><td>NA</td><td>NA</td></tr><tr><td>Total Mortgage Assets</td><td>$ 1,549,171</td><td>100.0%</td><td>4.29%</td><td>317</td><td>1-Dec-44</td><td>NA</td><td>NA</td><td>NA</td></tr></table>

($ in thousands)

<table><tr><td rowspan="2"></td><td colspan="3">December 31, 2015</td><td colspan="2">December 31, 2014</td></tr><tr><td>Fair Value</td><td>Percentage of Entire Portfolio</td><td>Fair Value</td><td>Percentage of Entire Portfolio</td><td></td></tr><tr><td>Fannie Mae</td><td>$ 1,747,699</td><td>81.0%</td><td>$ 1,243,923</td><td>80.3%</td><td></td></tr><tr><td>Freddie Mac</td><td>394,256</td><td>18.3%</td><td>296,203</td><td>19.1%</td><td></td></tr><tr><td>Ginnie Mae</td><td>16,055</td><td>0.7%</td><td>9,045</td><td>0.6%</td><td></td></tr><tr><td>Total Portfolio</td><td>$ 2,158,010</td><td>100.0%</td><td>$ 1,549,171</td><td>100.0%</td><td></td></tr><tr><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td></td><td></td><td>December 31, 2015</td><td>December 31, 2014</td><td></td></tr><tr><td>Weighted Average Pass-through Purchase Price</td><td></td><td></td><td>$ 108.05</td><td>$ 107.88</td><td></td></tr><tr><td>Weighted Average Structured Purchase Price</td><td></td><td></td><td>$ 14.18</td><td>$ 13.67</td><td></td></tr><tr><td>Weighted Average Pass-through Current Price</td><td></td><td></td><td>$ 107.56</td><td>$ 108.59</td><td></td></tr><tr><td>Weighted Average Structured Current Price</td><td></td><td></td><td>$ 14.17</td><td>$ 13.65</td><td></td></tr><tr><td>Effective Duration (1)</td><td></td><td></td><td>2.753</td><td>2.291</td><td></td></tr></table>

(1) Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 2.753 indicates that an interest rate increase of 1.0% would be expected to cause a 2.753% decrease in the value of the RMBS in the Company’s investment portfolio at December 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 years ended December 31, 2015 and 2014.

<table><tr><td colspan="7">(\( in thousands)</td></tr><tr><td></td><td colspan="2">2015</td><td colspan="2">2014</td><td></td><td></td></tr><tr><td></td><td colspan="2">Total Cost</td><td>Weighted Average Yield</td><td>Total Cost</td><td>Average Price</td><td>Weighted Average Yield</td></tr><tr><td>Pass-through RMBS</td><td>$ 2,621,132</td><td>107.96</td><td>2.46%</td><td>$ 2,135,392</td><td>108.09</td><td>2.68%</td></tr><tr><td>Structured RMBS</td><td>65,899</td><td>14.82</td><td>3.54%</td><td>56,890</td><td>14.91</td><td>-1.60%</td></tr></table>

## Borrowings

As of December 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. 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. During the fourth quarter of 2015 the Company, through its captive insurance subsidiary Orchid Island Casualty, LLC, became a member of the Federal Home Loan Bank (FHLB) of Cincinnati and received its first advance in December of 2015. On January 12, 2016, the regulator of the FHLB system, the Federal Housing Finance Administration (FHFA) issued a final ruling that, among other things, eliminated the ability of captive insurance subsidiaries such as Orchid Island Casualty, LLC from receiving advances from the FHLB of Cincinnati. While the Company no longer has access to advances from the FHLB of Cincinnati, we believe our other established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs.

As of December 31, 2015, we had obligations outstanding under the repurchase agreements of approximately $1,798.8 million with a net weighted average borrowing cost of 0.64%. The remaining maturity of our outstanding repurchase agreements obligations ranged from 4 to 43 days, with a weighted average remaining maturity of 15 days. Securing the repurchase agreement obligations as of December 31, 2015 are RMBS with an estimated fair value, including accrued interest, of approximately $1,909.3 million and a weighted average maturity of 313 months, and cash pledged to counterparties of approximately $4.0 million. Through February 25, 2016, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2015 with maturities through May 4, 2016.

As of December 31, 2015, our subsidiary had approximately $187.5 million of outstanding secured FHLB advances, with a weighted average borrowing rate of 0.42% and a weighted average remaining term to maturity of 22 days. These advances were secured by RMBS with a fair value, including accrued interest of approximately $192.2 million as of December 31, 2015. All FHLB advances were refinanced through repurchase agreements subsequent to December 31, 2015.



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

(dollars in thousands)

<table><tr><td rowspan="2"></td><td rowspan="2">Ending Balance of Borrowings</td><td rowspan="2">Average Balance of Borrowings</td><td colspan="2">Difference Between Ending Borrowings and Average Borrowings</td></tr><tr><td>Amount</td><td>Percent</td></tr><tr><td>Three Months Ended</td><td>$ 1,986,313</td><td>$ 1,964,806</td><td>$ 21,507</td><td>1.09%</td></tr><tr><td>December 31, 2015</td><td>1,943,299</td><td>1,978,685</td><td>(35,386)</td><td>(1.79)%</td></tr><tr><td>September 30, 2015</td><td>2,014,071</td><td>1,736,781</td><td>277,290</td><td>15.97% (1)</td></tr><tr><td>June 30, 2015</td><td>1,459,490</td><td>1,448,071</td><td>11,419</td><td>0.79%</td></tr><tr><td>March 31, 2015</td><td>1,436,651</td><td>1,346,314</td><td>90,337</td><td>6.71%</td></tr><tr><td>December 31, 2014</td><td>1,255,978</td><td>1,019,839</td><td>236,139</td><td>23.15% (2)</td></tr><tr><td>September 30, 2014</td><td>783,701</td><td>717,474</td><td>66,227</td><td>9.23%</td></tr><tr><td>June 30, 2014</td><td>651,246</td><td>484,902</td><td>166,344</td><td>34.30% (3)</td></tr><tr><td>March 31, 2014</td><td>651,246</td><td>484,902</td><td>166,344</td><td>34.30% (3)</td></tr></table>

(1) The higher ending balance relative to the average balance during the quarter ended June 30, 2015 reflects the deployment of the proceeds, on a leveraged basis, of the Company’s share issuances under the March 2015 Equity Distribution Agreement. During the quarter ended June 30, 2015, the Company’s investment in PT RMBS increased $457.4 million.

(2) 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 June 2014 and September 2014 Equity Distribution Agreements. During the quarter ended September 30, 2014, the Company’s investment in PT RMBS increased $284.2 million.

(3) 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 strategy for hedging our funding costs typically involves taking short positions in Eurodollar futures, T-Note futures, swaptions or other instruments. Since inception we have primarily used short positions in Eurodollar futures. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.

Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.

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 year ended December 31, 2015, haircuts on our pledged collateral remained stable and as of December 31, 2015, our weighted average haircut was approximately 5.5% of the value of our collateral.

As discussed earlier, we invest a portion of our capital in structured Agency RMBS. We do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured RMBS strategy has been a core element of the Company’s overall investment strategy since inception. However, we have and may continue to pledge a portion of our structured RMBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.

The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements and interest expense on repurchase agreements.

<table><tr><td colspan="7">(in thousands)</td></tr><tr><td></td><td></td><td colspan="5">Obligations Maturing</td></tr><tr><td></td><td></td><td>Within One Year</td><td>One to Three Years</td><td>Three to Five Years</td><td>More than Five Years</td><td>Total</td></tr><tr><td>Repurchase agreements</td><td>$ 1,798,813</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ 1,798,813</td></tr><tr><td>Interest expense on repurchase agreements (1)</td><td>1,324</td><td>-</td><td>-</td><td>-</td><td>-</td><td>1,324</td></tr><tr><td>FHLB advances (2)</td><td>187,500</td><td>-</td><td>-</td><td>-</td><td>-</td><td>187,500</td></tr><tr><td>Interest expense on FHLB advances (2)</td><td>65</td><td>-</td><td>-</td><td>-</td><td>-</td><td>65</td></tr><tr><td>Totals</td><td>$ 1,987,702</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ -</td><td>$ 1,987,702</td></tr></table>

(1) Interest expense on repurchase agreements is based on current interest rates as of December 31, 2015 and the remaining term of the liabilities existing at that date.

(2) Subsequent to December 31, 2015, all FHLB advances, including accrued interest, have been refinanced through repurchase agreements.



In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of December 31, 2015, we had cash and cash equivalents of $57.2 million. We generated cash flows of $282.2 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $1,782.1 million during the year ended December 31, 2015.

## Stockholders' Equity

On February 14, 2013, our Board of Directors declared a stock dividend whereby 5.37 shares of common stock were issued for each share of common stock then outstanding. The 827,555 shares distributed pursuant to the dividend were issued to Bimini on February 20, 2013, immediately prior to our IPO.

On February 20, 2013, we completed an IPO of our common stock, issuing 2,360,000 shares of common stock at a price of $15.00 per share. The gross proceeds we received on this sale were $35.4 million.

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.

On June 17, 2014, we entered into an equity distribution agreement (the “June 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 $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 $10,000,000 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 December 31, 2015, we issued a total of 6,221,102 shares under March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $83.1 million, net of commissions and fees.

On July 29, 2015 the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice. Through December 31, 2015, we repurchased a total of 1,216,243 shares for aggregate costs of approximately $10.8 million, net of commissions and fees.



## Outlook

## Interest Rates

Global interest rate and capital markets volatility continued throughout the fourth quarter of 2015. The uncertainty over when the Federal Reserve would begin to raise the target Federal Funds rate finally was resolved on December 16, 2015, when the Federal Reserve Open Market Committee (“FOMC”) announced that it was increasing the target Federal Funds rate by 0.25%. Although interest rates on longer-dated bonds initially increased in the aftermath of the FOMC’s announcement, mortgage spreads tightened during the fourth quarter, continuing to put downward pressure on net interest margin for many firms that primarily invest in mortgage-backed securities (“MBS”). We continue to see a relatively tight yield curve, making the investing environment difficult.

While the U.S. economy generally appears to be on a trajectory of slow, sustainable growth, many economic indicators were less positive in the fourth quarter and full year 2015 relative to 2014. The consensus forecast for first quarter of 2016 economic growth in the U.S. remains at approximately 2.5%, accompanied by marginal growth in payrolls and inflation. Some analysts have far lower expectations for 2016 annual growth, citing difficult economic conditions in countries as varied and diverse as China, Canada and Brazil. Some data suggest that American consumers are making fewer purchases and taking on less additional debt than in previous quarters, hindering GDP growth. In addition, wage growth and commodity prices remain weak, suggesting continued sluggish economic growth globally.

The Federal Reserve, in its December 16, 2015 announcement, cautioned capital markets to anticipate the possibility of one or more additional increases in the Federal Funds Rate in 2016, depending on future growth in inflation and other economic indicators. Federal Reserve Chair Janet Yellen, in her remarks following the December FOMC policy meeting, stated that monetary policy remains “accommodative” following the initial rise in the Federal Funds Rate. Together with increasingly negative economic data reported to date in 2016, many market participants are increasingly skeptical of additional increases in the Federal Funds Rate in the foreseeable future. We do not share this view and anticipate the Fed will indeed raise rates again this year and next, albeit at a more gradual pace than envisioned by the Fed last December. We believe that data dependency and analysis of the Federal Reserve will continue to drive the direction and volatility of interest rates in the U.S., with the uncertainty that this dynamic creates further enhancing volatility in the interest rate and fixed income markets.

With the flattening of the yield curve, a higher cost of capital for the Company is evident, which could, in the longer-term, lead to narrowing net interest margins and lower yields on existing Agency MBS. Home sales and new single-family home construction remain relatively slow due, in part, to mortgage lending rules implemented under the Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and bank conservatism in efforts to, among other things, prevent future MBS repurchase requests. These factors have created a shortage of mortgage origination, resulting in low Agency MBS issuance. The Federal Reserve's purchases of Agency MBS through reinvesting principal and interest payments it receives on its existing Agency MBS portfolio have continued to dominate the Agency MBS markets, where many participants perceive a lack of liquidity. The Federal Reserve purchases have contributed to strong Agency MBS demand and limited new investment opportunities in the fourth quarter of 2015. While the Federal Reserve has not indicated when it will cease or reduce its Agency MBS purchases by reinvesting principal and interest payments, private banks have less incentive to purchase Freddie Mac and Fannie Mae MBS, as the Basel III liquidity coverage ratio rules provide lower quality liquid asset credit for such securities on their balance sheet than for cash, U.S. Treasuries and MBS issued by Ginnie Mae.



While there are signs that slow and steady economic growth will continue to persist in the United States, uncertainty continues to dominate the market. We believe the general business environment will continue to be challenging for the rest of 2016. Our growth outlook is dependent, in part, on the strength of the financial markets, the impact of fiscal and monetary policy actions by the United States and other countries, and liquidity in the financial system. We do not anticipate the U.S. moving into a negative interest rate environment, and believe that the Fed will continue to remove accommodation at a very slow rate. Our portfolio positioning is therefore unlikely to change materially over the course of the year. We will continue to closely monitor the developments in the market and may seek to re-align our strategy as we evaluate the opportunities across the spectrum in the mortgage industry and other types of assets in a continuing effort to seek the highest risk-adjusted returns for our capital.

## Recent Regulatory Developments

In March 2015, housing and mortgage financial reform legislation, H.R. 1491, was proposed by congressmen John Delaney (D-MD), John Camey (D-DE) 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. Under this proposed legislation, all government guaranteed single-family and multi-family mortgage backed securities will be supported by a minimum of 5% private sector capital, which will stand in a first loss position. The remaining 95% of the risk will be shared between Ginnie Mae and a private reinsurer on a pari passu basis. Fees paid to Ginnie Mae for providing these securities will be allocated to affordable housing programs. 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 workable multifamily guarantee that utilizes private sector pricing consistent with the single family model. The GSEs' current multifamily businesses would continue to function within the new multifamily housing market as purely private organizations with an explicit government guarantee provided by Ginnie Mae and a private sector reinsurer.

In May 2015, Senate Banking Committee Chairman Richard Shelby (R-AL) released a draft bill entitled The Regulatory Relief Bill of 2015 (the "Regulatory Relief Bill"). If enacted, this bill would increase the threshold for a financial institution to be deemed a Systemically Important Financial Institution ("SIFI") from $50 billion to $500 billion while giving the Financial Stability Oversight Council discretion to designate banks with greater than $50 billion in assets as SIFIs, give non-banks an opportunity to file a remedial plan addressing regulators' concerns before being designated as SIFIs, require an affirmative vote every five-years to renew the SIFI designation of non-banks, provide regulatory relief for community banks and broaden the Consumer Financial Protection Bureau Qualified Mortgage rule. The draft bill was unable to win the support to bring it to a floor vote in the Senate. In July 2015, Senator Shelby attached this bill to a Senate Appropriations Subcommittee mark-up of the Financial Services and General Government Appropriations Act for Fiscal Year 2016, which passed a subcommittee vote.

We expect debate and discussion on residential housing and mortgage reform to continue in 2016. However, we cannot be certain if H.R. 1491, the Regulatory Relief Bill or any other housing- and/or mortgage-related bill will be approved by Congress, and if so, what the effect will be.



On January 12, 2016, the FHFA issued RIN 2590-AA39, Members of Federal Home Loan Banks (the "Final Rule"). The Final Rule, among other things, expressly excludes captive insurance companies, such as our wholly-owned captive insurance subsidiary, Orchid Island Casualty, LLC ("Orchid Island Casualty"), from being eligible for membership in the Federal Home Loan Bank ("FHLB") system. Under the Final Rule, there is a one-year transition period from the effective date of February 19, 2016 within which the FHLBs must wind down their relationships with any captive insurance companies that had been admitted to membership on or after September 12, 2014, including Orchid Island Casualty ("Post-NPR Captives"). The Final Rule also precludes the FHLBs from making any new advances or extending existing advances to Post-NPR Captives. In addition, upon the termination of membership, the FHLBs must liquidate all outstanding advances to Post-NPR Captives, settle all other business transactions, and repurchase or redeem all FHLB stock held by the terminated Post-NPR Captive in accordance with the Final Rule. Therefore, Orchid Island Casualty, along with all other Post-NPR Captives, must completely wind down all business relationships with the FHLB of Cincinnati ("FHLBC"), including the repayment of all outstanding advances, prior to or simultaneously with the termination of Orchid Island Casualty's membership with the FHLBC.

The adopting release for the Final Rule expressly invited Congress to address the treatment of Post-NPR Captives with respect to membership in the FHLB. In October 2015, Reps. Blaine Luetkemeyer (R-Mo.), Denny Heck (D-Wash.), Patrick McHenry (R-N.C.) and John Carney (D-Del.) introduced H.R. 3808, a bill that would have preemptively prevented the FHFA from adopting the Final Rule in such a way that would foreclose membership in the FHLB to captive insurance companies. There can be no way of predicting if any subsequent legislation addressing the status of Post-NPR Captives with respect to the FHLB will be proposed in either house of Congress, the likelihood of passage of any such legislation, and the ultimate effects, if any, on the availability of short-term, low-cost funding provided by the FHLBs to Post-NPR Captives subsequent to the enactment of any such legislation.

## 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 IOs, 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 IOs 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 IOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IOs, 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 IOs, 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.

We believe that we have ample borrowing capacity. However, since January 12, 2016, in response to the Final Rule on FHLB membership (described above), we replaced $187.5 million of FHLB advances held as of December 31, 2015 with borrowings from other counterparties under repurchase agreements. The Final Rule on FHLB membership requires the termination of the Company's captive insurance subsidiary's FHLBC membership prior to February 19, 2017. The Company does not expect these regulatory changes to materially adversely affect its core business and operations.

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 and T-Note futures contracts or interest rate swaptions.



## Summary

Over the past quarter the spread between short and long-term interest rates has increased, but has not positively affected our net interest margin as spreads between Agency RMBS and benchmark interest rates have widened. However, prepayment rates have declined to the benefit of our net interest margin. The market remains highly uncertain regarding when or by how much the Federal Reserve will increase interest rates or what the growth prospects are for the global economy. Economic data, as it is released, continues to have a significant impact in shaping market expectations. These developments are very important to our results as increases in the Federal Funds Rate and LIBOR could significantly increase our financing costs, which could lower our net interest margin.

## Critical Accounting Policies

Our consolidated 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. Management has identified its most critical accounting policies:

## Mortgage-Backed Securities

Our investments in Agency RMBS are accounted for under the fair value option. We acquire our Agency RMBS for the purpose of generating long-term returns, and not for the short-term investment of idle capital. Changes in the fair value of securities accounted for under the fair value option are reflected as part of our net income or loss in our consolidated statement of operations, as opposed to a component of other comprehensive income in our statement of stockholders' equity if they were instead reclassified as available-for-sale securities. We elected to account for all of our Agency RMBS under the fair value option in order to reflect changes in the fair value of our Agency RMBS in our consolidated statement of operations, which we believe more appropriately reflects the results of our operations for a particular reporting period. GAAP requires the use of a three-level valuation hierarchy to disclose the classification of fair value measurements used for determining the fair value of our Agency RMBS. These levels include:

- 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.

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

In managing our portfolio, Bimini Advisors employs the following four-step process at each valuation date to determine the fair value of our Agency RMBS:



- First, our Manager obtains fair values from subscription-based independent pricing sources. These prices are used by both our Manager as well as many of our repurchase agreement counterparty on a daily basis to establish margin requirements for our borrowings.

- Second, our Manager requests non-binding quotes from one to four broker-dealers for certain Agency RMBS in order to validate the values obtained by the pricing service. Our Manager requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested.

- Third, our Manager reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets.

- Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with our Manager’s market observations, our Manager makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent our Manager believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, our Manager may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency RMBS backed by fixed-rate mortgages, our Manager generally uses the quoted or observed market price. For assets such as Agency RMBS backed by ARMs or structured Agency RMBS, our Manager may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained.

Management believes its pricing methodology to be consistent with the definition of fair value described in FASB ASC 820, Fair Value Measurements.

## Derivative Financial Instruments

We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and we may continue to do so in the future. The principal instruments that we have used to date are T-Note and Eurodollar futures contracts and interest rate swaptions, but we may enter into other derivatives in the future.

We purchase a portion of our Agency RMBS through forward settling transactions, including “to-be-announced” (“TBA”) securities transactions. At times when market conditions are conducive, we may choose to move the settlement of these TBA securities transactions 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.

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

We have elected not to treat any of our derivative financial instruments as hedges in order to align the accounting treatment of its derivative instruments with the treatment of our 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.



## Repurchase Agreements

We finance the acquisition of a portion of our Agency RMBS through repurchase transactions under master repurchase agreements. Repurchase transactions are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, which due to their short term nature approximate fair value.

In instances where we acquire Agency RMBS through repurchase agreements with the same counterparty from whom the Agency RMBS were purchased, we account for the purchase commitment and repurchase agreement on a net basis and record a forward commitment to purchase Agency RMBS as a derivative instrument if the transaction does not comply with the criteria in FASB ASC 860, Transfers and Servicing, for gross presentation. If the transaction complies with the criteria for gross presentation, we present the assets and the related financing on a gross basis in our consolidated balance sheets, and the corresponding interest income and interest expense in our consolidated statement of operations. Such forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. Additionally, we record the cash portion of our investment in Agency RMBS as a mortgage related receivable from the counterparty on our consolidated balance sheet.

## Income Recognition

Since we commenced operations, we have elected to account for all of our Agency RMBS under the fair value option.

All of our Agency RMBS are either pass-through securities or structured Agency RMBS, including CMOs, IOs, IIOs or POs. Income on pass-through securities, POs and CMOs that contain principal balances is based on the stated interest rate of the security. As a result of accounting for our RMBS under the fair value option, premium or discount present at the date of purchase is not amortized. For IOs, IIOs and CMOs that do not contain principal balances, 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, current interest rates and current asset prices. The new effective yield is calculated based on the carrying value at the end of the previous reporting period, the new prepayment estimates and the contractual terms of the security. Changes in fair value of all of our Agency RMBS during the period are recorded in earnings and reported as unrealized gains (losses) on mortgage-backed securities in the accompanying consolidated statements of operations. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.

## Capital Expenditures

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

## Off-Balance Sheet Arrangements

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



## Dividends

In addition to other requirements that must be satisfied to qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as funding hedges for tax purposes.

In general, dividends declared by us will be considered ordinary income to stockholders for U.S. federal income tax purposes. From time to time, a portion of our dividends may be characterized as capital gains or return of capital. For the tax periods ended December 31, 2015 and 2014, all income distributed in the form of dividends declared was considered characterized as ordinary income. We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO.

(in thousands, except per share data)

<table><tr><td>Declaration Date</td><td>Record Date</td><td>Payment Date</td><td colspan="2">Per Share Amount</td><td>Total</td></tr><tr><td colspan="6">2016</td></tr><tr><td>February 10, 2016</td><td>February 24, 2016</td><td>February 29, 2016</td><td>$</td><td>0.140</td><td>$ 3,049</td></tr><tr><td>January 11, 2016</td><td>January 26, 2016</td><td>January 29, 2016</td><td>0.140</td><td></td><td>3,049</td></tr><tr><td colspan="3">Totals</td><td>$</td><td>0.280</td><td>$ 6,098</td></tr><tr><td colspan="6">2015</td></tr><tr><td>December 10, 2015</td><td>December 24, 2015</td><td>December 30, 2015</td><td>$</td><td>0.140</td><td>$ 3,048</td></tr><tr><td>November 10, 2015</td><td>November 24, 2015</td><td>November 30, 2015</td><td>0.140</td><td></td><td>3,051</td></tr><tr><td>October 8, 2015</td><td>October 26, 2015</td><td>October 30, 2015</td><td>0.140</td><td></td><td>3,051</td></tr><tr><td>September 11, 2015</td><td>September 25, 2015</td><td>September 30, 2015</td><td>0.140</td><td></td><td>3,069</td></tr><tr><td>August 11, 2015</td><td>August 26, 2015</td><td>August 31, 2015</td><td>0.140</td><td></td><td>3,132</td></tr><tr><td>July 9, 2015</td><td>July 27, 2015</td><td>July 31, 2015</td><td>0.140</td><td></td><td>3,218</td></tr><tr><td>June 9, 2015</td><td>June 22, 2015</td><td>June 30, 2015</td><td>0.180</td><td></td><td>4,057</td></tr><tr><td>May 11, 2015</td><td>May 26, 2015</td><td>May 29, 2015</td><td>0.180</td><td></td><td>3,580</td></tr><tr><td>April 9, 2015</td><td>April 27, 2015</td><td>April 30, 2015</td><td>0.180</td><td></td><td>3,303</td></tr><tr><td>March 10, 2015</td><td>March 27, 2015</td><td>March 31, 2015</td><td>0.180</td><td></td><td>3,205</td></tr><tr><td>February 10, 2015</td><td>February 25, 2015</td><td>February 27, 2015</td><td>0.180</td><td></td><td>3,017</td></tr><tr><td>January 13, 2015</td><td>January 26, 2015</td><td>January 30, 2015</td><td>0.180</td><td></td><td>3,017</td></tr><tr><td colspan="3">Totals</td><td>$</td><td>1.920</td><td>$ 38,748</td></tr><tr><td colspan="6">2014</td></tr><tr><td>December 9, 2014</td><td>December 26, 2014</td><td>December 30, 2014</td><td>$</td><td>0.180</td><td>$ 3,004</td></tr><tr><td>November 12, 2014</td><td>November 25, 2014</td><td>November 28, 2014</td><td>0.180</td><td></td><td>2,737</td></tr><tr><td>October 9, 2014</td><td>October 28, 2014</td><td>October 31, 2014</td><td>0.180</td><td></td><td>2,358</td></tr><tr><td>September 9, 2014</td><td>September 25, 2014</td><td>September 30, 2014</td><td>0.180</td><td></td><td>2,348</td></tr><tr><td>August 12, 2014</td><td>August 26, 2014</td><td>August 29, 2014</td><td>0.180</td><td></td><td>1,999</td></tr><tr><td>July 10, 2014</td><td>July 28, 2014</td><td>July 31, 2014</td><td>0.180</td><td></td><td>1,759</td></tr><tr><td>June 11, 2014</td><td>June 25, 2014</td><td>June 30, 2014</td><td>0.180</td><td></td><td>1,712</td></tr><tr><td>May 8, 2014</td><td>May 27, 2014</td><td>May 30, 2014</td><td>0.180</td><td></td><td>1,641</td></tr><tr><td>April 8, 2014</td><td>April 25, 2014</td><td>April 30, 2014</td><td>0.180</td><td></td><td>1,636</td></tr><tr><td>March 11, 2014</td><td>March 26, 2014</td><td>March 31, 2014</td><td>0.180</td><td></td><td>1,550</td></tr><tr><td>February 11, 2014</td><td>February 25, 2014</td><td>February 28, 2014</td><td>0.180</td><td></td><td>974</td></tr><tr><td>January 9, 2014</td><td>January 27, 2014</td><td>January 31, 2014</td><td>0.180</td><td></td><td>925</td></tr><tr><td colspan="3">Totals</td><td>$</td><td>2.160</td><td>$ 22,643</td></tr></table>



<table><tr><td>Declaration Date</td><td>Record Date</td><td>Payment Date</td><td colspan="2">Per Share Amount</td><td>Total</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 11, 2013</td><td>December 26, 2013</td><td>December 30, 2013</td><td>$</td><td>0.180</td><td>$</td></tr><tr><td>November 12, 2013</td><td>November 25, 2013</td><td>November 27, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>October 10, 2013</td><td>October 25, 2013</td><td>October 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>September 10, 2013</td><td>September 25, 2013</td><td>September 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>August 12, 2013</td><td>August 26, 2013</td><td>August 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>July 9, 2013</td><td>July 25, 2013</td><td>July 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>June 10, 2013</td><td>June 25, 2013</td><td>June 28, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>May 9, 2013</td><td>May 28, 2013</td><td>May 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>April 10, 2013</td><td>April 25, 2013</td><td>April 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>March 8, 2013</td><td>March 25, 2013</td><td>March 27, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>Totals</td><td></td><td></td><td>$</td><td>1.395</td><td>$</td></tr></table>

(1) The effect of the dividends declared during 2016 is not reflected in the Company’s consolidated financial statements as of December 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 consolidated 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 7A. 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 IO's 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 December 31, 2015 and 2014, assuming rates instantaneously fall 100 basis points (“bps”), fall 50bps, 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 December 31, 2015 and 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) \) 

<table><tr><td>Change in Interest Rate</td><td>Portfolio Market Value (2)(3)</td><td>Book Value (2)(4)</td></tr><tr><td>As of December 31, 2015</td><td></td><td></td></tr><tr><td>-100 Basis Points</td><td>(0.03)%</td><td>(0.21)%</td></tr><tr><td>-50 Basis Points</td><td>0.20%</td><td>1.75%</td></tr><tr><td>+50 Basis Points</td><td>(0.72)%</td><td>(6.16)%</td></tr><tr><td>+100 Basis Points</td><td>(2.10)%</td><td>(17.90)%</td></tr><tr><td>As of December 31, 2014</td><td></td><td></td></tr><tr><td>-100 Basis Points</td><td>(0.79)%</td><td>(5.63)%</td></tr><tr><td>-50 Basis Points</td><td>(0.13)%</td><td>(0.89)%</td></tr><tr><td>+50 Basis Points</td><td>(0.30)%</td><td>(2.10)%</td></tr><tr><td>+100 Basis Points</td><td>(0.94)%</td><td>(6.64)%</td></tr></table>

(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 RMBS 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 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 December 31, 2015, we had unrestricted cash and cash equivalents of $57.2 million and unpledged securities of approximately $62.4 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

## Index to Financial Statements

<table><tr><td></td><td>Page</td></tr><tr><td>Report of Independent Registered Public Accounting Firm</td><td>74</td></tr><tr><td>Consolidated Balance Sheets</td><td>75</td></tr><tr><td>Consolidated Statements of Operations</td><td>76</td></tr><tr><td>Consolidated Statements of Stockholders&#x27; Equity</td><td>77</td></tr><tr><td>Consolidated Statements of Cash Flows</td><td>78</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>79</td></tr></table>



Board of Directors and Stockholders
Orchid Island Capital, Inc.
Vero Beach, Florida

We have audited the accompanying consolidated balance sheets of Orchid Island Capital, Inc. and subsidiary (the "Company") as of December 31, 2015 and 2014 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

West Palm Beach, Florida
February 25, 2016



## ORCHID ISLAND CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 and 2014
($ in thousands, except per share data)

<table><tr><td></td><td>2015</td><td>2014</td></tr><tr><td>ASSETS:</td><td></td><td></td></tr><tr><td>Mortgage-backed securities, at fair value</td><td></td><td></td></tr><tr><td>Pledged to counterparties</td><td>$ 2,095,574</td><td>$ 1,517,304</td></tr><tr><td>Unpledged</td><td>62,436</td><td>31,867</td></tr><tr><td>Total mortgage-backed securities</td><td>2,158,010</td><td>1,549,171</td></tr><tr><td>Cash and cash equivalents</td><td>57,229</td><td>93,137</td></tr><tr><td>Restricted cash</td><td>12,730</td><td>7,790</td></tr><tr><td>Accrued interest receivable</td><td>8,490</td><td>6,211</td></tr><tr><td>Derivative assets, at fair value</td><td>669</td><td>1,217</td></tr><tr><td>Other assets</td><td>4,709</td><td>282</td></tr><tr><td>Total Assets</td><td>$ 2,241,837</td><td>$ 1,657,808</td></tr></table>

## LIABILITIES AND STOCKHOLDERS' EQUITY

<table><tr><td>LIABILITIES:</td><td></td><td></td></tr><tr><td>Repurchase agreements</td><td>$ 1,798,813</td><td>$ 1,436,651</td></tr><tr><td>FHLB advances</td><td>187,500</td><td>-</td></tr><tr><td>Accrued interest payable</td><td>863</td><td>628</td></tr><tr><td>Due to affiliates</td><td>465</td><td>330</td></tr><tr><td>Other liabilities</td><td>941</td><td>2,121</td></tr><tr><td>Total Liabilities</td><td>1,988,582</td><td>1,439,730</td></tr></table>

## COMMITMENTS AND CONTINGENCIES (Note 8)

<table><tr><td>STOCKHOLDERS&#x27; EQUITY:</td><td></td><td></td></tr><tr><td>Preferred stock, $0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding as of December 31, 2015 and 2014</td><td>-</td><td>-</td></tr><tr><td>Common stock, $0.01 par value; 500,000,000 shares authorized, 21,749,490 and 16,699,656 shares issued and outstanding as of December 31, 2015 and 2014, respectively</td><td>217</td><td>167</td></tr><tr><td>Additional paid-in capital</td><td>253,038</td><td>217,419</td></tr><tr><td>Retained earnings</td><td>-</td><td>492</td></tr><tr><td>Total Stockholders&#x27; Equity</td><td>253,255</td><td>218,078</td></tr><tr><td>Total Liabilities and Stockholders&#x27; Equity</td><td>$ 2,241,837</td><td>$ 1,657,808</td></tr></table>

See Notes to Consolidated Financial Statements



## ORCHID ISLAND CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2015, 2014 and 2013
($ in thousands, except per share data)

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Interest income</td><td>$ 68,811</td><td>$ 31,804</td><td>$ 9,199</td></tr><tr><td>Interest expense</td><td>(7,271)</td><td>(3,031)</td><td>(1,126)</td></tr><tr><td>Net interest income</td><td>61,540</td><td>28,773</td><td>8,073</td></tr><tr><td>Realized (losses) gains on mortgage-backed securities</td><td>(1,411)</td><td>2,791</td><td>(1,198)</td></tr><tr><td>Unrealized (losses) gains on mortgage-backed securities</td><td>(28,274)</td><td>11,368</td><td>(10,733)</td></tr><tr><td>(Losses) gains on derivative instruments</td><td>(22,890)</td><td>(13,925)</td><td>4,828</td></tr><tr><td>Net portfolio income</td><td>8,965</td><td>29,007</td><td>970</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td></tr><tr><td>Management fees</td><td>3,978</td><td>2,013</td><td>664</td></tr><tr><td>Allocated overhead</td><td>1,064</td><td>390</td><td>14</td></tr><tr><td>Accrued incentive compensation</td><td>646</td><td>500</td><td>-</td></tr><tr><td>Directors&#x27; fees and liability insurance</td><td>983</td><td>569</td><td>290</td></tr><tr><td>Audit, legal and other professional fees</td><td>706</td><td>588</td><td>420</td></tr><tr><td>Direct REIT operating expenses</td><td>241</td><td>182</td><td>164</td></tr><tr><td>Other administrative</td><td>276</td><td>246</td><td>116</td></tr><tr><td>Total expenses</td><td>7,894</td><td>4,488</td><td>1,668</td></tr><tr><td>Net income (loss)</td><td>$ 1,071</td><td>$ 24,519</td><td>$ (698)</td></tr><tr><td>Basic and diluted net income (loss) per share</td><td>$ 0.05</td><td>$ 2.48</td><td>$ (0.23)</td></tr><tr><td>Weighted Average Shares Outstanding</td><td>20,266,706</td><td>9,890,058</td><td>3,011,912</td></tr></table>

See Notes to Consolidated Financial Statements



## ORCHID ISLAND CAPITAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2015, 2014 and 2013
($ in thousands, except per share data)

<table><tr><td></td><td>Common Stock</td><td>Additional Paid-in Capital</td><td>(Accumulated Deficit) / Retained Earnings</td><td>Total</td></tr><tr><td>Balances, January 1, 2013</td><td>$ 2</td><td>$ 15,409</td><td>$ (686)</td><td>$ 14,725</td></tr><tr><td>Net loss</td><td>-</td><td>-</td><td>(698)</td><td>(698)</td></tr><tr><td>Cash dividends declared, $1.395 per share</td><td>-</td><td>(4,662)</td><td>-</td><td>(4,662)</td></tr><tr><td>Issuance of common stock pursuant to public offering</td><td>23</td><td>35,377</td><td>-</td><td>35,400</td></tr><tr><td>Issuance of common stock pursuant to stock dividend</td><td>8</td><td>(8)</td><td>-</td><td>-</td></tr><tr><td>Balances, December 31, 2013</td><td>33</td><td>46,116</td><td>(1,384)</td><td>44,765</td></tr><tr><td>Net income</td><td>-</td><td>-</td><td>24,519</td><td>24,519</td></tr><tr><td>Cash dividends declared, $2.160 per share</td><td>-</td><td>-</td><td>(22,643)</td><td>(22,643)</td></tr><tr><td>Issuance of common stock pursuant to public offerings</td><td>134</td><td>171,161</td><td>-</td><td>171,295</td></tr><tr><td>Issuance of common stock pursuant to equity compensation plan</td><td>-</td><td>77</td><td>-</td><td>77</td></tr><tr><td>Amortization of equity compensation</td><td>-</td><td>65</td><td>-</td><td>65</td></tr><tr><td>Balances, December 31, 2014</td><td>167</td><td>217,419</td><td>492</td><td>218,078</td></tr><tr><td>Net income</td><td>-</td><td>-</td><td>1,071</td><td>1,071</td></tr><tr><td>Cash dividends declared, $1.920 per share</td><td>-</td><td>(37,185)</td><td>(1,563)</td><td>(38,748)</td></tr><tr><td>Issuance of common stock pursuant to public offerings</td><td>62</td><td>83,213</td><td>-</td><td>83,275</td></tr><tr><td>Issuance of common stock pursuant to equity compensation plan</td><td>-</td><td>287</td><td>-</td><td>287</td></tr><tr><td>Amortization of equity compensation</td><td>-</td><td>144</td><td>-</td><td>144</td></tr><tr><td>Shares repurchased and retired</td><td>(12)</td><td>(10,840)</td><td>-</td><td>(10,852)</td></tr><tr><td>Balances, December 31, 2015</td><td>$ 217</td><td>$ 253,038</td><td>$ -</td><td>$ 253,255</td></tr></table>

See Notes to Consolidated Financial Statements



## ORCHID ISLAND CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2015, 2014 and 2013
($ in thousands)

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>CASH FLOWS FROM OPERATING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Net income (loss)</td><td>$ 1,071</td><td>$ 24,519</td><td>$ (698)</td></tr><tr><td>Adjustments to reconcile net income (loss) to net cash provided by operating activities:</td><td></td><td></td><td></td></tr><tr><td>Stock based compensation</td><td>431</td><td>142</td><td>-</td></tr><tr><td>Realized and unrealized losses (gains) on mortgage-backed securities</td><td>29,685</td><td>(14,159)</td><td>11,931</td></tr><tr><td>Realized and unrealized losses on interest rate swaptions</td><td>1,648</td><td>4,439</td><td>-</td></tr><tr><td>Realized and unrealized gains on forward settling to-be-announced securities</td><td>(386)</td><td>-</td><td>-</td></tr><tr><td>Changes in operating assets and liabilities:</td><td></td><td></td><td></td></tr><tr><td>Accrued interest receivable</td><td>(2,279)</td><td>(4,652)</td><td>(1,119)</td></tr><tr><td>Other assets</td><td>(19)</td><td>(105)</td><td>(119)</td></tr><tr><td>Accrued interest payable</td><td>235</td><td>536</td><td>37</td></tr><tr><td>Other liabilities</td><td>184</td><td>678</td><td>(60)</td></tr><tr><td>Due to affiliates</td><td>135</td><td>248</td><td>127</td></tr><tr><td>NET CASH PROVIDED BY OPERATING ACTIVITIES</td><td>30,705</td><td>11,646</td><td>10,099</td></tr><tr><td>CASH FLOWS FROM INVESTING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>From mortgage-backed securities investments:</td><td></td><td></td><td></td></tr><tr><td>Purchases</td><td>(2,687,031)</td><td>(2,192,282)</td><td>(687,584)</td></tr><tr><td>Sales</td><td>1,832,194</td><td>928,009</td><td>408,982</td></tr><tr><td>Principal repayments</td><td>215,658</td><td>80,486</td><td>30,778</td></tr><tr><td>Purchases of FHLB stock</td><td>(3,753)</td><td>-</td><td>-</td></tr><tr><td>Increase in restricted cash</td><td>(4,940)</td><td>(5,344)</td><td>(1,997)</td></tr><tr><td>Proceeds from net settlement of to-be-announced securities</td><td>386</td><td>-</td><td>-</td></tr><tr><td>Purchase of interest rate swaptions, net of margin cash received</td><td>(2,464)</td><td>(4,292)</td><td>-</td></tr><tr><td>NET CASH USED IN INVESTING ACTIVITIES</td><td>(649,950)</td><td>(1,193,423)</td><td>(249,821)</td></tr><tr><td>CASH FLOWS FROM FINANCING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Proceeds from repurchase agreements</td><td>18,867,303</td><td>7,663,332</td><td>3,319,670</td></tr><tr><td>Principal payments on repurchase agreements</td><td>(18,505,141)</td><td>(6,545,239)</td><td>(3,105,054)</td></tr><tr><td>Proceeds from FHLB advances</td><td>187,500</td><td>-</td><td>-</td></tr><tr><td>Cash dividends</td><td>(38,748)</td><td>(22,643)</td><td>(4,662)</td></tr><tr><td>Proceeds from issuance of common stock, net of issuance costs</td><td>83,275</td><td>171,295</td><td>35,400</td></tr><tr><td>Common stock repurchases</td><td>(10,852)</td><td>-</td><td>-</td></tr><tr><td>NET CASH PROVIDED BY FINANCING ACTIVITIES</td><td>583,337</td><td>1,266,745</td><td>245,354</td></tr><tr><td>NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS</td><td>(35,908)</td><td>84,968</td><td>5,632</td></tr><tr><td>CASH AND CASH EQUIVALENTS, beginning of the year</td><td>93,137</td><td>8,169</td><td>2,537</td></tr><tr><td>CASH AND CASH EQUIVALENTS, end of the year</td><td>$ 57,229</td><td>$ 93,137</td><td>$ 8,169</td></tr><tr><td>SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:</td><td></td><td></td><td></td></tr><tr><td>Cash paid during the year for:</td><td></td><td></td><td></td></tr><tr><td>Interest</td><td>$ 7,036</td><td>$ 2,495</td><td>$ 1,089</td></tr><tr><td>SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:</td><td></td><td></td><td></td></tr><tr><td>Issuance of common stock to Bimini Capital Management, Inc. pursuant to stock dividend</td><td>$ -</td><td>$ -</td><td>$ 8</td></tr></table>

See Notes to Consolidated Financial Statements



# ORCHID ISLAND CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

## 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 which were invested in 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 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 shares of common stock 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 on a leveraged basis.

Orchid completed a secondary offering of 3,200,000 shares of common stock 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 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 December 31, 2015, the Company issued a total of 6,221,102 shares under the March 2015 Equity Distribution Agreement for aggregate proceeds of approximately $83.1 million, net of commissions and fees.



On July 29, 2015 the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s common stock. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice. Through December 31, 2015, the Company repurchased a total of 1,216,243 shares at an aggregate cost of approximately $10.8 million, net of commissions and fees.

## Basis of Presentation, Consolidation and Use of Estimates

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of our wholly-owned subsidiary, Orchid Island Casualty, LLC. Significant intercompany accounts and transactions have been eliminated. 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 mortgage backed securities and derivatives.

## 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 (loss) has not been included as the Company has no items of other comprehensive income (loss). Comprehensive income (loss) is the same as net income (loss) 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 December 31, 2015, restricted cash consisted of $8.5 million of cash held by a broker as margin on futures contracts and $4.0 million of cash held on deposit as collateral with repurchase agreement counterparties. At December 31, 2014 restricted cash consisted of approximately $5.2 million of cash held by a broker as margin on futures contracts and $2.6 million 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 December 31, 2015, the Company’s cash deposits exceeded federally insured limits by approximately $55.2 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 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. 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 consolidated 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. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on MBS in the consolidated statements of operations. For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset's carrying value. At each reporting date, the effective yield is adjusted prospectively 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 consolidated statements of operations.

## FHLB Stock

The Company’s wholly-owned subsidiary, Orchid Island Casualty, LLC, is a member of, and owns capital stock in, the Federal Home Loan Bank of Cincinnati (“FHLBC”). As a condition of its membership in the FHLBC, the subsidiary is required to maintain a FHLBC stock investment, both for membership and for the level of advances from the FHLBC to the subsidiary. The Company accounts for its investment in FHLBC stock as a cost method investment in "Other assets". The Company periodically evaluates FHLBC stock for impairment in accordance with ASC 320. See Note 3 for more information about the subsidiary’s membership in the FHLBC.

## 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 swaps”), but may enter into other derivatives in the future.

The Company purchases a portion of its Agency RMBS through forward setting transactions, including “to-be-announced” (“TBA”) securities transactions. At times when market conditions are conducive, the Company may choose to move the settlement of these TBA securities transactions 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 the Company 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 of the TBA transaction, or throughout its term, that it will take physical delivery of the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, 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 transactions and dollar roll transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations. The fair value of TBA securities is estimated based on similar methods used to value RMBS securities.

The Company has elected not to 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 consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 11 of the consolidated financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, due to affiliates, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying values as of December 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 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 January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.

In June 2014, the FASB issued 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 consolidated 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. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.



## NOTE 2. MORTGAGE-BACKED SECURITIES

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

<table><tr><td>(in thousands)</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Pass-Through RMBS Certificates:</td><td></td><td></td></tr><tr><td>Hybrid Adjustable-rate Mortgages</td><td>$ 52,238</td><td>$ 70,400</td></tr><tr><td>Adjustable-rate Mortgages</td><td>2,976</td><td>3,794</td></tr><tr><td>Fixed-rate Mortgages</td><td>2,000,623</td><td>1,412,593</td></tr><tr><td>Total Pass-Through Certificates</td><td>2,055,837</td><td>1,486,787</td></tr><tr><td>Structured RMBS Certificates:</td><td></td><td></td></tr><tr><td>Interest-Only Securities</td><td>61,574</td><td>46,611</td></tr><tr><td>Inverse Interest-Only Securities</td><td>40,599</td><td>15,773</td></tr><tr><td>Total Structured RMBS Certificates</td><td>102,173</td><td>62,384</td></tr><tr><td>Total</td><td>$ 2,158,010</td><td>$ 1,549,171</td></tr></table>

The following table summarizes the Company’s RMBS portfolio as of December 31, 2015 and 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.

<table><tr><td>(in thousands)</td><td>December 31, 2015</td><td>December 31, 2014</td></tr><tr><td>Greater than five years and less than ten years</td><td>$ 835</td><td>$ 967</td></tr><tr><td>Greater than or equal to ten years</td><td>2,157,175</td><td>1,548,204</td></tr><tr><td>Total</td><td>$ 2,158,010</td><td>$ 1,549,171</td></tr></table>

## NOTE 3. REPURCHASE AGREEMENTS AND OTHER BORROWINGS

The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions and a secured borrowing facility with the FHLBC. Interest rates on the borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of December 31, 2015, the Company had met all margin call requirements.

Repurchase Agreements

As of December 31, 2015 and 2014, the Company had outstanding repurchase obligations of approximately $1,798.8 million with a net weighted average borrowing rate of 0.64%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $1,909.3 million, and cash pledged to the counterparties of approximately $4.0 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 the counterparties of approximately $2.6 million.



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

<table><tr><td>(\( in thousands)</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td>OVERNIGHT (1 DAY OR LESS)</td><td>BETWEEN 2 AND 30 DAYS</td><td>BETWEEN 31 AND 90 DAYS</td><td>GREATER THAN 90 DAYS</td><td>TOTAL</td><td></td></tr><tr><td>December 31, 2015</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fair market value of securities pledged, including accrued interest receivable</td><td>$ -</td><td>$ 1,894,491</td><td>$ 14,801</td><td>$ -</td><td>$ 1,909,292</td><td></td></tr><tr><td>Repurchase agreement liabilities associated with these securities</td><td>$ -</td><td>$ 1,789,338</td><td>$ 9,475</td><td>$ -</td><td>$ 1,798,813</td><td></td></tr><tr><td>Net weighted average borrowing rate</td><td>-</td><td>0.64%</td><td>1.19%</td><td>-</td><td>0.64%</td><td></td></tr><tr><td>December 31, 2014</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Fair market value of securities pledged, including accrued interest receivable</td><td>$ -</td><td>$ 984,823</td><td>$ 534,238</td><td>$ 3,844</td><td>$ 1,522,905</td><td></td></tr><tr><td>Repurchase agreement liabilities associated with these securities</td><td>$ -</td><td>$ 929,831</td><td>$ 502,947</td><td>$ 3,873</td><td>$ 1,436,651</td><td></td></tr><tr><td>Net weighted average borrowing rate</td><td>-</td><td>0.36%</td><td>0.37%</td><td>0.38%</td><td>0.36%</td><td></td></tr></table>

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 December 31, 2015, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $113.7 million. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company's equity at December 31, 2015 and 2014.

## FHLB Advances

In December 2015, our wholly-owned subsidiary, Orchid Island Casualty, LLC, was accepted for membership in the FHLBC. As of December 31, 2015, our subsidiary had approximately $187.5 million of outstanding secured FHLB advances, with a weighted average borrowing rate of 0.42% and a weighted average remaining term to maturity of 22 days. These advances were secured by RMBS with a fair value, including accrued interest of approximately $192.2 million as of December 31, 2015. This agreement also required our subsidiary to purchase and hold stock in the FHLBC in an amount equal to a specified percentage of outstanding advances. As of December 31, 2015, our subsidiary held FHLBC stock with a cost basis of approximately $3.8 million that is included in other assets in our consolidated balance sheets.

On January 12, 2016, the regulator of the FHLB system, the Federal Housing Finance Agency (“FHFA”), released a final rule that amends regulations governing FHLB membership, including an amendment which prevents captive insurance companies from being eligible for FHLB membership. Under the terms of the final rule, our subsidiary is required to terminate its membership, redeem existing FHLBC stock, and repay its existing advances within one year following the effective date of the final rule. In addition, our subsidiary is prohibited from obtaining new advances or renewing existing advances upon their maturity during the one year transition period. The final rule became effective on February 19, 2016. Subsequent to December 31, 2015, all of our subsidiary’s outstanding advances, including accrued interest, have been refinanced through repurchase agreements.



## 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, the Company has 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 for a long position, or make delivery of the Agency RMBS for a short position, 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 December 31, 2015 and 2014.

<table><tr><td>Derivative Instruments and Related Accounts</td><td>Balance Sheet Location</td><td>2015</td><td>2014</td></tr><tr><td>Assets</td><td></td><td></td><td></td></tr><tr><td>Futures - Margin posted to counterparty</td><td>Restricted cash</td><td>$ 8,483</td><td>$ 5,174</td></tr><tr><td>Receiver swaptions</td><td>Derivative assets, at fair value</td><td>669</td><td>-</td></tr><tr><td>Payer swaptions</td><td>Derivative assets, at fair value</td><td>-</td><td>1,217</td></tr><tr><td></td><td></td><td>$ 9,152</td><td>$ 6,391</td></tr><tr><td>Liability</td><td></td><td></td><td></td></tr><tr><td>Payer swaptions - Margin posted by counterparty</td><td>Other liabilities</td><td>$ -</td><td>$ (1,364)</td></tr></table>

Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar and T-Note futures positions at December 31, 2015 and 2014.

<table><tr><td rowspan="2"></td><td colspan="4">December 31, 2015</td></tr><tr><td>Average Contract Notional Amount</td><td>Weighted Average Entry Rate</td><td>Weighted Average Effective Rate</td><td>Open Equity (1)</td></tr><tr><td>Expiration Year</td><td></td><td></td><td></td><td></td></tr><tr><td>Eurodollar Futures Contracts (Short Positions)</td><td></td><td></td><td></td><td></td></tr><tr><td>2016</td><td>900,000</td><td>1.51%</td><td>0.98%</td><td>(4,718)</td></tr><tr><td>2017</td><td>900,000</td><td>2.31%</td><td>1.59%</td><td>(6,550)</td></tr><tr><td>2018</td><td>900,000</td><td>2.77%</td><td>1.99%</td><td>(7,060)</td></tr><tr><td>2019</td><td>900,000</td><td>2.56%</td><td>2.17%</td><td>(865)</td></tr><tr><td>Total / Weighted Average</td><td>$ 900,000</td><td>2.23%</td><td>1.57%</td><td>(19,193)</td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Treasury Note Futures Contracts (Short Position) (2)</td><td></td><td></td><td></td><td></td></tr><tr><td>March 2016 10 year T-Note futures</td><td></td><td></td><td></td><td></td></tr><tr><td>(Mar 2016 - Mar 2026 Hedge Period)</td><td>$ 185,000</td><td>1.99%</td><td>1.95%</td><td>$ 1,091</td></tr></table>



<table><tr><td rowspan="2"></td><td colspan="4">December 31, 2014</td></tr><tr><td>Average Contract Notional Amount</td><td>Weighted Average Entry Rate</td><td>Weighted Average Effective Rate</td><td>Open Equity (1)</td></tr><tr><td>Expiration Year</td><td></td><td></td><td></td><td></td></tr><tr><td>Eurodollar Futures Contracts (Short Positions)</td><td></td><td></td><td></td><td></td></tr><tr><td>2015</td><td>$ 650,000</td><td>0.79%</td><td>0.63%</td><td>(1,039)</td></tr><tr><td>2016</td><td>800,000</td><td>1.52%</td><td>1.54%</td><td>139</td></tr><tr><td>2017</td><td>800,000</td><td>2.36%</td><td>2.23%</td><td>(1,041)</td></tr><tr><td>2018</td><td>800,000</td><td>2.94%</td><td>2.54%</td><td>(2,361)</td></tr><tr><td>Total / Weighted Average</td><td>$ 760,000</td><td>1.88%</td><td>1.73%</td><td>(4,302)</td></tr></table>

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

(2) T-Note futures contracts were valued at a price of $125.91 at December 31, 2015. The nominal value of the short position was $232.9 million.

The table below presents information related to the Company’s interest rate swaption positions at December 31, 2015 and 2014.

<table><tr><td rowspan="2">(\( in thousands)</td><td colspan="3">Option</td><td colspan="4">Underlying Swap</td></tr><tr><td></td><td></td><td></td><td rowspan="2">Notional Amount</td><td rowspan="2">Fixed Pay Rate</td><td rowspan="2">Receive Rate (LIBOR)</td><td rowspan="2">Weighted Average Term (Years)</td></tr><tr><td>Expiration</td><td>Cost</td><td>Fair Value</td><td>Weighted Average Months to Expiration</td></tr><tr><td colspan="8">December 31, 2015 - Receiver Swaptions</td></tr><tr><td>≤ 1 year</td><td>$ 1,100</td><td>$ 669</td><td>4.2</td><td>$ 100,000</td><td>1.77%</td><td>3 Month</td><td>5.0</td></tr><tr><td colspan="8">December 31, 2014 - Payer Swaptions</td></tr><tr><td>≤ 1 year</td><td>$ 5,350</td><td>$ 1,217</td><td>6.2</td><td>$ 375,000</td><td>2.79%</td><td>3 Month</td><td>7.3</td></tr></table>

## Gain (Loss) From Derivative Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013.

<table><tr><td>(in thousands)</td><td></td><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Eurodollar futures contracts (short positions)</td><td></td><td></td><td>$ (17,741)</td><td>$ (9,558)</td><td>$ 4,828</td></tr><tr><td>T-Note futures contract (short position)</td><td></td><td></td><td>(3,887)</td><td>72</td><td>-</td></tr><tr><td>Receiver swaptions</td><td></td><td></td><td>(431)</td><td>-</td><td>-</td></tr><tr><td>Payer swaptions</td><td></td><td></td><td>(1,217)</td><td>(4,439)</td><td>-</td></tr><tr><td>Net TBA securities</td><td></td><td></td><td>386</td><td>-</td><td>-</td></tr><tr><td></td><td></td><td></td><td>$ (22,890)</td><td>$ (13,925)</td><td>$ 4,828</td></tr></table>



## 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 consolidated 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 December 31, 2015 and 2014.

<table><tr><td rowspan="2">(in thousands)</td><td colspan="2">Offsetting of Assets</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gross Amount of Recognized Assets</td><td>Gross Amount Offset in the Consolidated Balance Sheet</td><td>Net Amount of Assets Presented in the Consolidated Balance Sheet</td><td>Gross Amount Not Offset in the Consolidated Balance Sheet</td><td>Financial Instruments Received as Collateral</td><td>Cash Received as Collateral</td><td>Net Amount</td></tr><tr><td>December 31, 2015</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative assets - Receiver swaptions</td><td>$ 669</td><td>$ -</td><td>$ 669</td><td>$ (669)</td><td>$ -</td><td>$ -</td><td></td></tr><tr><td>December 31, 2014</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Derivative assets - Payer swaptions</td><td>$ 1,217</td><td>$ -</td><td>$ 1,217</td><td>$ -</td><td>$ (1,217)</td><td>$ -</td><td></td></tr><tr><td>(in thousands)</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td></td><td colspan="4">Offsetting of Liabilities</td><td></td><td></td><td></td></tr><tr><td></td><td>Gross Amount of Recognized Liabilities</td><td>Gross Amount Offset in the Consolidated Balance Sheet</td><td>Net Amount of Liabilities Presented in the Consolidated Balance Sheet</td><td>Gross Amount Not Offset in the Consolidated Balance Sheet</td><td>Financial Instruments Posted as Collateral</td><td>Cash Posted Collateral</td><td>Net Amount</td></tr><tr><td>December 31, 2015</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Repurchase Agreements</td><td>$ 1,798,813</td><td>$ -</td><td>$ 1,798,813</td><td>$ (1,794,816)</td><td>$ (3,997)</td><td>$ -</td><td></td></tr><tr><td>December 31, 2014</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Repurchase Agreements</td><td>$ 1,436,651</td><td>$ -</td><td>$ 1,436,651</td><td>$ (1,434,035)</td><td>$ (2,616)</td><td>$ -</td><td></td></tr></table>



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 consolidated 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

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.

Our charter authorizes our Board of Directors, without stockholder approval, to reclassify any unissued shares of our common stock into other classes or series of stock and to establish the number of shares in each class or series and to set the preferences, conversion or other rights, voting powers (including voting rights exclusive to such class or series), restrictions (including, without limitation, restrictions on transferability), limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each such class or series.

Our charter authorizes our Board of Directors, without stockholder approval, to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any class or series of preferred stock. Prior to issuance of shares of each class or series, our Board of Directors is required by Maryland law and our charter to set the preferences, conversion or other rights, voting powers (including voting rights exclusive to such class or series), restrictions (including, without limitation, restrictions on transferability), limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each such class or series. Thus, our Board of Directors could authorize the issuance of shares of preferred stock that have priority over our common stock with respect to dividends or rights upon liquidation or with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of our common stock or otherwise be in their best interests. No shares of preferred stock have been issued, therefore none are outstanding.

## Restrictions on Ownership and Transfer

In order to qualify as a REIT under the Code for each taxable year beginning after December 31, 2013, our shares of stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, for our taxable years beginning after December 31, 2013, no more than 50% of the value of our outstanding shares of capital stock may be owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the second half of any calendar year.

Because the Company’s Board of Directors believes it is at present essential for us to qualify as a REIT, our charter provides that, subject to certain exceptions, no person or entity may beneficially or constructively own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock, or the ownership limit.



The Company’s charter also prohibits any person from (i) beneficially or constructively owning or transferring shares of the Company’s capital stock if such ownership or transfer would result in the Company being “closely held” under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or otherwise cause the Company to fail to qualify as a REIT and (ii) transferring shares of the Company’s capital stock if such transfer would result in the Company’s capital stock being beneficially owned by fewer than 100 persons (determined under the principles of Section 856(a)(5) of the Code). Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of the Company’s stock that will or may violate any of the foregoing restrictions on transfer and ownership, or who is the intended transferee of shares of the Company’s stock which are transferred to the trust (as described below), will be required to give written notice immediately to the Company or in the case of a proposed or attempted transaction, to give at least 15 days’ prior written notice, and provide the Company with such other information as the Company may request in order to determine the effect, if any, of such transfer on the Company’s status as a REIT. The foregoing restrictions on transfer and ownership will not apply if the Company’s Board of Directors determines that it is no longer in the Company’s best interests to attempt to qualify, or to continue to qualify, as a REIT, or that compliance with the restrictions on transfer and ownership is no longer required for the Company to qualify as a REIT.

The Company’s Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a person from certain of the limits described above and may establish or increase an exempted holder limit for such person. The person seeking an exemption must provide to the Board of Directors any such representations, covenants and undertakings as the Board of Directors may deem appropriate in order to conclude that granting the exemption and/or establishing or increasing an excepted holder limit, as the case may be, will not cause the Company to fail to qualify as a REIT. The Company’s Board of Directors may also require a ruling from the IRS or an opinion of counsel in order to determine that granting the exemption will not cause the Company to lose its qualification as a REIT. In connection with granting a waiver of the ownership limit or creating an excepted holder limit or at any other time, the Company’s Board of Directors may from time to time increase or decrease the ownership limit, subject to certain restrictions.



## Common Stock Issuances

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

<table><tr><td colspan="5">($ in thousands, except per share amounts)</td></tr><tr><td>Type of Offering</td><td>Period</td><td>Weighted Average Price Received Per Share (1)</td><td>Shares</td><td>Net Proceeds (2)</td></tr><tr><td>2015</td><td></td><td></td><td></td><td></td></tr><tr><td>At the Market Offering Program (3)</td><td>First Quarter</td><td>$ 13.66</td><td>1,210,487</td><td>$ 16,175</td></tr><tr><td>At the Market Offering Program (3)</td><td>Second Quarter</td><td>13.65</td><td>5,024,530</td><td>67,100</td></tr><tr><td></td><td></td><td></td><td>6,235,017</td><td>$ 83,275</td></tr><tr><td>2014</td><td></td><td></td><td></td><td></td></tr><tr><td>Secondary Offering</td><td>First Quarter</td><td>$ 12.50</td><td>2,070,000</td><td>$ 24,174</td></tr><tr><td>Secondary Offering (4)</td><td>First Quarter</td><td>12.55</td><td>3,680,000</td><td>43,989</td></tr><tr><td>At the Market Offering Program (3)</td><td>Second Quarter</td><td>13.14</td><td>537,499</td><td>6,914</td></tr><tr><td>At the Market Offering Program (3)</td><td>Third Quarter</td><td>13.99</td><td>3,389,441</td><td>46,372</td></tr><tr><td>At the Market Offering Program (3)</td><td>Fourth Quarter</td><td>13.87</td><td>3,675,207</td><td>49,846</td></tr><tr><td></td><td></td><td></td><td>13,352,147</td><td>$ 171,295</td></tr></table>

(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. As of December 31, 2015, shares with a value of $15.0 million remain available for issuance under the March 2015 Equity Distribution Agreement.

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

## Stock Repurchase Program

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s common stock. As part of the stock repurchase program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice.



Through December 31, 2015, the Company repurchased a total of 1,216,243 shares under the stock repurchase program at an aggregate cost of approximately $10.8 million, including commissions and fees, for a weighted average price of $8.92 per share.

<table><tr><td>Period</td><td>Weighted Average Price Paid Per Share</td><td>Shares Repurchased</td><td>Net Cost</td></tr><tr><td>2015</td><td></td><td></td><td></td></tr><tr><td>Third Quarter</td><td>$ 8.89</td><td>1,069,720</td><td>$ 9,512</td></tr><tr><td>Fourth Quarter</td><td>$ 9.14</td><td>146,523</td><td>1,340</td></tr></table>

## Stock Dividend

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 pursuant to this dividend were issued to Bimini on February 20, 2013, immediately prior to the Company’s IPO.

## Cash Dividends

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

(in thousands, except per share data)

<table><tr><td>Declaration Date</td><td>Record Date</td><td>Payment Date</td><td colspan="2">Per Share Amount</td><td>Total</td></tr><tr><td>2016</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>February 10, 2016 (1)</td><td>February 24, 2016</td><td>February 29, 2016</td><td>$</td><td>0.140</td><td>$ 3,049</td></tr><tr><td>January 11, 2016 (1)</td><td>January 26, 2016</td><td>January 29, 2016</td><td></td><td>0.140</td><td>3,049</td></tr><tr><td>Totals</td><td></td><td></td><td>$</td><td>0.280</td><td>$ 6,098</td></tr><tr><td>2015</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 10, 2015</td><td>December 24, 2015</td><td>December 30, 2015</td><td>$</td><td>0.140</td><td>$ 3,048</td></tr><tr><td>November 10, 2015</td><td>November 24, 2015</td><td>November 30, 2015</td><td></td><td>0.140</td><td>3,051</td></tr><tr><td>October 8, 2015</td><td>October 26, 2015</td><td>October 30, 2015</td><td></td><td>0.140</td><td>3,051</td></tr><tr><td>September 11, 2015</td><td>September 25, 2015</td><td>September 30, 2015</td><td></td><td>0.140</td><td>3,069</td></tr><tr><td>August 11, 2015</td><td>August 26, 2015</td><td>August 31, 2015</td><td></td><td>0.140</td><td>3,132</td></tr><tr><td>July 9, 2015</td><td>July 27, 2015</td><td>July 31, 2015</td><td></td><td>0.140</td><td>3,218</td></tr><tr><td>June 9, 2015</td><td>June 22, 2015</td><td>June 30, 2015</td><td></td><td>0.180</td><td>4,057</td></tr><tr><td>May 11, 2015</td><td>May 26, 2015</td><td>May 29, 2015</td><td></td><td>0.180</td><td>3,580</td></tr><tr><td>April 9, 2015</td><td>April 27, 2015</td><td>April 30, 2015</td><td></td><td>0.180</td><td>3,303</td></tr><tr><td>March 10, 2015</td><td>March 27, 2015</td><td>March 31, 2015</td><td></td><td>0.180</td><td>3,205</td></tr><tr><td>February 10, 2015</td><td>February 25, 2015</td><td>February 27, 2015</td><td></td><td>0.180</td><td>3,017</td></tr><tr><td>January 13, 2015</td><td>January 26, 2015</td><td>January 30, 2015</td><td></td><td>0.180</td><td>3,017</td></tr><tr><td>Totals</td><td></td><td></td><td>$</td><td>1.920</td><td>$ 38,748</td></tr></table>



<table><tr><td>Declaration Date</td><td>Record Date</td><td>Payment Date</td><td colspan="2">Per Share Amount</td><td>Total</td></tr><tr><td>2014</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 9, 2014</td><td>December 26, 2014</td><td>December 30, 2014</td><td>$</td><td>0.180</td><td>$ 3,004</td></tr><tr><td>November 12, 2014</td><td>November 25, 2014</td><td>November 28, 2014</td><td></td><td>0.180</td><td>2,737</td></tr><tr><td>October 9, 2014</td><td>October 28, 2014</td><td>October 31, 2014</td><td></td><td>0.180</td><td>2,358</td></tr><tr><td>September 9, 2014</td><td>September 25, 2014</td><td>September 30, 2014</td><td></td><td>0.180</td><td>2,348</td></tr><tr><td>August 12, 2014</td><td>August 26, 2014</td><td>August 29, 2014</td><td></td><td>0.180</td><td>1,999</td></tr><tr><td>July 10, 2014</td><td>July 28, 2014</td><td>July 31, 2014</td><td></td><td>0.180</td><td>1,759</td></tr><tr><td>June 11, 2014</td><td>June 25, 2014</td><td>June 30, 2014</td><td></td><td>0.180</td><td>1,712</td></tr><tr><td>May 8, 2014</td><td>May 27, 2014</td><td>May 30, 2014</td><td></td><td>0.180</td><td>1,641</td></tr><tr><td>April 8, 2014</td><td>April 25, 2014</td><td>April 30, 2014</td><td></td><td>0.180</td><td>1,636</td></tr><tr><td>March 11, 2014</td><td>March 26, 2014</td><td>March 31, 2014</td><td></td><td>0.180</td><td>1,550</td></tr><tr><td>February 11, 2014</td><td>February 25, 2014</td><td>February 28, 2014</td><td></td><td>0.180</td><td>974</td></tr><tr><td>January 9, 2014</td><td>January 27, 2014</td><td>January 31, 2014</td><td></td><td>0.180</td><td>925</td></tr><tr><td>Totals</td><td></td><td></td><td>$</td><td>2.160</td><td>$ 22,643</td></tr><tr><td>2013</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>December 11, 2013</td><td>December 26, 2013</td><td>December 30, 2013</td><td>$</td><td>0.180</td><td>$ 603</td></tr><tr><td>November 12, 2013</td><td>November 25, 2013</td><td>November 27, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>October 10, 2013</td><td>October 25, 2013</td><td>October 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>September 10, 2013</td><td>September 25, 2013</td><td>September 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>August 12, 2013</td><td>August 26, 2013</td><td>August 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>July 9, 2013</td><td>July 25, 2013</td><td>July 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>June 10, 2013</td><td>June 25, 2013</td><td>June 28, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>May 9, 2013</td><td>May 28, 2013</td><td>May 31, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>April 10, 2013</td><td>April 25, 2013</td><td>April 30, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>March 8, 2013</td><td>March 25, 2013</td><td>March 27, 2013</td><td></td><td>0.135</td><td>451</td></tr><tr><td>Totals</td><td></td><td></td><td>$</td><td>1.395</td><td>$ 4,662</td></tr></table>

(1) The effect of the dividends declared during 2016 is not reflected in the Company’s consolidated financial statements as of December 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. A total of 8,000 shares of restricted stock vested during the year ended December 31, 2015. There were 16,000 and 24,000 shares of restricted stock that were issued but unvested at December 31, 2015 and December 31, 2014, respectively.

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

<table><tr><td rowspan="2">($ in thousands, except per share data)</td><td colspan="2">2015</td><td colspan="2">2014</td></tr><tr><td>Shares</td><td>Weighted Average Grant Date Fair Value</td><td>Shares</td><td>Weighted Average Grant Date Fair Value</td></tr><tr><td>Unvested, beginning of period</td><td>24,000</td><td>$ 12.23</td><td>-</td><td>$ -</td></tr><tr><td>Granted</td><td>-</td><td>-</td><td>24,000</td><td>12.23</td></tr><tr><td>Vested and issued</td><td>(8,000)</td><td>12.23</td><td>-</td><td>-</td></tr><tr><td>Unvested, end of period</td><td>16,000</td><td>$ 12.23</td><td>24,000</td><td>$ 12.23</td></tr><tr><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Compensation expense during period</td><td></td><td>$ 98</td><td></td><td>$ 65</td></tr><tr><td>Unrecognized compensation expense, end of period</td><td></td><td>$ 130</td><td></td><td>$ 228</td></tr><tr><td>Intrinsic value, end of period</td><td></td><td>$ 159</td><td></td><td>$ 318</td></tr><tr><td>Weighted-average remaining vesting term (in years)</td><td></td><td>1.3</td><td></td><td>2.3</td></tr></table>

## 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 years ended December 31, 2015 and 2014.

<table><tr><td colspan="3">($ in thousands, except per share data)</td></tr><tr><td></td><td>2015</td><td>2014</td></tr><tr><td>Fully vested shares granted (1)(2)</td><td>30,535</td><td>5,844</td></tr><tr><td>Weighted average grant date price</td><td>$ 12.67</td><td>$ 13.16</td></tr><tr><td>Compensation expense related to fully vested common share awards (1)</td><td>$ 387</td><td>$ 77</td></tr></table>

(1) The table above includes 21,715 shares of fully vested shares which were granted in January 2015 with respect to service performed during 2014. Approximately $288,000 of compensation expense related to these share awards were accrued and recognized in 2014.

(2) The table above includes 7,475 shares with a fair value of approximately $100,000 surrendered for the satisfaction of tax withholding obligations.



## Performance Units

The Company may issue 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 non-forfeitable 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 for the year ended December 31, 2015.

<table><tr><td colspan="2">($ in thousands, except per share data)</td></tr><tr><td>Performance units granted during the period</td><td>7,508</td></tr><tr><td>Weighted average grant date price</td><td>$ 13.32</td></tr><tr><td>Compensation expense related to performance units</td><td>$ 46</td></tr><tr><td>Intrinsic value, at period end</td><td>$ 75</td></tr><tr><td>Unrecognized compensation expense, at period end</td><td>$ 54</td></tr><tr><td>Weighted average remaining vesting term (in years), at period end</td><td>1.4</td></tr></table>

## 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 December 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.

REIT taxable income (loss) is computed in accordance with the Code, which is different than the Company’s financial statement net income (loss) computed in accordance with GAAP. Book to tax differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as hedges for tax purposes. All of the Company’s estimated REIT taxable income or loss prior to the completion of the Company’s IPO is included in the consolidated tax return of Bimini.

In general, dividends declared by the Company will be considered ordinary income to stockholders for income tax purposes. From time to time, a portion of the Company’s dividends may be characterized as capital gains or return of capital. For the tax periods ended December 31, 2015 and 2014 all income distributed in the form of dividends declared is considered characterized as ordinary income.

As of December 31, 2015, we had distributed all of our estimated REIT taxable income through fiscal year 2015. The Company has elected to treat approximately $0.4 million of the January 2015 dividend as having been paid with respect to 2014, respectively in order to reduce REIT taxable income to zero for 2014. Accordingly, no income tax provision was recorded for 2015 and 2014.



## NOTE 10. EARNINGS PER SHARE (EPS)

The Company had dividend eligible shares of restricted common stock and Performance Units that were outstanding during the years ended December 31, 2015 and 2014. The basic and diluted per share computations include these unvested shares of restricted common stock and Performance Units 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 years ended December 31, 2015, 2014 and 2013.

<table><tr><td></td><td>2015</td><td>2014</td><td>2013</td></tr><tr><td>Basic and diluted EPS per common share:</td><td></td><td></td><td></td></tr><tr><td>Numerator for basic and diluted EPS per common share:</td><td></td><td></td><td></td></tr><tr><td>Net income (loss) - Basic and diluted</td><td>$ 1,071</td><td>$ 24,519</td><td>$ (698)</td></tr><tr><td>Weighted average common shares:</td><td></td><td></td><td></td></tr><tr><td>Common stock outstanding at the balance sheet date</td><td>21,749</td><td>16,700</td><td>3,342</td></tr><tr><td>Unvested dividend-eligible share based compensation</td><td></td><td></td><td></td></tr><tr><td>outstanding at the balance sheet date</td><td>24</td><td>24</td><td>-</td></tr><tr><td>Effect of weighting</td><td>(1,506)</td><td>(6,834)</td><td>(330)</td></tr><tr><td>Weighted average shares-basic and diluted</td><td>20,267</td><td>9,890</td><td>3,012</td></tr><tr><td>Income (loss) per common share:</td><td></td><td></td><td></td></tr><tr><td>Basic and diluted</td><td>$ 0.05</td><td>$ 2.48</td><td>$ (0.23)</td></tr></table>

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 years ended December 31, 2013 and 2012, 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 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 and interest rate swaptions determined by either an independent third-party or do so internally.

FHLBC stock of approximately $3.8 million at December 31, 2015, is excluded from the table below as the Company accounts for its investment in FHLBC stock as a cost method investment.

RMBS (based on the fair value option), interest rate swaptions and futures contracts were recorded at fair value on a recurring basis during the years ended December 31, 2015, 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 December 31, 2015 and 2014:

<table><tr><td>(in thousands)</td><td>Fair Value Measurements</td><td>Quoted Prices in Active Markets for Identical Assets (Level 1)</td><td>Significant Other Observable Inputs (Level 2)</td><td>Significant Unobservable Inputs (Level 3)</td></tr><tr><td>December 31, 2015</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$ 2,158,010</td><td>$ -</td><td>$ 2,158,010</td><td>$ -</td></tr><tr><td>Eurodollar and T-Note futures contracts</td><td>8,483</td><td>8,483</td><td>-</td><td>-</td></tr><tr><td>Receiver swaptions</td><td>669</td><td>-</td><td>669</td><td>-</td></tr><tr><td>December 31, 2014</td><td></td><td></td><td></td><td></td></tr><tr><td>Mortgage-backed securities</td><td>$ 1,549,171</td><td>$ -</td><td>$ 1,549,171</td><td>$ -</td></tr><tr><td>Eurodollar futures contracts</td><td>5,174</td><td>5,174</td><td>-</td><td>-</td></tr><tr><td>Payer swaptions</td><td>1,217</td><td>-</td><td>1,217</td><td></td></tr></table>

During the years ended December 31, 2015, 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

At the completion of its IPO, the Company entered into a management agreement with Bimini Advisors (the "Manager"), which provided for an initial term through February 20, 2016 with automatic one-year extensions and is subject to certain termination rights. Bimini Advisors is a wholly-owned subsidiary of Bimini. 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 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 years ended December 31, 2015, 2014 and 2013 for the management fee and costs incurred were approximately $5.0 million, $2.4 million and $0.7 million, respectively.

At December 31, 2015 and December 31, 2014, the net amount due to affiliates was approximately $0.5 million and $0.3 million, 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. In addition, Bimini owns 1,395,036 shares, or 6.4%, or Orchid common stock.



## NOTE 13. QUARTERLY RESULTS (UNAUDITED)

The following is a presentation of the quarterly results of operations for the years ended December 31, 2015 and 2014.

(in thousands, except per share information)

<table><tr><td rowspan="2"></td><td colspan="6">Quarter Ended</td></tr><tr><td colspan="2">March 31, 2015</td><td colspan="2">June 30, 2015</td><td colspan="2">September 30, 2015</td></tr><tr><td>Interest income</td><td>$ 14,614</td><td></td><td>$ 16,753</td><td></td><td>$ 18,352</td><td>$ 19,092</td></tr><tr><td>Interest expense</td><td>(1,296)</td><td></td><td>(1,567)</td><td></td><td>(2,037)</td><td>(2,371)</td></tr><tr><td>Net interest income</td><td>13,318</td><td></td><td>15,186</td><td></td><td>16,315</td><td>16,721</td></tr><tr><td>Losses</td><td>(6,063)</td><td></td><td>(16,017)</td><td></td><td>(23,682)</td><td>(6,813)</td></tr><tr><td>Net portfolio income (loss)</td><td>7,255</td><td></td><td>(831)</td><td></td><td>(7,367)</td><td>9,908</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Management fees</td><td>855</td><td></td><td>1,014</td><td></td><td>1,061</td><td>1,048</td></tr><tr><td>Other expenses</td><td>891</td><td></td><td>987</td><td></td><td>989</td><td>1,049</td></tr><tr><td>Total expenses</td><td>1,746</td><td></td><td>2,001</td><td></td><td>2,050</td><td>2,097</td></tr><tr><td>Net income (loss)</td><td>$ 5,509</td><td></td><td>$ (2,832)</td><td></td><td>$ (9,417)</td><td>$ 7,811</td></tr><tr><td>Basic and diluted net income (loss) per share</td><td>$ 0.54</td><td></td><td>(0.14)</td><td></td><td>$ (0.42)</td><td>$ 0.36</td></tr><tr><td>Weighted Average Shares Outstanding</td><td>16,847</td><td></td><td>19,752</td><td></td><td>22,545</td><td>21,771</td></tr><tr><td>Dividends declared per share</td><td>$ 0.54</td><td></td><td>$ 0.54</td><td></td><td>$ 0.42</td><td>$ 0.42</td></tr></table>

<table><tr><td rowspan="2"></td><td colspan="6">Quarter Ended</td></tr><tr><td colspan="2">March 31, 2014</td><td colspan="2">June 30, 2014</td><td colspan="2">September 30, 2014</td></tr><tr><td>Interest income</td><td>$ 3,783</td><td></td><td>$ 6,589</td><td></td><td>$ 9,286</td><td>$ 12,146</td></tr><tr><td>Interest expense</td><td>(411)</td><td></td><td>(676)</td><td></td><td>(818)</td><td>(1,126)</td></tr><tr><td>Net interest income</td><td>3,372</td><td></td><td>5,913</td><td></td><td>8,468</td><td>11,020</td></tr><tr><td>Gains (losses)</td><td>758</td><td></td><td>5,837</td><td></td><td>(307)</td><td>(6,054)</td></tr><tr><td>Net portfolio income</td><td>4,130</td><td></td><td>11,750</td><td></td><td>8,161</td><td>4,966</td></tr><tr><td>Expenses:</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Management fees</td><td>303</td><td></td><td>430</td><td></td><td>543</td><td>737</td></tr><tr><td>Other expenses</td><td>232</td><td></td><td>685</td><td></td><td>850</td><td>708</td></tr><tr><td>Total expenses</td><td>535</td><td></td><td>1,115</td><td></td><td>1,393</td><td>1,445</td></tr><tr><td>Net income</td><td>$ 3,595</td><td></td><td>$ 10,635</td><td></td><td>$ 6,768</td><td>$ 3,521</td></tr><tr><td>Basic and diluted net income per share</td><td>$ 0.71</td><td></td><td>$ 1.17</td><td></td><td>$ 0.63</td><td>$ 0.24</td></tr><tr><td>Weighted Average Shares Outstanding</td><td>$ 5,094</td><td></td><td>$ 9,078</td><td></td><td>$ 10,710</td><td>$ 14,565</td></tr><tr><td>Dividends declared per share</td><td>$ 0.54</td><td></td><td>$ 0.54</td><td></td><td>$ 0.54</td><td>$ 0.54</td></tr></table>

Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. The sum of the four quarters' EPS may not equal the full year EPS.



## ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We had no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or practices or financial statement disclosure.

## ITEM 9A. 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 and its subsidiary 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.

## Management’s Report of Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

- pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

- provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of consolidated financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used criteria set forth Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on management’s assessment, the Company’s management believes that, as of December 31, 2015, the Company’s internal control over financial reporting was effective based on those criteria.

## ITEM 9B. OTHER INFORMATION

## ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of additional material U.S. federal income tax considerations with respect to the purchase, ownership and disposition of our securities, and our qualification and taxation as a REIT under the Code. This summary includes a description of the changes to the Code made by the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”). This summary supplements and, where applicable, supersedes the discussion under “Material U.S. Federal Income Tax Considerations” in the prospectus dated May 7, 2014 and filed as part of our Registration Statement on Form S-3 (No. 333-195389) (the “Prospectus”), and should be read together with such discussion.

## Taxation of Our Company

The first sentence of the fifth to the last bullet point in “Material U.S. Federal Income Tax Considerations—Taxation of Our Company” is replaced in its entirety with the following:

If we acquire any asset from a C corporation, or a corporation generally subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis in the asset that is determined by reference either to the C corporation’s basis in the asset or to another asset, we will pay tax at the highest regular corporate rate applicable if recognize gain on the sale or disposition of the asset during the 5-year period after we acquire the asset.

## Requirements for Qualification

The final sentence in the second paragraph of the discussion in the Prospectus under “Material U.S. Federal Income Tax Considerations—Requirements for Qualification—Taxable REIT Subsidiaries” is replaced in its entirety with the following:

Overall, no more than 25% (20% for taxable years beginning with after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.



## Gross Income Tests

As discussed in the Prospectus under “Material U.S. Federal Income Tax Considerations—Gross Income Tests,” we must satisfy two gross income tests annually to maintain our qualification as a REIT. Although a debt instrument issued by a “publicly offered REIT” (i.e., a REIT that is required to file annual and periodic reports with the SEC under the Exchange Act) is treated as a “real estate asset” for purposes of the asset tests for taxable years beginning after December 31, 2015, the gain from the sale of such debt instruments is not treated as qualifying income for the 75% gross income test unless the debt instrument is secured by real property or an interest in real property.

Interest. As discussed in the Prospectus under “Material U.S. Federal Income Tax Considerations—Gross Income Tests—Interest,” interest income generally constitutes qualifying mortgage interest for purposes of the 75% gross income test to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. Except as provided in the following sentence, if we receive interest income with respect to a mortgage loan that is secured by both real and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we agreed to acquire the mortgage loan or on the date we modified the loan (if the modification is treated as “significant modification” for tax purposes), the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. For taxable years beginning after December 31, 2015, in the case of mortgage loans secured by both real property and personal property, if the fair market value of such personal property does not exceed 15% of the total fair market value of all such property securing the loan, then the personal property securing the loan will be treated as real property for purposes of determining whether the mortgage loan is a qualifying asset for the 75% asset test and the related interest income qualifies for purposes of the 75% gross income test.

Hedging Transactions. The discussion in the Prospectus under “Material U.S. Federal Income Tax Considerations—Gross Income Tests—Hedging Transactions” is supplemented by inserting following after the third sentence in such subsection:

In addition, effective for taxable years beginning after December 31, 2015, if we have entered into a “hedging transaction” as described above (an “Original Hedge”), and a portion of the hedged indebtedness is extinguished or the related property is disposed of and in connection with such extinguishment or disposition we enter into a new clearly identified hedging transaction that would counteract the Original Hedge (a “Counteracting Hedge”), income from the Original Hedge and income from the Counteracting Hedge (including gain from the disposition of the Original Hedge and the Counteracting Hedge) will not be treated as gross income for purposes of the 95% and 75% gross income tests.

Foreclosure Property. As discussed in the Prospectus under “Material U.S. Federal Income Tax Considerations—Gross Income Tests—Foreclosure Property,” property generally ceases to be foreclosure property as of the close of the third taxable year following the taxable year in which we acquired the property. However, property shall cease to be foreclosure property on a date prior to such date under certain circumstances, including if the property is used in a trade or business which is conducted by the REIT more than 90 days after the REIT acquires the property. An exception to this rule provides that such property may be used in such a trade or business if such activity is conducted through an “independent contractor” or, effective for taxable years beginning after December 31, 2015, a TRS.



## Asset Tests

As discussed in the Prospectus under “Material U.S. Federal Income Tax Considerations—Asset Tests,” to maintain our qualification as a REIT, we also must satisfy several asset tests at the end of each quarter of each taxable year. Under the first test described in the Prospectus, at least 75% of the value of our total assets must consist of the items listed in the Prospectus. In addition to those items, qualifying assets for purposes of the 75% asset test include, effective for taxable years beginning after December 31, 2015, (i) personal property leased in connection with real property to the extent that rents attributable to such personal property are treated as “rents from real property” and (ii) debt instruments issued by “publicly offered REITs.”

In addition, the fourth test described in the Prospectus in such subsection is replaced in its entirety by the following:

Fourth, not more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets may be represented by the securities of one or more TRSs.

Finally, an additional test, effective for taxable years beginning after December 31, 2015, provides that not more than 25% of the value of our total assets may be represented by debt instruments issued by ‘publicly offered REITs’ to the extent not secured by real property or interests in real property.

## Distribution Requirements

The third to last paragraph of the discussion in the Prospectus under “Material U.S. Federal Income Tax Considerations—Distribution Requirements” is replaced in its entirety with the following:

For taxable years beginning on or before December 31, 2014, in order for distributions to be counted towards our distribution requirement, and to provide us with a tax deduction, such distributions must not have been “preferential dividends.” A distribution is not a preferential dividend if it is pro rata among all outstanding shares within a particular class, and is in accordance with the preferences among the different classes of shares as set forth in our organizational documents. However, for taxable years beginning after December 31, 2014, so long as we continue to be a “publicly offered REIT,” the preferential dividend rule will not apply to us.

## Taxation of Non-U.S. Stockholders

The Prospectus discusses the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) exemption on distributions attributable to gain from sales or exchanges by us of United States real property interests (“USRPI’s”) with respect to non-U.S. stockholders that own no more than 5% of our stock during the applicable period under “Material U.S. Federal Income Tax Considerations—Taxation of Non-U.S. Stockholders.” The FIRPTA exemption limit on distributions on publicly traded REIT stock has been increased from ownership of more than 5% of such stock to ownership of more than 10% of such stock for distributions on or after December 18, 2015. In addition, the Prospectus notes that we may be required to withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. This 10% withholding requirement was increased to 15% under the PATH Act for distributions after February 16, 2016. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent we do not do so, we may withhold at a rate of 15% on any portion of a distribution not subject to withholding at a rate of 30%.

In addition, the PATH Act created additional exemptions from FIRPTA applicable to “qualified shareholders” and “qualified foreign pension plans.” Accordingly, the discussion in the Prospectus is supplemented by inserting the following paragraphs before the final paragraph in the subsection entitled “Material U.S. Federal Income Tax Considerations—Taxation of Non-U.S. Stockholders”:



Qualified Shareholders. Subject to the exception discussed below, any distribution on or after December 18, 2015 to a “qualified shareholder” who holds REIT stock directly or indirectly (through one or more partnerships) will not be subject to U.S. tax as income effectively connected with a U.S. trade or business and thus will not be subject to special withholding rules under FIRPTA. While a “qualified shareholder” will not be subject to FIRPTA withholding on REIT distributions, certain investors of a “qualified shareholder” (i.e., non-U.S. persons who hold interests in the “qualified shareholder” (other than interests solely as a creditor), and hold more than 10% of the stock of such REIT (whether or not by reason of the investor’s ownership in the “qualified shareholder”)) may be subject to FIRPTA withholding.

In addition, on or after December 18, 2015, a sale of our stock by a “qualified shareholder” who holds such stock directly or indirectly (through one or more partnerships) will not be subject to U.S. federal income taxation under FIRPTA. As with distributions, certain investors of a “qualified shareholder” (i.e., non-U.S. persons who hold interests in the “qualified shareholder” (other than interests solely as a creditor), and hold more than 10% of the stock of such REIT (whether or not by reason of the investor’s ownership in the “qualified shareholder”)) may be subject to FIRPTA withholding on a sale of our stock.

A “qualified shareholder” is a foreign person that (i) either is eligible for the benefits of a comprehensive income tax treaty which includes an exchange of information program and whose principal class of interests is listed and regularly traded on one or more recognized stock exchanges (as defined in such comprehensive income tax treaty), or is a foreign partnership that is created or organized under foreign law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with respect to taxes with the United States and has a class of limited partnership units representing greater than 50% of the value of all the partnership units that is regularly traded on the NYSE or NASDAQ markets, (ii) is a qualified collective investment vehicle (defined below), and (iii) maintains records on the identity of each person who, at any time during the foreign person’s taxable year, is the direct owner of 5% or more of the class of interests or units (as applicable) described in (i), above.

A qualified collective investment vehicle is a foreign person that (i) would be eligible for a reduced rate of withholding under the comprehensive income tax treaty described above, even if such entity holds more than 10% of the stock of such REIT, (ii) is publicly traded, is treated as a partnership under the Code, is a withholding foreign partnership, and would be treated as a “United States real property holding corporation” if it were a domestic corporation, or (iii) is designated as such by the Secretary of the Treasury and is either (a) fiscally transparent within the meaning of section 894, or (b) required to include dividends in its gross income, but is entitled to a deduction for distributions to its investors.

Qualified Foreign Pension Funds. Any distribution on or after December 18, 2015 to a “qualified foreign pension fund” (or an entity all of the interests of which are held by a “qualified foreign pension fund”) who holds REIT stock directly or indirectly (through one or more partnerships) will not be subject to U.S. tax as income effectively connected with a U.S. trade or business and thus will not be subject to special withholding rules under FIRPTA. In addition, on or after December 18, 2015, a sale of our stock by a “qualified foreign pension fund” that holds such stock directly or indirectly (through one or more partnerships) will not be subject to U.S. federal income taxation under FIRPTA.



A qualified foreign pension fund is any trust, corporation, or other organization or arrangement (i) which is created or organized under the law of a country other than the United States, (ii) which is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by such employees) of one or more employers in consideration for services rendered, (iii) which does not have a single participant or beneficiary with a right to more than 5% of its assets or income, (iv) which is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates, and (v) with respect to which, under the laws of the country in which it is established or operates, (a) contributions to such organization or arrangement that would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or taxed at a reduced rate, or (b) taxation of any investment income of such organization or arrangement is deferred or such income is taxed at a reduced rate.

## Gain Subject to FIRPTA.

In addition, the fourth paragraph in discussion in the Prospectus under “Material U.S. Federal Income Tax Considerations—Taxation of Non-U.S. Stockholders” is replaced in its entirety with the following:

A U.S. withholding tax at a 30% rate will be imposed on dividends paid on our stock received by certain non-U.S. stockholders if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. In addition, if those disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed, for payments after December 31, 2018, on proceeds from the sale of our stock received by certain non-U.S. stockholders. If payment of withholding taxes is required, non-U.S. stockholders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect of such dividends and proceeds will be required to seek a refund from the IRS to obtain the benefit or such exemption or reduction. We will not pay any additional amounts in respect of any amounts withheld.

## Information Reporting Requirements and Backup Withholding, Shares Held Offshore

The final paragraph in discussion in the Prospectus under “Material U.S. Federal Income Tax Considerations—Information Reporting Requirements and Backup Withholding, Shares Held Offshore” is replaced in its entirety with the following:

A U.S. withholding tax at a 30% rate will be imposed on dividends paid to U.S. stockholders who own their stock through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. In addition, if these disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed for payments after December 31, 2018 on proceeds from the sale of our stock received by U.S. stockholders who own their stock through foreign accounts or foreign intermediaries. We will not pay any additional amounts in respect of any amounts withheld.



## PART III

## ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Company's 2016 Annual Meeting of Stockholders (the "Proxy Statement"), which the Company expects to file with the U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after December 31, 2015.

## ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.

## ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

The information required by this Item 12 is incorporated herein by reference to the Proxy Statement and to Part II, Item 5 of this Form 10-K.

## ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.

## ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is incorporated herein by reference to the Proxy Statement.



## PART IV

## ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

a. Financial Statements. The financial statements of the Company, together with the report of Independent Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form 10-K and are incorporated herein by reference.

The following information is filed as part of this Form 10-K:

<table><tr><td></td><td>Page</td></tr><tr><td>Report of Independent Registered Public Accounting Firm</td><td>74</td></tr><tr><td>Consolidated Balance Sheets</td><td>75</td></tr><tr><td>Consolidated Statements of Operations</td><td>76</td></tr><tr><td>Consolidated Statements of Stockholders&#x27; Equity</td><td>77</td></tr><tr><td>Consolidated Statements of Cash Flows</td><td>78</td></tr><tr><td>Notes to Consolidated Financial Statements</td><td>79</td></tr></table>

b. Financial Statement Schedules.

Not applicable.

c. Exhibits.

<table><tr><td>Exhibit No.</td><td>Description</td></tr><tr><td>3.1</td><td>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)</td></tr><tr><td>3.2</td><td>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)</td></tr><tr><td>4.1</td><td>Specimen Certificate of common stock of Orchid Island Capital, Inc. (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference)</td></tr><tr><td>10.1</td><td>Form of Management Agreement between Orchid Island Capital, Inc. and Bimini Advisors, LLC (filed as Exhibit 10.1 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)</td></tr><tr><td>10.2</td><td>Form of Investment Allocation Agreement by and among Orchid Island Capital, Inc., Bimini Advisors, LLC and Bimini Capital Management, Inc. (filed as Exhibit 10.2 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)</td></tr><tr><td>10.3</td><td>2012 Equity Incentive Plan (filed as Exhibit 10.3 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)*</td></tr></table>



10.4 Form of Indemnification Agreement by and between Orchid Island Capital, Inc. and Indemnitee (filed as Exhibit 10.4 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)*

10.5 Form of Master Repurchase Agreement (filed as Exhibit 10.5 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)

10.6 Performance Unit Award Agreement by Orchid Island Capital, Inc. to Robert E. Cauley dated January 21, 2015 (filed as Exhibit 99.2 to Form 8-K filed on January 23, 2015 and incorporated herein by reference)*

10.7 Performance Unit Award Agreement by Orchid Island Capital, Inc. to G. Hunter Haas, IV dated January 21, 2015 (filed as Exhibit 99.4 to Form 8-K filed on January 23, 2015 and incorporated herein by reference)*

10.8 2015 Long Term Incentive Compensation Plan (filed as Exhibit 99.1 to Form 8-K filed on March 25, 2015 and incorporated herein by reference)*

21.1 Subsidiaries of the Company

23.1 Consent of BDO USA, LLP**

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 Instance Document ****

101.INS

XBRL

Exhibit Taxonomy Extension Schema Document ****

101.SCH

Exhibit Taxonomy Extension Calculation Linkbase Document****

101.CAL

XBRL

Exhibit Additional Taxonomy Extension Definition Linkbase Document Created****

101.DEF

XBRL

Exhibit Taxonomy Extension Label Linkbase Document ****

101.LAB

XBRL

Exhibit Taxonomy Extension Presentation Linkbase Document ****

101.PRE

XBRL

* Represents a management contract or compensatory plan or arrangement.

** 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: February 25, 2016
By: /s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board

Date: February 25, 2016
By: /s/ G. Hunter Haas, IV
G. Hunter Haas IV
Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

<table><tr><td>/s/ Robert E. Cauley</td><td>Chairman of the Board, Director, Chief</td><td>February 25, 2016</td></tr><tr><td>Robert E. Cauley</td><td>Executive Officer, and President (Principal Executive Officer)</td><td></td></tr><tr><td>/s/ G. Hunter Haas, IV</td><td>Chief Financial Officer, Chief</td><td>February 25, 2016</td></tr><tr><td>G. Hunter Haas, IV</td><td>Investment Officer, and Director (Principal Financial Officer)</td><td></td></tr><tr><td>/s/ Jerry Sintes</td><td>Treasurer</td><td>February 25, 2016</td></tr><tr><td>Jerry Sintes</td><td>(Principal Accounting Officer)</td><td></td></tr><tr><td>/s/ W Coleman Bitting</td><td>Independent Director</td><td>February 25, 2016</td></tr><tr><td>W Coleman Bitting</td><td></td><td></td></tr><tr><td>/s/ John B Van Heuvelen</td><td>Independent Director</td><td>February 25, 2016</td></tr><tr><td>John B. Van Heuvelen</td><td></td><td></td></tr><tr><td>/s/ Frank P. Filippes</td><td>Independent Director</td><td>February 25, 2016</td></tr><tr><td>Frank P. Filippes</td><td></td><td></td></tr><tr><td>/s/ Ava L. Parker</td><td>Independent Director</td><td>February 25, 2016</td></tr><tr><td>Ava L. Parker</td><td></td><td></td></tr></table>



<table><tr><td>Exhibit No.</td><td>Description</td></tr><tr><td>3.1</td><td>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)</td></tr><tr><td>3.2</td><td>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)</td></tr><tr><td>4.1</td><td>Specimen Certificate of common stock of Orchid Island Capital, Inc. (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference)</td></tr><tr><td>10.1</td><td>Form of Management Agreement between Orchid Island Capital, Inc. and Bimini Advisors, LLC (filed as Exhibit 10.1 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)</td></tr><tr><td>10.2</td><td>Form of Investment Allocation Agreement by and among Orchid Island Capital, Inc., Bimini Advisors, LLC and Bimini Capital Management, Inc. (filed as Exhibit 10.2 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)</td></tr><tr><td>10.3</td><td>2012 Equity Incentive Plan (filed as Exhibit 10.3 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)*</td></tr><tr><td>10.4</td><td>Form of Indemnification Agreement by and between Orchid Island Capital, Inc. and Indemnitee (filed as Exhibit 10.4 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)*</td></tr><tr><td>10.5</td><td>Form of Master Repurchase Agreement (filed as Exhibit 10.5 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)</td></tr><tr><td>10.6</td><td>Performance Unit Award Agreement by Orchid Island Capital, Inc. to Robert E. Cauley dated January 21, 2015 (filed as Exhibit 99.2 to Form 8-K filed on January 23, 2015 and incorporated herein by reference)*</td></tr><tr><td>10.7</td><td>Performance Unit Award Agreement by Orchid Island Capital, Inc. to G. Hunter Haas, IV dated January 21, 2015 (filed as Exhibit 99.4 to Form 8-K filed on January 23, 2015 and incorporated herein by reference)*</td></tr><tr><td>10.8</td><td>2015 Long Term Incentive Compensation Plan (filed as Exhibit 99.1 to Form 8-K filed on March 25, 2015 and incorporated herein by reference)*</td></tr><tr><td>21.1</td><td>Subsidiaries of the Company</td></tr><tr><td>23.1</td><td>Consent of BDO USA, LLP**</td></tr><tr><td>31.1</td><td>Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**</td></tr><tr><td>31.2</td><td>Certification of G. Hunter Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**</td></tr><tr><td>32.1</td><td>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.**</td></tr><tr><td>32.2</td><td>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.**</td></tr><tr><td>Exhibit</td><td>Instance Document ****</td></tr><tr><td>101.INS</td><td></td></tr><tr><td>XBRL</td><td></td></tr><tr><td>Exhibit</td><td>Taxonomy Extension Schema Document ****</td></tr><tr><td>101.SCH</td><td></td></tr><tr><td>XBRL</td><td></td></tr><tr><td>Exhibit</td><td>Taxonomic Extension Calculation Linkbase Document****</td></tr><tr><td>101.CAL</td><td></td></tr><tr><td>XBRL</td><td></td></tr><tr><td>Exhibit</td><td>Additional Taxonomy Extension Definition Linkbase Document Created****</td></tr><tr><td>101.DEF</td><td></td></tr><tr><td>XBRL</td><td></td></tr><tr><td>Exhibit</td><td>Taxonomic Extension Label Linkbase Document ****</td></tr><tr><td>101.LAB</td><td></td></tr><tr><td>XBRL</td><td></td></tr><tr><td>Exhibit</td><td>Taxonomic Extension Presentation Linkbase Document ****</td></tr><tr><td>101.PRE</td><td></td></tr><tr><td>XBRL</td><td></td></tr></table>

* Represents a management contract or compensatory plan or arrangement.

** Filed herewith.

*** Furnished herewith.

**** Submitted electronically herewith.



## Subsidiaries of Registrant

<table><tr><td>Subsidiary</td><td>Jurisdiction</td></tr><tr><td>Orchid Island Casualty, LLC</td><td>Maryland</td></tr></table>



## Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-187632) and Form S-3 (No. 333-195389) of our report dated February 25, 2016, relating to the consolidated financial statements of Orchid Island Capital, Inc. which appear in this Form 10-K.



# CERTIFICATIONS

I, Robert E. Cauley, certify that:

1. I have reviewed this annual report on Form 10-K of Orchid Island Capital, Inc. (the "registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 25, 2016

/s/ Robert E. Cauley
Robert E. Cauley
Chairman of the Board, Chief
Executive Officer and President



## CERTIFICATIONS

I, G. Hunter Haas, certify that:

1. I have reviewed this annual report on Form 10-K of Orchid Island Capital, Inc. (the "registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 25, 2016

/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
Chief Financial Officer and Chief Investment Officer



# CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

In connection with the annual report on Form 10-K of Orchid Island Capital, Inc. (the "Company") for the period ended December 31, 2015 to be filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, Robert E. Cauley, Chairman of the Board, Chief Executive Officer and President of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates of, and for the periods covered by, the Report.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934

February 25, 2016

/s/ Robert E. Cauley

Robert E. Cauley

Chairman of the Board,

Chief Executive Officer and

President



# CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

In connection with the annual report on Form 10-K of Orchid Island Capital, Inc. (the "Company") for the period ended December 31, 2015 to be filed with the Securities and Exchange Commission on or about the date hereof (the "Report"), I, G. Hunter Haas, Chief Financial Officer and Chief Investment Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates of, and for the periods covered by, the Report.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934

February 25, 2016

/s/ G. Hunter Haas, IV

G. Hunter Haas, IV

Chief Financial Officer and

Chief Investment Officer