Orchid Island Capital(ORC) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This part provides detailed financial statements, management's discussion and analysis, and disclosures on market risks ITEM 1. Financial Statements This section presents the unaudited condensed financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial instruments and transactions Condensed Balance Sheets (unaudited) This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Balance Sheet Highlights (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :------------------ | | Total Assets | $5,107,927 | $4,058,051 | | Total Liabilities | $4,554,106 | $3,642,760 | | Total Stockholders' Equity | $553,821 | $415,291 | | Mortgage-backed securities | $4,671,239 | $3,726,895 | | Repurchase agreements | $4,514,704 | $3,595,586 | - Total Assets increased by approximately 25.8% from December 31, 2020, to June 30, 2021[11] - Total Stockholders' Equity increased by approximately 33.4% from December 31, 2020, to June 30, 2021[11] Condensed Statements of Operations (unaudited) This section outlines the company's financial performance over periods, including revenues, expenses, and net income or loss Condensed Statements of Operations Highlights (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Interest income | $56,110 | $62,929 | $29,254 | $27,258 | | Interest expense | $(3,497) | $(21,002) | $(1,556) | $(4,479) | | Net interest income | $52,613 | $41,927 | $27,698 | $22,779 | | Realized (losses) gains on MBS | $(6,045) | $(25,020) | $1,352 | $3,360 | | Unrealized (losses) gains on MBS | $(96,147) | $37,272 | $(7,281) | $34,240 | | Gains (losses) on derivative instruments | $10,557 | $(91,709) | $(34,915) | $(8,851) | | Net (loss) income | $(46,234) | $(42,427) | $(16,865) | $48,772 | | Basic net (loss) income per share | $(0.50) | $(0.65) | $(0.17) | $0.74 | | Dividends declared per common share | $0.390 | $0.405 | $0.195 | $0.165 | - Net interest income increased by $10.7 million for the six months ended June 30, 2021, compared to the same period in 2020[13] - The company reported a net loss of $(16.9) million for the three months ended June 30, 2021, a significant decrease from net income of $48.8 million in the prior year period, primarily due to unrealized losses on mortgage-backed securities and derivative instruments[13] Condensed Statements of Stockholders' Equity (unaudited) This section details changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit Changes in Stockholders' Equity (in thousands) | Metric | Balances, January 1, 2021 | Balances, June 30, 2021 | | :------------------------------------------ | :------------------------ | :---------------------- | | Common Stock Par Value | $761 | $1,175 | | Additional Paid-in Capital | $432,524 | $616,874 | | Accumulated Deficit | $(17,994) | $(64,228) | | Total Stockholders' Equity | $415,291 | $553,821 | - Total Stockholders' Equity increased by $138.5 million from January 1, 2021, to June 30, 2021[16] - Issuance of common stock pursuant to public offerings, net, contributed $221.7 million to additional paid-in capital during the six months ended June 30, 2021[16] Condensed Statements of Cash Flows (unaudited) This section reports on the cash inflows and outflows from operating, investing, and financing activities Condensed Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $38,648 | $12,063 | | Net cash (used in) provided by investing activities | $(1,063,982) | $227,308 | | Net cash provided by (used in) financing activities | $1,105,546 | $(281,996) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $80,212 | $(42,625) | | Cash, cash equivalents and restricted cash, end of period | $379,718 | $236,030 | - Net cash provided by financing activities significantly increased in 2021, primarily due to proceeds from common stock issuances[19] - Investing activities shifted from providing cash in 2020 to using a substantial amount of cash in 2021, mainly due to increased purchases of mortgage-backed securities[19] Notes to Condensed Financial Statements (unaudited) This section provides additional information and explanations for items presented in the financial statements NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES This note describes the company's business, accounting principles, and significant financial policies - Orchid Island Capital, Inc. invests in residential mortgage-backed securities (RMBS) and is externally managed by Bimini Advisors, LLC[21][104] - The company raised approximately $221.65 million in net proceeds from common stock issuances during the six months ended June 30, 2021[22][23][24][74] - The Agency RMBS market experienced severe dislocations in mid-March 2020 due to COVID-19 but largely stabilized after Federal Reserve intervention[26] - The company accounts for its RMBS investments at fair value, with changes recorded in the statement of operations, and uses derivative instruments to manage interest rate risk[34][38] - Orchid has elected to be taxed as a real estate investment trust (REIT), requiring annual distribution of at least 90% of its REIT taxable income[45] NOTE 2. MORTGAGE-BACKED SECURITIES This note details the company's mortgage-backed securities portfolio, including types and fair values RMBS Portfolio (in thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :------------------ | | Pass-Through RMBS Certificates | $4,574,539 | $3,698,199 | | Structured RMBS Certificates | $96,700 | $28,696 | | Total Mortgage-backed securities | $4,671,239 | $3,726,895 | - Total mortgage-backed securities increased by approximately 25.3% from December 31, 2020, to June 30, 2021[49] NOTE 3. REPURCHASE AGREEMENTS This note provides information on the company's repurchase agreement liabilities and borrowing rates Repurchase Agreement Liabilities and Rates (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :------------------ | | Repurchase agreement liabilities | $4,514,704 | $3,595,586 | | Net weighted average borrowing rate | 0.13% | 0.23% | | Fair market value of securities pledged | $4,678,071 | $3,729,543 | - The net weighted average borrowing rate for repurchase agreements decreased by 10 basis points from December 31, 2020, to June 30, 2021[51] - Cash pledged to counterparties for repurchase agreements was approximately $79.1 million as of June 30, 2021, up from $58.8 million at December 31, 2020[51] NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS This note outlines the company's use of derivative instruments for hedging and their fair values and gains/losses Derivative and Other Hedging Instruments Fair Value (in thousands) | Category | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :------------------ | | Total derivative assets, at fair value | $43,735 | $20,999 | | Total derivative liabilities, at fair value | $16,769 | $33,227 | | Total margin balances on derivative contracts | $15,616 | $14,451 | Gain (Loss) From Derivative and Other Hedging Instruments, Net (in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Eurodollar futures contracts (short) | $(7) | $(8,318) | $(19) | $(101) | | T-Note futures contracts (short) | $285 | $(4,724) | $(2,191) | $(385) | | Interest rate swaps | $9,446 | $(68,202) | $(17,677) | $(7,579) | | Payer swaptions (short) | $1,212 | $(889) | $27,379 | $(889) | | Payer swaptions (long) | $3,710 | $(4,201) | $(36,360) | $(1,612) | | Interest rate floors | $1,300 | $- | $(84) | $- | | TBA securities (short) | $3,170 | $(6,377) | $(5,963) | $713 | | TBA securities (long) | $(8,559) | $1,133 | $- | $1,133 | | U.S. Treasury securities (short) | $- | $(131) | $- | $(131) | | Total | $10,557 | $(91,709) | $(34,915) | $(8,851) | - The company's interest rate swaps moved from a net liability of $24.7 million at December 31, 2020, to a net asset of $14.3 million at June 30, 2021[55] NOTE 5. PLEDGED ASSETS This note details assets pledged to and from counterparties, primarily for repurchase agreements and derivatives Assets Pledged to Counterparties (in thousands) | Asset Category | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :------------------ | | PT RMBS - fair value | $4,570,053 | $3,692,811 | | Structured RMBS - fair value | $95,525 | $27,095 | | Accrued interest on pledged securities | $12,493 | $9,636 | | Restricted cash | $106,876 | $79,363 | | Total Assets Pledged to Counterparties | $4,784,947 | $3,808,905 | Assets Pledged from Counterparties (in thousands) | Asset Category | June 30, 2021 | December 31, 2020 | | :--------------- | :------------ | :------------------ | | Cash | $12,187 | $6,203 | | U.S. Treasury securities - fair value | $- | $253 | | Total | $12,187 | $6,456 | - Total assets pledged to counterparties increased by approximately 25.6% from December 31, 2020, to June 30, 2021[66] NOTE 6. OFFSETTING ASSETS AND LIABILITIES This note explains the company's policy for offsetting financial assets and liabilities under master netting arrangements Offsetting of Assets (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :------------------ | | Gross Amount of Recognized Assets (Derivatives) | $43,735 | $20,999 | | Net Amount of Assets | $31,548 | $14,916 | Offsetting of Liabilities (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :------------------ | | Gross Amount of Recognized Liabilities (Repurchase Agreements & Derivatives) | $4,531,473 | $3,628,813 | | Net Amount of Liabilities | $9,243 | $13,182 | - The company reports assets and liabilities subject to master netting arrangements on a gross basis[70] NOTE 7. CAPITAL STOCK This note covers the company's common stock issuances, repurchase program, and cash dividends Common Stock Issuances This section details the company's activities related to issuing common stock, including shares and net proceeds Common Stock Issuances (in thousands, except per share amounts) | Type of Offering | Period | Shares | Net Proceeds | | :-------------------------------- | :------------- | :------- | :------------- | | At the Market Offering Program | First Quarter 2021 | 308,048 | $1,572 | | Follow-on Offerings | First Quarter 2021 | 17,940,000 | $95,336 | | At the Market Offering Programs | Second Quarter 2021 | 23,087,089 | $124,746 | | Total 2021 (Six Months) | | 41,335,137 | $221,654 | | Total 2020 | | 13,019,240 | $71,050 | - The company issued 41,335,137 shares of common stock in the first six months of 2021, generating $221.7 million in net proceeds[74] Stock Repurchase Program This section outlines the company's stock repurchase activities and remaining authorization - No shares were repurchased during the six months ended June 30, 2021[78] - The remaining authorization under the repurchase program as of June 30, 2021, was 837,311 shares[78] - Since inception through June 30, 2021, the company repurchased 5,685,511 shares at an aggregate cost of approximately $40.4 million[78] Cash Dividends This section reports on cash dividends declared and paid on common stock Cash Dividends Declared on Common Stock (in thousands, except per share amounts) | Year | Per Share Amount | Total | | :--- | :--------------- | :---- | | 2020 | $0.790 | $53,570 | | 2021 - YTD | $0.455 | $45,460 | - The company declared a dividend of $0.065 per share on July 14, 2021, to be paid on August 27, 2021[80] NOTE 8. STOCK INCENTIVE PLAN This note describes the company's stock incentive plan, including performance units, stock awards, and deferred stock units Performance Units This section details the status and compensation expense related to performance units granted under the stock incentive plan Performance Units Outstanding (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Unvested, beginning of period | 4,554 | 19,021 | | Granted | 137,897 | - | | Vested and issued | (4,554) | (8,305) | | Unvested, end of period | 137,897 | 10,716 | | Compensation expense during period | $113 | $25 | | Unrecognized compensation expense, end of period | $702 | $17 | | Weighted-average remaining vesting term (in years) | 1.9 | 0.6 | - The number of unvested Performance Units increased significantly from 10,716 at June 30, 2020, to 137,897 at June 30, 2021[84] Stock Awards This section describes fully vested common stock awards and their associated compensation expense Fully Vested Common Stock Awards (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Fully vested shares granted | 137,897 | - | | Weighted average grant date price per share | $5.88 | $- | | Compensation expense related to fully vested shares | $811 | $- | - 137,897 fully vested shares were granted in the first six months of 2021, resulting in $0.8 million in compensation expense[86] Deferred Stock Units This section provides information on deferred stock units outstanding and related compensation expense Deferred Stock Units Outstanding (in thousands, except per share data) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Outstanding, beginning of period | 90,946 | 43,570 | | Granted and vested | 22,528 | 25,518 | | Outstanding, end of period | 113,474 | 69,088 | | Compensation expense during period | $120 | $90 | - The number of outstanding Deferred Stock Units increased by 64.2% from June 30, 2020, to June 30, 2021[89] NOTE 9. COMMITMENTS AND CONTINGENCIES This note addresses any material commitments or contingencies the company faces - Management is not aware of any material pending legal proceedings or unreported contingencies as of June 30, 2021[90] NOTE 10. INCOME TAXES This note explains the company's income tax status as a real estate investment trust (REIT) - The company has qualified and elected to be taxed as a real estate investment trust (REIT)[91] - As a REIT, the company is generally not subject to federal income tax on its REIT taxable income if it distributes at least 90% of such income annually[91] NOTE 11. EARNINGS PER SHARE (EPS) This note details the calculation of basic and diluted earnings per share Basic and Diluted EPS (in thousands, except per share information) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Net (loss) income - Basic and diluted | $(46,234) | $(42,427) | $(16,865) | $48,772 | | Weighted average shares-basic and diluted | 92,456 | 65,409 | 99,489 | 66,310 | | Basic net (loss) income per share | $(0.50) | $(0.65) | $(0.17) | $0.74 | | Diluted net (loss) income per share | $(0.50) | $(0.65) | $(0.17) | $0.73 | - Unvested Performance Units and Deferred Stock Units are included in EPS computations when income is available due to dividend participation rights, but excluded during periods of net loss[92] NOTE 12. FAIR VALUE This note describes the valuation methodologies and fair value hierarchy for the company's financial instruments - The company's RMBS and TBA securities are classified as Level 2 valuations, based on quoted market prices for similar instruments or model-based valuations with observable inputs[94][97] - Futures contracts are classified as Level 1 valuations, as they are exchange-traded instruments with quoted market prices[95] - Interest rate swaps are valued using a discounted cash flow approach, and interest rate swaptions are valued using an option pricing model[95] NOTE 13. RELATED PARTY TRANSACTIONS This note discloses transactions and relationships with related parties, including the external manager Management Agreement This section outlines the terms and expenses associated with the company's external management agreement - The company is externally managed and advised by Bimini Advisors, LLC[98] - Total expenses for management fees and overhead allocation were approximately $4.2 million for the six months ended June 30, 2021, compared to $3.3 million for the same period in 2020[100] Other Relationships with Bimini This section describes other relationships and stock ownership between the company and its manager, Bimini - Orchid's CEO and Chairman, Robert Cauley, and CFO, George H. Haas, IV, also serve as executives at Bimini Capital Management, Inc[101] - Bimini Capital Management, Inc. owned 2.2% of Orchid's common stock as of June 30, 2021[101] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, discussing investment strategy, capital raising, market factors, and detailed financial performance metrics, including GAAP and non-GAAP reconciliations, and an outlook on economic and regulatory developments Overview This section provides a high-level summary of the company's business, investment strategy, and REIT status - Orchid Island Capital, Inc. is a specialty finance company investing in Agency RMBS, aiming for attractive risk-adjusted total returns through capital appreciation and monthly distributions[104][105] - The company operates as a REIT, generally exempt from U.S. federal income tax if 90% of its taxable income is distributed annually[106] Capital Raising Activities This section details the company's equity capital raising efforts, including common stock issuances - The company issued 41,335,137 shares of common stock in the first six months of 2021, generating $221.65 million in net proceeds through various equity distribution and underwriting agreements[111][112][113] - An additional 5,560,000 shares were issued through July 30, 2021, under the June 2021 Equity Distribution Agreement, yielding $28.2 million in net proceeds[113] Stock Repurchase Agreement This section outlines the company's stock repurchase activities and remaining authorization - No shares were repurchased during the six and three months ended June 30, 2021[115] - As of June 30, 2021, 837,311 shares remained authorized under the stock repurchase program[115] - Since inception, 5,685,511 shares have been repurchased at an aggregate cost of approximately $40.4 million[115] Factors that Affect our Results of Operations and Financial Condition This section discusses key internal and external factors influencing the company's financial performance and position - Key external factors include interest rate trends, the spread between Agency RMBS yields and funding/hedging costs, competition, and actions by U.S. government entities (Fed, FHFA, FOMC, Treasury)[116][117] - Internal factors such as leverage, access to funding, borrowing costs, hedging activities, and the market value of investments also significantly impact results[117] Results of Operations This section analyzes the company's financial performance, including net income, interest income, and expenses Net (Loss) Income Summary This section summarizes the company's net income or loss, highlighting key contributing factors Net (Loss) Income Summary (in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Net interest income | $52,613 | $41,927 | $27,698 | $22,779 | | (Losses) gains on RMBS and derivative contracts | $(91,635) | $(79,457) | $(40,844) | $28,749 | | Net (loss) income | $(46,234) | $(42,427) | $(16,865) | $48,772 | - Net loss for the three months ended June 30, 2021, was $(16.9) million, a significant decline from net income of $48.8 million in the prior year, primarily due to increased losses on RMBS and derivative contracts[118] GAAP and Non-GAAP Reconciliations This section reconciles GAAP net income to non-GAAP measures, providing alternative views of financial performance Net Earnings Excluding Realized and Unrealized Gains and Losses (in thousands) | Period | Net Income (GAAP) | Realized and Unrealized Gains and Losses | Net Earnings Excluding Realized and Unrealized Gains and Losses | | :----------------------- | :---------------- | :--------------------------------------- | :-------------------------------------------------------------- | | Three Months Ended June 30, 2021 | $(16,865) | $(40,844) | $23,979 | | Six Months Ended June 30, 2021 | $(46,234) | $(91,635) | $45,401 | | Six Months Ended June 30, 2020 | $(42,427) | $(79,457) | $37,030 | - The company uses non-GAAP measures to isolate net interest income and other expenses from fair value adjustments, aiding in the assessment of funding and hedging strategies[122] Economic Interest Expense and Economic Net Interest Income This section presents interest expense and net interest income adjusted for economic hedging activities Economic Interest Expense and Net Interest Income (in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | GAAP Interest Expense | $3,497 | $21,002 | $1,556 | $4,479 | | Economic Interest Expense | $12,645 | $31,653 | $6,660 | $10,230 | | GAAP Net Interest Income | $52,613 | $41,927 | $27,698 | $22,779 | | Economic Net Interest Income | $43,465 | $31,276 | $22,594 | $17,028 | - Economic net interest income increased by $12.2 million for the six months ended June 30, 2021, compared to the same period in 2020[133] - The company adjusts GAAP interest expense to reflect gains or losses on derivative instruments for economic hedging purposes, providing a more comprehensive view of funding costs[126] Net Interest Income This section analyzes the company's net interest income, detailing changes and drivers - Net interest income for the six months ended June 30, 2021, was $52.6 million, an increase of $10.7 million from $41.9 million in the prior year, driven by a $17.5 million decrease in interest expense[135] - For the three months ended June 30, 2021, net interest income was $27.7 million, up $4.9 million from $22.8 million in the prior year, due to a $2.9 million decrease in interest expense[137] - On an economic basis, net interest income for the six months ended June 30, 2021, was $43.5 million, compared to $31.3 million in 2020[136] Interest Income and Average Asset Yield This section provides details on interest income generated and the average yield on the company's assets Interest Income and Average Asset Yield (Six Months Ended June 30) (in thousands) | Metric | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Interest income | $56,110 | $62,929 | | Average RMBS Held | $4,268,800 | $3,198,300 | | Realized Yield on Average RMBS | 2.63% | 3.94% | Interest Income and Average Asset Yield (Three Months Ended June 30) (in thousands) | Metric | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Interest income | $29,254 | $27,258 | | Average RMBS Held | $4,504,900 | $3,126,800 | | Realized Yield on Average RMBS | 2.60% | 3.49% | - Interest income decreased by $6.8 million for the six months ended June 30, 2021, due to a 131 basis point decrease in RMBS yield, partially offset by a $1,070.5 million increase in average RMBS holdings[142] Interest Expense and the Cost of Funds This section analyzes the company's interest expense and the overall cost of its borrowings Interest Expense and Cost of Funds (Six Months Ended June 30) (in thousands) | Metric | 2021 | 2020 | | :-------------------------------- | :--- | :--- | | Average outstanding borrowings | $4,118,400 | $3,060,800 | | Total interest expense (GAAP) | $3,497 | $21,002 | | Average cost of funds (GAAP) | 0.17% | 1.37% | | Economic interest expense | $12,645 | $31,653 | | Average economic cost of funds | 0.61% | 2.07% | - Total interest expense decreased by $17.5 million for the six months ended June 30, 2021, due to a 120 bps decrease in the average cost of funds[146] - The average economic cost of funds decreased by 146 bps to 0.61% for the six months ended June 30, 2021[147] - The average term to maturity of outstanding repurchase agreements decreased to 29 days at June 30, 2021, from 31 days at December 31, 2020[150] Gains or Losses This section details realized and unrealized gains or losses on the company's RMBS and derivative instruments Gains or Losses (in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Total (losses) gains on RMBS | $(102,192) | $12,252 | $(5,930) | $37,600 | | Unrealized (losses) gains on RMBS | $(96,147) | $37,272 | $(7,282) | $34,240 | | Total (losses) gains from derivative instruments | $10,557 | $(91,709) | $(34,915) | $(8,851) | - The company experienced significant total losses on RMBS of $(102.2) million for the six months ended June 30, 2021, compared to gains of $12.3 million in the prior year[155] - Total gains from derivative instruments swung to $10.6 million for the six months ended June 30, 2021, from losses of $(91.7) million in the prior year[155] Expenses This section outlines the company's operating expenses, including management fees and compensation Operating Expenses (in thousands) | Expense Category | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------------------------- | :------------------------------- | | Management fees | $3,413 | $2,645 | $1,792 | $1,268 | | Overhead allocation | $799 | $695 | $395 | $348 | | Accrued incentive compensation | $625 | $(275) | $261 | $161 | | Total expenses | $7,212 | $4,897 | $3,719 | $2,756 | - Total operating expenses increased by $2.3 million for the six months ended June 30, 2021, compared to the same period in 2020, primarily due to higher management fees and accrued incentive compensation[161] Financial Condition This section assesses the company's financial position, focusing on its RMBS portfolio, borrowings, and equity Mortgage-Backed Securities This section describes the characteristics and fair value of the company's mortgage-backed securities portfolio RMBS Portfolio Characteristics (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :------------ | :------------------ | | RMBS portfolio fair value | $4,671,239 | $3,726,895 | | Weighted average coupon | 3.06% | 3.19% | | 3-month Constant Prepayment Rate (CPR) | 12.9% | 20.1% | | Effective Duration | 3.830 | 2.360 | - The RMBS portfolio increased to $4,671.2 million at fair value as of June 30, 2021, from $3,726.9 million at December 31, 2020[163][164] - Fannie Mae securities constituted 80.8% of the total portfolio as of June 30, 2021[164] Borrowings This section provides details on the company's repurchase agreement borrowings and associated rates Borrowings Information (in thousands) | Metric | June 30, 2021 | | :--------------------------------------- | :------------ | | Obligations outstanding under repurchase agreements | $4,514,704 | | Weighted average borrowing rate | 0.13% | | Weighted average remaining maturity | 29 days | - The company had borrowing facilities with 23 counterparties in the repurchase agreement market as of June 30, 2021[167] Liquidity and Capital Resources This section discusses the company's liquidity position, cash resources, and capital management strategies - As of June 30, 2021, the company had $272.8 million in unrestricted cash and cash equivalents and $5.7 million in unpledged securities[173][181] - The weighted average haircut on pledged collateral remained stable at approximately 5.0% as of June 30, 2021[175] Contractual Obligations for Repurchase Agreements (in thousands) | Obligation | Within One Year | | :--------------------------------------- | :-------------- | | Repurchase agreements | $4,514,704 | | Interest expense on repurchase agreements | $1,516 | | Totals | $4,516,220 | Stockholders' Equity This section details changes in the company's stockholders' equity, including capital raising activities - The company raised significant capital through common stock issuances in 2020 and 2021, including $19.4 million (January 2020), $147.4 million (August 2020), $45.2 million (January 2021), $50.0 million (March 2021), and $30.6 million (June 2021)[182][184][185][186][187] - An additional $28.2 million in net proceeds was generated from common stock issuances through July 30, 2021[187] Outlook This section provides management's perspective on future economic conditions, market trends, and their potential impact on the company Economic Summary This section summarizes recent economic conditions, including GDP, inflation, and employment trends - The economy experienced a strong recovery in Q2 2021, driven by widespread vaccine distribution, substantial government stimulus, and accommodative monetary policy[188] - GDP is estimated to have expanded at an 8.0% annualized rate in Q2 2021, with retail sales, travel, and home sales surging[189] - Inflation, as measured by the Consumer Price Index (CPI), accelerated to over 5% year-over-year for the first time since 2008, primarily due to supply/demand imbalances[190] - Job growth remained a disappointment, potentially impacted by the rapid emergence of the Delta variant of COVID-19[190] Legislative Response and the Federal Reserve This section discusses government stimulus measures and the Federal Reserve's monetary policy actions - Congress passed additional stimulus packages in late 2020 (Consolidated Appropriations Act of 2021) and March 2021 (American Rescue Plan Act of 2021)[200][201] - The Fed unveiled a new monetary framework policy focused on average inflation rate targeting, allowing the Fed Funds rate to remain low even if inflation temporarily surpasses 2%[191] - The Fed is committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS monthly, and has reiterated its intention to provide notice before reducing the pace of such purchases[197] Interest Rates This section analyzes recent trends in interest rates and their implications for the company's portfolio - Longer-term interest rates declined in Q2 2021, with the 10-year U.S. Treasury note falling by 27.2 bps and the 30-year U.S. Treasury bond by 32.5 bps[192] - This counter-intuitive movement was attributed to technical market positioning, disappointing job growth, and the Fed's insistence that inflationary pressures are transitory[192][193] - The market interpreted the June FOMC meeting as a hawkish shift, despite Fed leadership maintaining that their stance has not changed[193] The Agency RMBS Market This section provides an overview of the performance and key dynamics within the Agency RMBS market - The Agency RMBS market underperformed most other asset classes in Q2 2021, with a sub-index performance of 0.33% for the quarter[194] - Underperformance was primarily driven by market anticipation of the Fed tapering its asset purchases sooner than expected[194] - A rally in long-term interest rates led to re-accelerated refinancing activity, delaying burn-out for higher coupon, more seasoned mortgages[195] Recent Legislative and Regulatory Developments This section outlines recent legislative and regulatory changes affecting the company's operations and market environment - Foreclosure and eviction moratoriums, initially under the CARES Act, were extended to July 31, 2021[200] - A new regulatory capital framework for Fannie Mae and Freddie Mac was published in December 2020, with FHFA leadership changes potentially impacting future GSE reform[202] - LIBOR is scheduled to be replaced by SOFR, with publication ceasing for most USD settings by December 31, 2021, and all by June 30, 2023[203] - Fannie Mae extended its delinquent loan buyout policy for Single-Family UMBS and MBS to 24 consecutively missed monthly payments[205] Effect on Us This section explains the potential impact of economic, legislative, and market developments on the company's business - Changes in the guarantee structure of Agency RMBS or their elimination could increase costs or necessitate a change in investment strategy[208] - Lower long-term interest rates can increase Agency RMBS value, but higher prepayment levels can decrease it, particularly for Interest-Only (IO) and Inverse Interest-Only (IIO) securities[209][210] - Rising interest rates increase borrowing costs on repurchase agreements, which the company hedges using interest rate swaps, futures, and swaptions[214][215] - The Fed's potential modification or reduction of Agency RMBS purchases could negatively impact the company's investment portfolio[212] Summary This section provides a concise overview of the key economic and market developments impacting the company - Q2 2021 saw a strong economic recovery with GDP expanding at an 8.0% annualized rate and CPI over 5% year-over-year, driven by vaccines, stimulus, and accommodative monetary policy[216][217] - The Agency RMBS market underperformed due to anticipated Fed tapering of asset purchases and a rally in long-term interest rates, which re-accelerated refinancing activity[218] Critical Accounting Estimates This section discusses the company's critical accounting estimates and any changes thereto - No material changes to critical accounting estimates were reported since the annual report on Form 10-K for the year ended December 31, 2020[219] Capital Expenditures This section reports on the company's capital expenditure commitments - As of June 30, 2021, the company had no material commitments for capital expenditures[220] Off-Balance Sheet Arrangements This section discloses any off-balance sheet arrangements the company may have - As of June 30, 2021, the company did not have any off-balance sheet arrangements[221] Dividends This section details the company's dividend policy and declared cash dividends - To maintain REIT qualification, the company must distribute at least 90% of its REIT taxable income annually[223] Cash Dividends Declared (in thousands, except per share amounts) | Year | Per Share Amount | Total | | :--- | :--------------- | :---- | | 2020 | $0.790 | $53,570 | | 2021 - YTD | $0.455 | $45,460 | Inflation This section discusses the impact of inflation on the company's financial performance - The company's performance is primarily influenced by interest rates rather than inflation, as its assets and liabilities are interest rate sensitive[226] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines the company's exposure to various market risks, including interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk, and counterparty credit risk, and describes the strategies and instruments used to manage these risks Interest Rate Risk This section describes the company's exposure to interest rate fluctuations and its hedging strategies - The company is highly sensitive to interest rate changes, which affect net interest income, prepayment rates, and the value of its RMBS portfolio[228] - Futures contracts, interest rate swaps, and swaptions are utilized as economic hedges against future interest rate increases on repurchase agreement borrowings[229] - The company strives to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0[231] Interest Rate Sensitivity (June 30, 2021) | Change in Interest Rate | Portfolio Market Value | Book Value | | :---------------------- | :--------------------- | :--------- | | -200 Basis Points | (0.71)% | (6.01)% | | -100 Basis Points | 0.27% | 2.26% | | -50 Basis Points | 0.37% | 3.12% | | +50 Basis Points | (0.96)% | (8.09)% | | +100 Basis Points | (2.37)% | (19.96)% | | +200 Basis Points | (5.88)% | (49.61)% | Prepayment Risk This section explains the risk associated with mortgage loan prepayments and its effect on the company - The company faces the risk that mortgage loans will be prepaid faster than anticipated, affecting net interest income and reinvestment yields[240][241] - Prepayment rates are influenced by interest rates, housing prices, and economic conditions, generally increasing when mortgage interest rates fall[240] Spread Risk This section outlines the company's exposure to changes in market spreads between asset yields and funding costs - The company is exposed to 'spread risk' or 'basis risk,' where widening market spreads between Agency RMBS yields and benchmark rates can cause portfolio value to decline, even if hedging instruments tied to benchmark rates increase in value[242] - This risk is independent of benchmark interest rate changes and is not typically protected by futures contracts or interest rate swaps/swaptions[242] Liquidity Risk This section discusses the company's liquidity management and potential risks related to funding - The primary liquidity risk arises from financing long-term assets with shorter-term repurchase agreements[243] - As of June 30, 2021, the company had $272.8 million in unrestricted cash and cash equivalents and $5.7 million in unpledged securities to meet margin calls and for other corporate purposes[243] - Risks include increased margin calls, inability to renew repurchase agreements, or significantly higher haircuts, which could force asset sales[243] Extension Risk This section describes the risk of asset durations extending in a rising interest rate environment - If prepayment rates decrease in a rising interest rate environment, the average life or duration of fixed-rate assets extends, negatively impacting results as fixed-expiration hedging instruments cover a smaller percentage of funding exposure[245] - This situation could cause the market value of Agency RMBS and CMOs to decline and potentially force asset sales to maintain liquidity, incurring realized losses[245] Counterparty Credit Risk This section addresses the risk of counterparties failing to meet their obligations in financial transactions - The company is exposed to counterparty credit risk from repurchase agreements and derivative contracts, where counterparties may fail to perform their obligations[246] - This risk is mitigated through daily collateral adjustments, limiting counterparties to registered central clearing exchanges and major financial institutions with acceptable credit ratings[247] ITEM 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal controls over financial reporting Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures - As of June 30, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures were effective in ensuring timely and accurate information for required disclosures[248] Changes in Internal Controls over Financial Reporting This section discloses any changes in the company's internal controls over financial reporting - No significant changes in the company's internal control over financial reporting occurred during the most recent fiscal quarter[249] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures ITEM 1. Legal Proceedings This section confirms that the company is not involved in any material legal proceedings - The company is not a party to any material pending legal proceedings as of June 30, 2021[252] ITEM 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's annual report - No material changes in risk factors from those set forth in the Annual Report on Form 10-K for the year ended December 31, 2020, as of June 30, 2021[253] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's equity security sales and repurchase activity, noting no unregistered sales and a small number of repurchases for tax withholding purposes during the quarter - The company did not have any unregistered sales of its equity securities during the three months ended June 30, 2021[255] - 311 shares were repurchased in June 2021 at a weighted-average price of $5.23 per share for tax withholding purposes, which do not reduce the stock repurchase program authorization[255] - The maximum number of shares that may yet be repurchased under the authorization is 837,311[255] ITEM 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities - None[256] ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not Applicable[257] ITEM 5. Other Information This section reports that there is no other information to disclose - None[258] ITEM 6. Exhibits This section lists all exhibits filed with the 10-Q report, including XBRL documents, corporate governance documents, and certifications - Includes various XBRL Taxonomy Extension Documents (Instance, Schema, Calculation, Definition, Label, Presentation)[260] - Key corporate governance documents such as Articles of Amendment, Bylaws, and the 2021 Equity Incentive Plan are filed[262] - Certifications from the Chief Executive Officer and Chief Financial Officer are included pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[262] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the filing of the report - The report is signed by Robert E. Cauley, Chief Executive Officer, President and Chairman of the Board, and George H. Haas, IV, Secretary, Chief Financial Officer, Chief Investment Officer and Director[266] - The report was signed on July 30, 2021[266]