-3-
BIMINI CAPITAL MANAGEMENT, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(Unaudited) | |
For the Nine Months Ended September 30, 2019 and 2018 | |
| | | | | | |
| | 2019 | | | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income (loss) | | $ | 344,765 | | | $ | (2,177,995 | ) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | | | |
Stock based compensation | | | - | | | | 3,918 | |
Depreciation | | | 54,886 | | | | 57,853 | |
Deferred income tax provision (benefit) | | | 1,136,975 | | | | (480,767 | ) |
(Gains) losses on mortgage-backed securities, net | | | (6,249,664 | ) | | | 8,983,541 | |
Gains on retained interests in securitizations | | | (314,984 | ) | | | (1,105,056 | ) |
Impairment of real property held for sale | | | 673,438 | | | | - | |
Unrealized losses on Orchid Island Capital, Inc. common stock | | | 972,823 | | | | 3,085,673 | |
Realized and unrealized losses (gains) on forward settling TBA securities | | | 2,005,175 | | | | (19,297 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accrued interest receivable | | | 194,552 | | | | (29,006 | ) |
Other assets | | | (158,981 | ) | | | (1,315,505 | ) |
Accrued interest payable | | | (365,887 | ) | | | 128,514 | |
Other liabilities | | | (315,920 | ) | | | 383,980 | |
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | | (2,022,822 | ) | | | 7,515,853 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
From mortgage-backed securities investments: | | | | | | | | |
Purchases | | | (3,285,372 | ) | | | (91,578,375 | ) |
Sales | | | 43,975,274 | | | | 60,431,192 | |
Principal repayments | | | 14,756,931 | | | | 19,646,969 | |
Payments received on retained interests in securitizations | | | - | | | | 426,414 | |
Proceeds from termination of retained interests | | | 314,984 | | | | 4,968,740 | |
Costs associated with termination of retained interests | | | - | | | | (3,636,718 | ) |
Purchases of property and equipment | | | - | | | | (15,393 | ) |
Net settlement of forward settling TBA contracts | | | (2,889,941 | ) | | | (222,891 | ) |
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | | | 52,871,876 | | | | (9,980,062 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from repurchase agreements | | | 860,182,000 | | | | 1,233,087,584 | |
Principal repayments on repurchase agreements | | | (906,103,000 | ) | | | (1,229,528,096 | ) |
Class A common shares repurchased and retired | | | (2,277,607 | ) | | | (143,820 | ) |
Class A common shares sold directly to employees | | | - | | | | 199,997 | |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | (48,198,607 | ) | | | 3,615,665 | |
| | | | | | | | |
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 2,650,447 | | | | 1,151,456 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | | | 6,240,488 | | | | 8,752,860 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | | $ | 8,890,935 | | | $ | 9,904,316 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid (received) during the period for: | | | | | | | | |
Interest expense | | $ | 5,216,252 | | | $ | 3,764,711 | |
Income taxes | | $ | (46,700 | ) | | $ | 1,418,880 | |
See Notes to Condensed Consolidated Financial Statements | |
-4-
BIMINI CAPITAL MANAGEMENT, INC. | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |
(Unaudited) | |
For the Nine Months Ended September 30, 2017 and 2016 | |
| | | | | | |
| | 2017 | | | 2016 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 1,936,380 | | | $ | 2,226,926 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Stock based compensation | | | 21,515 | | | | 217,206 | |
Depreciation | | | 57,903 | | | | 64,780 | |
Deferred income tax provision | | | 1,200,403 | | | | 1,891,268 | |
Losses on mortgage-backed securities, net | | | 296,691 | | | | 133,320 | |
Gains on retained interests in securitizations | | | (389,568 | ) | | | (2,100,367 | ) |
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock | | | 823,308 | | | | (683,568 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accrued interest receivable | | | (198,270 | ) | | | (136,360 | ) |
Other assets | | | 20,445 | | | | (226,813 | ) |
Accrued interest payable | | | 133,397 | | | | 12,000 | |
Other liabilities | | | (678,809 | ) | | | (879,328 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 3,223,395 | | | | 519,064 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
From mortgage-backed securities investments: | | | | | | | | |
Purchases | | | (77,294,851 | ) | | | (133,099,987 | ) |
Sales | | | 1,654,834 | | | | 73,061,443 | |
Principal repayments | | | 7,654,912 | | | | 10,291,945 | |
Payments received on retained interests in securitizations | | | 945,645 | | | | 1,758,303 | |
Purchases of property and equipment | | | (29,379 | ) | | | - | |
Purchases of Orchid Island Capital, Inc. common stock | | | (1,204,235 | ) | | | (1,859,277 | ) |
NET CASH USED IN INVESTING ACTIVITIES | | | (68,273,074 | ) | | | (49,847,573 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from repurchase agreements | | | 762,398,624 | | | | 712,324,734 | |
Principal repayments on repurchase agreements | | | (696,852,430 | ) | | | (663,567,951 | ) |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 65,546,194 | | | | 48,756,783 | |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 496,515 | | | | (571,726 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | | | 5,651,437 | | | | 6,712,483 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | | $ | 6,147,952 | | | $ | 6,140,757 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 1,891,045 | | | $ | 1,302,681 | |
Income taxes | | $ | 261,492 | | | $ | 515,689 | |
| | | | | | | | |
See Notes to Condensed Consolidated Financial Statements | |
BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2017
2019
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Bimini Capital Management, Inc., a Maryland corporation ("(“Bimini Capital"Capital” or the "Company"“Company”), was formed in September 2003, foris a holding company. The Company operates in two business segments through its principal wholly-owned operating subsidiaries, Bimini Advisors Holdings, LLC and Royal Palm Capital, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the purpose of creatingSecurities and managingExchange Commission), are collectively referred to as "Bimini Advisors." Bimini Advisors manages a leveraged investment portfolio consisting of residential mortgage-backed securities ("MBS"(“MBS”). In addition, the Company manages an MBS portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services.
Consolidation Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
The accompanying consolidated financial statements include the accounts of Bimini Capital, its wholly-owned subsidiaries, Bimini Advisors Holdings, LLC (formerly known as Bimini Advisors, Inc.) and Royal Palm Capital, LLC (formerly known as MortCo TRS, LLC). Bimini Advisors Holdings, LLC andmaintains an investment portfolio, consisting primarily of MBS investments, for its wholly-owned subsidiary, Bimini Advisors, LLC are collectively referred to as "Bimini Advisors."own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.
Variable Interest Entities (“VIEs”)
Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 810, Consolidation, requires the consolidation of a variable interest entity ("VIE") by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 8 for a description of the accounting used for this VIE.
The Company obtains interests in VIEs through its investments in mortgage-backed securities. The interests in these VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future. As a result, the Company does not consolidate these VIEs and accounts for the interest in these VIEs as mortgage-backed securities. See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they domay not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine and three month periods ended September 30, 20172019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2019.
The consolidated balance sheet at December 31, 20162018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.
2018.
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. Significant estimates affecting the accompanying consolidated financial statements include determining the fair values of MBS, investment in Orchid common shares, derivatives and retained interests, determining the amounts of asset valuation allowances, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period.
Statement of Comprehensive IncomeSegment Reporting
In accordance with ASC Topic 220, Comprehensive Income, a statementThe Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance. The accounting policies of comprehensive income has not been included as the Company has no items of other comprehensive income (loss). Comprehensive income isoperating segments are the same as net income for all periods presented.the Company’s accounting policies with the exception that inter-segment revenues and expenses are included in the presentation of segment results. For further information see Note 15.
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. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments. The following table presents the Company’s cash, cash equivalents and restricted cash as of September 30, 2019 and December 31, 2018.
(in thousands) | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | September 30, 2019 | | December 31, 2018 | |
Cash and cash equivalents | | $ | 5,211,532 | | | $ | 4,429,459 | | | $ | 7,801,875 | | | $ | 4,947,801 | |
Restricted cash | | | 936,420 | | | | 1,221,978 | | | | 1,089,060 | | | | 1,292,687 | |
Total cash, cash equivalents and restricted cash | | $ | 6,147,952 | | | $ | 5,651,437 | | | $ | 8,890,935 | | | $ | 6,240,488 | |
The Company maintains cash balances at several banks and atexcess margin with an exchange clearing member. At times, these 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 September 30, 2017,2019, the Company'sCompany’s cash deposits exceeded federally insured limits by approximately $3.3$6.6 million. The Company also maintains excess margin in accounts with derivative exchanges. 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 banks and derivative counterpartiesexchange clearing members and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are recognized over the period of time in which the service is performed.
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through ("PT"(“PT”) certificates, collateralized mortgage obligations (“CMOs”), and interest-only ("IO"(“IO”) securities and inverse interest-only ("IIO"(“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans. The Company has elected to account for its investment in MBS 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'smanagement’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 MBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the MBS balance with an offsetting receivable recorded.
The fairFair value of the Company's investment in MBS is governed by ASC Topic 820, Fair Value Measurement. The definition of fair value in ASC Topic 820 focuses ondefined as 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 MBS are based on independent pricing sources and/or third-party broker quotes, when available.
Income on PT MBS 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 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'sasset’s carrying value. At each reporting date, the effective yield is adjusted prospectively from thefor future reporting periodperiods 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 MBS 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. The amount reported as unrealized gains or losses on mortgage backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period.
Orchid Island Capital, Inc. Common Stock
The Company has elected the fair value option for its investment in Orchid common shares. The change in the fair value of this investment and dividends received on this investment are reflected in other income in the consolidated statements of operations. We estimate the fair value of our investment in Orchid on a market approach using "Level 1"“Level 1” inputs based on the quoted market price of Orchid'sOrchid’s common stock on a national stock exchange. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management'smanagement’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf.
Retained Interests in Securitizations
Retained interests in the subordinated tranches of securities created in securitization transactions were initially recorded at their fair value when issued by Royal Palm. SubsequentThese retained interests currently have a recorded fair value of zero, but may generate cash flows in the future. Any cash received from the retained interests are reflected in the consolidated statement of cash flows. Realized gains and subsequent adjustments to fair value are reflected in earnings. Quoted market prices for these assets are generally not available, so the Company estimates fair value based on the present valueconsolidated statements of expected future cash flows using management's best estimates of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.operations.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Treasury Note ("T-Note"(“T-Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities transactions, but the Companyit may enter into other transactionsderivatives in the future.
The Company has elected not to treat any of itsaccounts for TBA securities as derivative financial instruments as hedgesinstruments. Gains and losses associated with TBA securities transactions are reported in order to align the accounting treatment of itsgain (loss) on derivative instruments within the treatmentaccompanying consolidated statements of its portfolio assets under the fair value option. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivativeoperations.
Derivative instruments beare carried at fair value. Changesvalue, and changes in fair value are recorded in earningsthe consolidated operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part ofby 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
ASC Topic 825, Financial Instruments, requires disclosure of theThe fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the financial statements or in the accompanying notes. MBS, Orchid common stock Eurodollar futures contracts, interest rate swaptions and retained interests in securitization transactionsderivative assets and liabilities 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 14 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of September 30, 20172019 and December 31, 2016,2018, due to the short-term nature of these financial instruments.
It is impractical to estimate the fair value of the Company'sCompany’s junior subordinated notes. Currently, there is a limited market for these types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. InformationFurther information regarding carrying amount and effective interest rate for these instruments is presented in Note 8 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30 years. Property and equipment is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets.
The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accountsRepurchase agreements are accounted for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
-8-
Share-Based Compensation
The Company follows the provisions of ASC Topic 718, Compensation – Stock Compensation, to account for stock and stock-based awards. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings over the vesting period based on the fair value of the award. The Company applies a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal. A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate. For transactions with non-employees in which services are performed in exchange for the Company'sCompany’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance.the issuance of the common stock.
Earnings Per Share
The Company follows the provisions of ASC Topic 260, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents or two (or more) classes of securities that participate in dividend distributions to present both basic and diluted earnings per share ("EPS") on the face of the consolidated statement of operations. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors.Stock. Accordingly, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class B and Class C Common Stock are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.
For the calendar year ended December 31, 2015, Bimini Capital, Bimini Advisors, Inc. and Royal Palm were separate taxpaying entities for income tax purposes and filed separate Federal income tax returns. Bimini Advisors, Inc. remained a separate tax paying entity through January 31, 2016; on that date, Bimini Advisors, Inc. was reorganized (as Bimini Advisors Holdings, LLC) to be an LLC wholly-owned by Bimini Capital. Beginning with the tax period starting on February 1, 2016, Bimini Capital and Bimini Advisors are combined as a single tax paying entity. Royal Palm continues to be treated as a separate tax paying entity.
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company'sCompany’s evaluation, it is more likely than not that they will not be realized.
The Company'sCompany’s U.S. federal income tax returns for years ended on or after December 31, 20142016 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company.
For tax filing purposes, Bimini Capital and Bimini Advisors are consolidated as a single tax paying entity. Royal Palm files as a separate tax paying entity.
The Company measures, recognizes and presents its uncertain tax positions in accordance with ASC Topic 740, Income Taxes. Under that guidance, the Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.
Recent Accounting Pronouncements
In NovemberJune 2016, the FASB issued Accounting Standards Update ("ASU"(“ASU”) 2016-18,2016-13, Statement of Cash Flows – (Topic 230): Restricted Cash. ASU 2016-18 requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company adopted the ASU beginning with the first quarter of 2017. The prior period consolidated statement of cash flows has been retrospectively adjusted to conform to this presentation.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). ASU 2016-13 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019. Early application is permitted for fiscal periods beginning after December 15, 2018. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 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 does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.statements because our financial assets are measured at fair value through earnings.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the terms of a management agreement. As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The term of the management agreement is automatically renewed on February 20 of each year for an additional one year term unless terminated by either party. The current term of the management agreement expires February 20, 2020. Orchid did not notify the Company of its intention to not renew the agreement within the prescribed 180 day notice period. Therefore, the agreement will remain in place through February 20, 2021. Should Orchid terminate the management agreement without cause, it will be obligated to 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 current automatic renewal term.
The following table summarizes the advisory services revenue from Orchid for the nine and three months ended September 30, 2019 and 2018.
(in thousands) | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Management fee | | $ | 4,051 | | | $ | 4,800 | | | $ | 1,440 | | | $ | 1,482 | |
Allocated overhead | | | 1,001 | | | | 1,133 | | | | 351 | | | | 391 | |
Total | | $ | 5,052 | | | $ | 5,933 | | | $ | 1,791 | | | $ | 1,873 | |
At September 30, 2019 and December 31, 2018, the net amount due from Orchid was approximately $0.6 million and $0.7 million, respectively. These amounts are included in “other assets” in the consolidated balance sheets.
NOTE 2.3. MORTGAGE-BACKED SECURITIES
The following table presents the Company'sCompany’s MBS portfolio as of September 30, 20172019 and December 31, 2016:2018:
(in thousands) | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | |
Pass-Through MBS: | | | | | | |
Fixed-rate Mortgages | | $ | 195,151 | | | $ | 124,299 | |
Total Pass-Through MBS | | | 195,151 | | | | 124,299 | |
Structured MBS: | | | | | | | | |
Interest-Only Securities | | | 1,643 | | | | 2,654 | |
Inverse Interest-Only Securities | | | 1,196 | | | | 3,349 | |
Total Structured MBS | | | 2,839 | | | | 6,003 | |
Total | | $ | 197,990 | | | $ | 130,302 | |
(in thousands) | | | | | | |
| | September 30, 2019 | | | December 31, 2018 | |
Fixed-rate MBS | | $ | 161,538 | | | $ | 209,675 | |
Interest-Only MBS | | | 1,136 | | | | 2,021 | |
Inverse Interest-Only MBS | | | 553 | | | | 728 | |
Total | | $ | 163,227 | | | $ | 212,424 | |
The following table summarizes the Company's MBS portfolio as of September 30, 2017 and December 31, 2016, according to the contractual maturities of the securities in the portfolio. Actual maturities of MBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.
(in thousands) | | | | | | |
| September 30, 2017 | | December 31, 2016 | |
Greater than or equal to ten years | | $ | 197,990 | | | $ | 130,302 | |
Total | | $ | 197,990 | | | $ | 130,302 | |
NOTE 3. RETAINED INTERESTS IN SECURITIZATIONS
The following table summarizes the estimated fair value of the Company's retained interests in asset backed securities as of September 30, 2017 and December 31, 2016:
(in thousands) | | | | | | | |
Series | Issue Date | | September 30, 2017 | | | December 31, 2016 | |
HMAC 2004-2 | May 10, 2004 | | $ | 20 | | | $ | 143 | |
HMAC 2004-3 | June 30, 2004 | | | 148 | | | | 364 | |
HMAC 2004-4 | August 16, 2004 | | | 290 | | | | 463 | |
HMAC 2004-5 | September 28, 2004 | | | 100 | | | | 144 | |
Total | | | $ | 558 | | | $ | 1,114 | |
NOTE 4. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. 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 September 30, 2017,2019, the Company had outstanding repurchase agreement obligations of approximately $187.4 million with a net weighted average borrowing rate of 1.35%. These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $198.2 million. As of December 31, 2016, the Company had outstanding repurchase agreement obligations of approximately $121.8 million with a net weighted average borrowing rate of 0.99%. These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $130.1 million.
met all margin call requirements.
As of September 30, 20172019 and December 31, 2016,2018, the Company'sCompany’s repurchase agreements had remaining maturities as summarized below:
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | OVERNIGHT | | | BETWEEN 2 | | | BETWEEN 31 | | | GREATER | | | | | | OVERNIGHT | | | BETWEEN 2 | | | BETWEEN 31 | | | GREATER | | | | |
| | (1 DAY OR | | | AND | | | AND | | | THAN | | | | | | (1 DAY OR | | | AND | | | AND | | | THAN | | | | |
| | LESS) | | | 30 DAYS | | | 90 DAYS | | | 90 DAYS | | | TOTAL | | | LESS) | | | 30 DAYS | | | 90 DAYS | | | 90 DAYS | | | TOTAL | |
September 30, 2017 | | | | | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interest receivable | | $ | - | | | $ | 75,619 | | | $ | 122,589 | | | $ | - | | | $ | 198,208 | | | $ | - | | | $ | 162,592 | | | $ | 1,171 | | | $ | - | | | $ | 163,763 | |
Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
these securities | | $ | - | | | $ | 71,261 | | | $ | 116,113 | | | $ | - | | | $ | 187,374 | | | $ | - | | | $ | 153,429 | | | $ | 1,046 | | | $ | - | | | $ | 154,475 | |
Net weighted average borrowing rate | | | - | | | | 1.35 | % | | | 1.34 | % | | | - | | | | 1.35 | % | | | - | | | | 2.34 | % | | | 2.18 | % | | | - | | | | 2.34 | % |
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interest receivable | | $ | - | | | $ | 71,565 | | | $ | 41,334 | | | $ | 17,172 | | | $ | 130,071 | | | $ | - | | | $ | 107,876 | | | $ | 105,251 | | | $ | - | | | $ | 213,127 | |
Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
these securities | | $ | - | | | $ | 66,919 | | | $ | 38,733 | | | $ | 16,176 | | | $ | 121,828 | | | $ | - | | | $ | 101,327 | | | $ | 99,069 | | | $ | - | | | $ | 200,396 | |
Net weighted average borrowing rate | | | - | | | | 1.01 | % | | | 0.96 | % | | | 0.98 | % | | | 0.99 | % | | | - | | | | 2.56 | % | | | 2.56 | % | | | - | | | | 2.56 | % |
In addition, cash pledged to counterparties for repurchase agreements was approximately $0.4 million and $0.2 million as of September 30, 2019 and December 31, 2018, respectively.
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, if any. At September 30, 20172019 and December 31, 2016,2018, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $11.0$9.4 million and $8.4$12.4 million, respectively. The Company did not have an amountSummary information regarding amounts at risk with any individual counterpartycounterparties greater than 10% of the Company's equity at September 30, 2017 or2019 and December 31, 2016.2018 is presented in the table below.
($ in thousands) | | | | | | | | | |
| | | | | % of | | | Weighted | |
| | | | | Stockholders' | | | Average | |
| | Amount | | | Equity | | | Maturity | |
Repurchase Agreement Counterparties | | at Risk | | | at Risk | | | (in Days) | |
September 30, 2019 | | | | | | | | | |
ED&F Man Capital Markets Inc. | | $ | 3,433 | | | | 12.7 | % | | | 16 | |
Mirae Asset Securities (USA) Inc. | | | 3,216 | | | | 11.9 | % | | | 9 | |
December 31, 2018 | | | | | | | | | | | | |
ED&F Man Capital Markets Inc. | | $ | 4,037 | | | | 13.9 | % | | | 17 | |
Mirae Asset Securities (USA) Inc. | | | 3,506 | | | | 12.1 | % | | | 40 | |
NOTE 5. 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 and junior subordinated notes by entering into derivatives and other hedging contracts. To date the Company has entered into Eurodollar and T-Note futures contracts, 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.
AsIn addition, the Company utilizes TBA securities as a means of investing in and financing MBS or as a means of reducing its exposure to MBS. The Company accounts for TBA securities as derivative instruments.
Derivative Liabilities, at Fair Value
The table below summarizes fair value information about our derivative liabilities as of September 30, 20172019 and December 31, 2016, such instruments were comprised entirely of 2018.
(in thousands) | | | | | | |
Derivative Instruments and Related Accounts | Balance Sheet Location | | September 30, 2019 | | | December 31, 2018 | |
Liabilities | | | | | | |
TBA Securities | Other liabilities | | $ | 53 | | | $ | 938 | |
Total derivative liabilities, at fair value | | | $ | 53 | | | $ | 938 | |
| | | | | | | | | |
Margin Balances Posted To (From) Counterparties | | | | | | | | | |
Futures contracts | Restricted cash | | $ | 690 | | | $ | 520 | |
TBA securities | Restricted cash | | | - | | | | 543 | |
TBA securities | Other liabilities | | | (91 | ) | | | - | |
Total margin balances on derivative contracts | | | $ | 781 | | | $ | 1,063 | |
Eurodollar futures contracts. Eurodollarand T-Note futures are cash settled futures contracts on an interest rate, with gains orand losses credited or charged to the Company's accountCompany’s cash accounts on a daily basis and reflected in earnings as they occur.basis. A minimum balance, or "margin"“margin”, is required to be maintained in the account on a daily basis. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker. This margin represents the collateral the Company has posted for its open positions and is recorded on the consolidated balance sheets as part of restricted cash.
The tables below present information related to the Company'sCompany’s Eurodollar and T-note futures positions at September 30, 20172019 and December 31, 2016.2018.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2017 | | | | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | | | | |
| | Repurchase Agreement Funding Hedges | | | Repurchase Agreement Funding Hedges | |
| | Average | | | Weighted | | | Weighted | | | | | | Average | | | Weighted | | | Weighted | | | | |
| | Contract | | | Average | | | Average | | | | | | Contract | | | Average | | | Average | | | | |
| | Notional | | | Entry | | | Effective | | | Open | | | Notional | | | Entry | | | Effective | | | Open | |
Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | | | Amount | | | Rate | | | Rate | | | Equity(1) | |
2017 | | $ | 60,000 | | | | 1.58 | % | | | 1.48 | % | | $ | (14 | ) | |
2018 | | | 60,000 | | | | 1.90 | % | | | 1.73 | % | | | (100 | ) | |
Eurodollar Futures Contracts (Short Positions) | | | | | | | | | | | | | |
2019 | | | 60,000 | | | | 2.32 | % | | | 1.98 | % | | | (207 | ) | | $ | 120,000 | | | 2.83 | % | | 1.96 | % | | $ | (261 | ) |
2020 | | | 60,000 | | | | 2.60 | % | | | 2.14 | % | | | (278 | ) | | 120,000 | | | 2.90 | % | | 1.54 | % | | (1,632 | ) |
2021 | | | 60,000 | | | | 2.80 | % | | | 2.29 | % | | | (306 | ) | | | 80,000 | | | | 2.80 | % | | | 1.38 | % | | | (1,135 | ) |
Total / Weighted Average | | $ | 60,000 | | | | 2.36 | % | | | 2.00 | % | | $ | (905 | ) | | $ | 102,222 | | | | 2.86 | % | | | 1.54 | % | | $ | (3,028 | ) |
| | | | | | | | | | | | | | | | | |
Treasury Note Futures Contracts (Short Position)(2) | | | | | | | | | | | | | | | | | |
December 2019 5-year T-Note futures | | | | | | | | | | | | | |
(Dec 2019 - Dec 2024 Hedge Period) | | | $ | 20,000 | | | | 1.79 | % | | | 1.96 | % | | $ | 161 | |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2017 | | | | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | | | | |
| | Junior Subordinated Debt Funding Hedges | | | Junior Subordinated Debt Funding Hedges | |
| | Average | | | Weighted | | | Weighted | | | | | | Average | | | Weighted | | | Weighted | | | | |
| | Contract | | | Average | | | Average | | | | | | Contract | | | Average | | | Average | | | | |
| | Notional | | | Entry | | | Effective | | | Open | | | Notional | | | Entry | | | Effective | | | Open | |
Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | | | Amount | | | Rate | | | Rate | | | Equity(1) | |
2017 | | $ | 26,000 | | | | 2.15 | % | | | 1.48 | % | | $ | (43 | ) | |
2018 | | | 26,000 | | | | 1.84 | % | | | 1.73 | % | | $ | (28 | ) | |
2019 | | | 26,000 | | | | 1.63 | % | | | 1.98 | % | | $ | 90 | | | $ | 26,000 | | | 1.77 | % | | 1.96 | % | | $ | 13 | |
2020 | | | 26,000 | | | | 1.95 | % | | | 2.14 | % | | $ | 50 | | | | 19,500 | | | | 1.92 | % | | | 1.57 | % | | | (69 | ) |
2021 | | | 26,000 | | | | 2.22 | % | | | 2.29 | % | | $ | 18 | | |
Total / Weighted Average | | $ | 26,000 | | | | 1.92 | % | | | 2.00 | % | | $ | 87 | | | $ | 20,800 | | | | 1.88 | % | | | 1.67 | % | | $ | (56 | ) |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | | | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | | | | |
| | Repurchase Agreement Funding Hedges | | | Repurchase Agreement Funding Hedges | |
| | Average | | | Weighted | | | Weighted | | | | | | Average | | | Weighted | | | Weighted | | | | |
| | Contract | | | Average | | | Average | | | | | | Contract | | | Average | | | Average | | | | |
| | Notional | | | Entry | | | Effective | | | Open | | | Notional | | | Entry | | | Effective | | | Open | |
Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | | | Amount | | | Rate | | | Rate | | | Equity(1) | |
2017 | | $ | 60,000 | | | | 1.32 | % | | | 1.28 | % | | $ | (26 | ) | |
2018 | | | 60,000 | | | | 1.90 | % | | | 1.82 | % | | $ | (49 | ) | |
2019 | | | 60,000 | | | | 2.32 | % | | | 2.21 | % | | $ | (69 | ) | | $ | 125,000 | | | 2.56 | % | | 2.67 | % | | $ | 139 | |
2020 | | | 60,000 | | | | 2.60 | % | | | 2.45 | % | | $ | (88 | ) | | 150,000 | | | 2.84 | % | | 2.49 | % | | (523 | ) |
2021 | | | 60,000 | | | | 2.80 | % | | | 2.64 | % | | $ | (93 | ) | | | 100,000 | | | | 2.80 | % | | | 2.46 | % | | | (346 | ) |
Total / Weighted Average | | $ | 60,000 | | | | 2.19 | % | | | 2.08 | % | | $ | (325 | ) | | $ | 125,000 | | | | 2.74 | % | | | 2.54 | % | | $ | (730 | ) |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 | | | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | | | | |
| | Junior Subordinated Debt Funding Hedges | | | Junior Subordinated Debt Funding Hedges | |
| | Average | | | Weighted | | | Weighted | | | | | | Average | | | Weighted | | | Weighted | | | | |
| | Contract | | | Average | | | Average | | | | | | Contract | | | Average | | | Average | | | | |
| | Notional | | | Entry | | | Effective | | | Open | | | Notional | | | Entry | | | Effective | | | Open | |
Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | | | Amount | | | Rate | | | Rate | | | Equity(1) | |
2017 | | $ | 26,000 | | | | 1.93 | % | | | 1.28 | % | | $ | (169 | ) | |
2018 | | | 26,000 | | | | 1.84 | % | | | 1.82 | % | | $ | (6 | ) | |
2019 | | | 26,000 | | | | 1.63 | % | | | 2.21 | % | | $ | 150 | | | $ | 26,000 | | | 1.63 | % | | 2.68 | % | | $ | 271 | |
2020 | | | 26,000 | | | | 1.95 | % | | | 2.45 | % | | $ | 132 | | | 26,000 | | | 1.95 | % | | 2.49 | % | | 142 | |
2021 | | | 26,000 | | | | 2.22 | % | | | 2.64 | % | | $ | 110 | | | | 26,000 | | | | 2.22 | % | | | 2.46 | % | | | 61 | |
Total / Weighted Average | | $ | 26,000 | | | | 1.91 | % | | | 2.08 | % | | $ | 217 | | | $ | 26,000 | | | | 1.93 | % | | | 2.54 | % | | $ | 474 | |
(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 $119.15 at September 30, 2019. The notional contract values of the short positions were $23.8 million. |
The following table summarizes our contracts to purchase and sell TBA securities as of September 30, 2019 and December 31, 2018.
($ in thousands) | | | | | | | | | | |
| | | | Notional | | | | | | | | | Net | |
| | | | Amount | | | Cost | | | Market | | | Carrying | |
| | | | Long (Short)(1) | | | Basis(2) | | | Value(3) | | | Value(4) | |
September 30, 2019 | | | | | | | | | | | | | |
30-Year TBA Securities: | | | | | | | | | | | | | |
| | 3.5 | % | | $ | (50,000 | ) | | $ | (51,268 | ) | | $ | (51,321 | ) | | $ | (53 | ) |
December 31, 2018 | | | | | | | | | | | | | | | | | |
30-Year TBA Securities: | | | | | | | | | | | | | | | | | |
| | 3.0 | % | | $ | (50,000 | ) | | $ | (47,844 | ) | | $ | (48,782 | ) | | $ | (938 | ) |
(1) | Notional amount represents the par value (or principal balance) of the underlying Agency MBS. |
(2) | Cost basis represents the forward price to be paid (received) for the underlying Agency MBS. |
(3) | Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) as of period-end. |
(4) | Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our consolidated balance sheets. |
(Losses) Gains On Derivative Instruments Net
The table below presents the effect of the Company'sCompany’s derivative financial instruments on the consolidated statements of operations for the nine and three months ended September 30, 20172019 and 2016.2018.
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Eurodollar futures contracts (short positions) | | $ | (829 | ) | | $ | (1,550 | ) | | $ | (19 | ) | | $ | 508 | | | | | | | | | | | | | |
Repurchase agreement funding hedges | | | $ | (2,995 | ) | | $ | 2,101 | | | $ | (164 | ) | | $ | 477 | |
Junior subordinated debt funding hedges | | | (409 | ) | | 679 | | | - | | | 122 | |
T-Note futures contracts (short positions) | | | | | | | | | | | | | |
Repurchase agreement funding hedges | | | (696 | ) | | 759 | | | (115 | ) | | - | |
Net TBA securities | | | | (2,005 | ) | | | 19 | | | | (204 | ) | | | 349 | |
(Losses) gains on derivative instruments | | $ | (829 | ) | | $ | (1,550 | ) | | $ | (19 | ) | | $ | 508 | | | $ | (6,105 | ) | | $ | 3,558 | | | $ | (483 | ) | | $ | 948 | |
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. The Company attempts to minimize this risk in several ways. For instruments which are not centrally cleared on a registered exchange, the Company limits its counterparties to major financial institutions with acceptable credit ratings,, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its 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, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty obtainingrecovering its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company'sCompany’s derivative instruments are included in restricted cash on the consolidated balance sheets.
Assets Pledged to Counterparties
The tablestable below summarize oursummarizes Bimini’s assets pledged as collateral under ourits repurchase agreements and derivative agreements pledged related to securities sold but not yet settled, as of September 30, 20172019 and December 31, 2016.
2018.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2017 | | | | | | | | | | |
| | | September 30, 2019 | | | December 31, 2018 | |
| | Repurchase | | | Derivative | | | | | | Repurchase | | | Derivative | | | | | | Repurchase | | | Derivative | | | | |
Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | |
PT MBS - at fair value | | $ | 195,151 | | | $ | - | | | $ | 195,151 | | | $ | 161,538 | | | $ | - | | | $ | 161,538 | | | $ | 209,675 | | | $ | - | | | $ | 209,675 | |
Structured MBS - at fair value | | | 2,364 | | | | - | | | | 2,364 | | | 1,641 | | | - | | | 1,641 | | | 2,675 | | | - | | | 2,675 | |
Accrued interest on pledged securities | | | 693 | | | | - | | | | 693 | | | 584 | | | - | | | 584 | | | 777 | | | - | | | 777 | |
Cash | | | 391 | | | | 545 | | | | 936 | | |
Restricted cash | | | | 399 | | | | 690 | | | | 1,089 | | | | 230 | | | | 1,063 | | | | 1,293 | |
Total | | $ | 198,599 | | | $ | 545 | | | $ | 199,144 | | | $ | 164,162 | | | $ | 690 | | | $ | 164,852 | | | $ | 213,357 | | | $ | 1,063 | | | $ | 214,420 | |
($ in thousands) | | | | | | | | | |
As of December 31, 2016 | | | | | | | | | |
| | Repurchase | | | Derivative | | | | |
Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | |
PT MBS - at fair value | | $ | 124,298 | | | $ | - | | | $ | 124,298 | |
Structured MBS - at fair value | | | 5,284 | | | | - | | | | 5,284 | |
Accrued interest on pledged securities | | | 489 | | | | - | | | | 489 | |
Cash | | | 456 | | | | 766 | | | | 1,222 | |
Total | | $ | 130,527 | | | $ | 766 | | | $ | 131,293 | |
Assets Pledged from Counterparties
The table below summarizes assetscash pledged to usBimini from counterparties under our repurchase agreements and derivative agreements as of September 30, 20172019 and December 31, 2016.2018. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements or other liabilities in the consolidated balance sheets.
($ in thousands) | | | | | | | | | | | | |
Assets Pledged to Bimini | | September 30, 2017 | | | December 31, 2016 | | | September 30, 2019 | | | December 31, 2018 | |
Cash | | $ | 8 | | | $ | - | | |
Repurchase agreements | | | $ | 172 | | | $ | 371 | |
Derivative agreements | | | | 91 | | | | - | |
Total | | $ | 8 | | | $ | - | | | $ | 263 | | | $ | 371 | |
NOTE 7. OFFSETTING ASSETS AND LIABILITIES
The Company'sCompany’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 presentstables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of September 30, 20172019 and December 31, 2016.2018.
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Liabilities | Offsetting of Liabilities | | Offsetting of Liabilities | |
| | | | | | | | | | Gross Amount Not Offset in the | | | | | | | | | | | | | | Gross Amount Not Offset in the | | | | |
| | | | | | | Net Amount | | Consolidated Balance Sheet | | | | | | | | | | | Net Amount | | Consolidated Balance Sheet | | | | |
| | | Gross Amount | | of Liabilities | | Financial | | | | | | | | Gross Amount | | of Liabilities | | Financial | | | | | |
| Gross Amount | | Offset in the | | Presented in the | | Instruments | | Cash | | | | Gross Amount | | Offset in the | | Presented in the | | Instruments | | Cash | | | |
| of Recognized | | Consolidated | | Consolidated | | Posted as | | Posted as | | Net | | of Recognized | | Consolidated | | Consolidated | | Posted as | | Posted as | | Net | |
| Liabilities | | Balance Sheet | | Balance Sheet | | Collateral | | Collateral | | Amount | | Liabilities | | Balance Sheet | | Balance Sheet | | Collateral | | Collateral | | Amount | |
September 30, 2017 | | | | | | | | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 187,374 | | | $ | - | | | $ | 187,374 | | | $ | (186,983 | ) | | $ | (391 | ) | | $ | - | | | $ | 154,475 | | | $ | - | | | $ | 154,475 | | | $ | (154,076 | ) | | $ | (399 | ) | | $ | - | |
December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
TBA securities | | | | 53 | | | | - | | | | 53 | | | | - | | | | - | | | | 53 | |
| | | $ | 154,528 | | | $ | - | | | $ | 154,528 | | | $ | (154,076 | ) | | $ | (399 | ) | | $ | 53 | |
December 31, 2018 | | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 121,828 | | | $ | - | | | $ | 121,828 | | | $ | (121,372 | ) | | $ | (456 | ) | | $ | - | | | $ | 200,396 | | | $ | - | | | $ | 200,396 | | | $ | (200,166 | ) | | $ | (230 | ) | | $ | - | |
TBA securities | | | | 938 | | | | - | | | | 938 | | | | - | | | | (543 | ) | | | 395 | |
| | | $ | 201,334 | | | $ | - | | | $ | 201,334 | | | $ | (200,166 | ) | | $ | (773 | ) | | $ | 395 | |
The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.ASC 210-20-50. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 6 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.
NOTE 8. TRUST PREFERRED SECURITIES
During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II ("BCTII"(“BCTII”) of which 100% of the common equity is owned by Bimini Capital. It was formed for the purpose of issuing trust preferred capital securities to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital. The debt securities held by BCTII are the sole assets of BCTII.
As of September 30, 20172019 and December 31, 2016,2018, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate. As of September 30, 2017,2019, the interest rate was 4.82%5.62%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions and are redeemable at Bimini Capital's option, in whole or in part and without penalty. Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in right of payment to all present and future senior indebtedness.
BCTII is a VIE because the holders of the equity investment at risk do not have adequatesubstantive decision making ability over BCTII'sBCTII’s activities. Since Bimini Capital's investment in BCTII'sBCTII’s common equity securities was financed directly by BCTII as a result of its loan of the proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not consolidated the financial statements of BCTII into its consolidated financial statements, and this investment is accounted for on the equity method.
The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to BCTII as a liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets). For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.
NOTE 9. COMMON STOCK
The table below presents information related toIn January 2018, Bimini Capital'ssold 83,332 shares of its Class A Common Stock issueddirectly to two employees. There were no other issuances of the Company’s Class A Common stock during the nine and three months ended September 30, 20172019 and 2016.2018.
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
Shares Issued Related To: | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Vested incentive plan shares | | | - | | | | 258,333 | | | | - | | | | - | |
Total shares of Class A Common Stock issued | | | - | | | | 258,333 | | | | - | | | | - | |
There were no issuances of Bimini Capital's Class B Common Stock and Class C Common Stock during the nine months ended September 30, 20172019 and 2016.2018.
Stock Repurchase Plan
On March 26, 2018, the Board of Directors of Bimini Capital Management, Inc. (the “Company”) approved a Stock Repurchase Plan (“Repurchase Plan”). Pursuant to Repurchase Plan, the Company may purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. Share repurchases may be executed through various means, including, without limitation, open market transactions. The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended by the Board of Directors until November 15, 2020. The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.
From the inception of the Repurchase Plan through September 30, 2019, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.
Tender Offer
In July 2019, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of Bimini Capital’s Class A common stock at a price of $2.00 per share.
NOTE 10. STOCK INCENTIVE PLANS
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 20172019 and December 31, 2016:2018:
The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 20172019 and 2016:2018:
During the nine months ended September 30, 20172019 and 2016,2018, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
-21-
Our retained interests are valued based on a discounted cash flow approach. These values are sensitive to changes in unobservable inputs, including: estimated prepayment speeds, default rates and loss severity, weighted-average life, and discount rates. Significant increases or decreases in any of these inputs may result in significantly different fair value measurements.
NOTE 15. SEGMENT INFORMATION
The following table summarizesCompany’s operations are classified into two principal reportable segments: the significant quantitativeasset management segment and the investment portfolio segment.
The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid. Total revenues received under this management agreement for the nine months ended September 30, 2019 and 2018, were approximately $5.1 million and $5.9 million, respectively, accounting for approximately 42% and 45% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted by Royal Palm. The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.
Segment information about our level 3 fair value measurementsfor the nine months ended September 30, 2019 and 2018 is as follows:
(in thousands) | | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 5,052 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,052 | |
Advisory services, other operating segments(1) | | | 200 | | | | - | | | | - | | | | (200 | ) | | | - | |
Interest and dividend income | | | - | | | | 7,064 | | | | 1 | | | | - | | | | 7,065 | |
Interest expense | | | - | | | | (3,655 | ) | | | (1,195 | )(2) | | | - | | | | (4,850 | ) |
Net revenues | | | 5,252 | | | | 3,409 | | | | (1,194 | ) | | | (200 | ) | | | 7,267 | |
Other | | | - | | | | (419 | ) | | | (736 | )(3) | | | - | | | | (1,155 | ) |
Operating expenses(4) | | | (2,019 | ) | | | (2,806 | ) | | | - | | | | - | | | | (4,825 | ) |
Intercompany expenses(1) | | | - | | | | (200 | ) | | | - | | | | 200 | | | | - | |
Income (loss) before income taxes | | $ | 3,233
| | | $ | (16 | ) | | $ | (1,930 | ) | | $ | - | | | $ | 1,287 | |
| | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2018 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 5,933 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,933 | |
Advisory services, other operating segments(1) | | | 185 | | | | - | | | | - | | | | (185 | ) | | | - | |
Interest and dividend income | | | - | | | | 7,396 | | | | 1 | | | | - | | | | 7,397 | |
Interest expense | | | - | | | | (2,796 | ) | | | (1,097 | )(2) | | | - | | | | (3,893 | ) |
Net revenues | | | 6,118 | | | | 4,600 | | | | (1,096 | ) | | | (185 | ) | | | 9,437 | |
Other | | | - | | | | (9,190 | ) | | | 1,785 | (3) | | | - | | | | (7,405 | ) |
Operating expenses(4) | | | (2,174 | ) | | | (2,712 | ) | | | - | | | | - | | | | (4,886 | ) |
Intercompany expenses(1) | | | - | | | | (185 | ) | | | - | | | | 185 | | | | - | |
Income (loss) before income taxes | | $ | 3,944 | | | $ | (7,487 | ) | | $ | 689 | | | $ | - | | | $ | (2,854 | ) |
Segment information for the three months ended September 30, 2019 and 2018 is as follows:
(in thousands) | | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 1,791 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,791 | |
Advisory services, other operating segments(1) | | | 63 | | | | - | | | | - | | | | (63 | ) | | | - | |
Interest and dividend income | | | - | | | | 2,011 | | | | - | | | | - | | | | 2,011 | |
Interest expense | | | - | | | | (1,002 | ) | | | (389 | )(2) | | | - | | | | (1,391 | ) |
Net revenues | | | 1,854 | | | | 1,009 | | | | (389 | ) | | | (63 | ) | | | 2,411 | |
Other | | | - | | | | (438 | ) | | | (601 | )(3) | | | - | | | | (1,039 | ) |
Operating expenses(4) | | | (754 | ) | | | (852 | ) | | | - | | | | - | | | | (1,606 | ) |
Intercompany expenses(1) | | | - | | | | (63 | ) | | | - | | | | 63 | | | | - | |
Income (loss) before income taxes | | $ | 1,100 | | | $ | (344 | ) | | $ | (990 | ) | | $ | - | | | $ | (234 | ) |
| | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2018 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 1,873 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,873 | |
Advisory services, other operating segments(1) | | | 65 | | | | - | | | | - | | | | (65 | ) | | | - | |
Interest and dividend income | | | - | | | | 2,434 | | | | - | | | | - | | | | 2,434 | |
Interest expense | | | - | | | | (1,049 | ) | | | (388 | )(2) | | | - | | | | (1,437 | ) |
Net revenues | | | 1,938 | | | | 1,385 | | | | (388 | ) | | | (65 | ) | | | 2,870 | |
Other | | | - | | | | (1,651 | ) | | | 1,478 | (3) | | | - | | | | (173 | ) |
Operating expenses(4) | | | (653 | ) | | | (842 | ) | | | - | | | | - | | | | (1,495 | ) |
Intercompany expenses(1) | | | - | | | | (65 | ) | | | - | | | | 65 | | | | - | |
Income (loss) before income taxes | | $ | 1,285 | | | $ | (1,173 | ) | | $ | 1,090 | | | $ | - | | | $ | 1,202 | |
(1) | Includes fees paid by Royal Palm to Bimini Advisors for advisory services. |
(2) | Includes interest on junior subordinated note. |
(3) | Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
(4) | Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
Assets in each reportable segment as of September 30, 2017.2019 and December 31, 2018 were as follows:
Retained interests in securitzations, at fair value (in thousands) | | | | | | | | $ | 558 | |
| | | | | CPR Range | | | | | |
Prepayment Assumption | | | | | (Weighted Average) | | | | | |
Constant Prepayment Rate | | | | | | 10% (10 | %) | | | | |
| | | | | Severity | | | | | |
Default Assumptions | | Probability of Default | | | (Weighted Average) | | | Range Of Loss Timing | |
Real Estate Owned | | | 100 | % | | | 25.5 | % | | Next 10 Months | |
Loans in Foreclosure | | | 100 | % | | | 25.5 | % | | Month 4 - 13 | |
Loans 90 Day Delinquent | | | 100 | % | | | 45 | % | | Month 11-28 | |
Loans 60 Day Delinquent | | | 85 | % | | | 45 | % | | Month 11-28 | |
Loans 30 Day Delinquent | | | 75 | % | | | 45 | % | | Month 11-28 | |
Current Loans | | | 3.1 | % | | | 45 | % | | Month 29 and Beyond | |
| | | | | | Remaining Life Range | | | Discount Rate Range | |
Cash Flow Recognition | | Valuation Technique | | | (Weighted Average) | | | (Weighted Average) | |
Nominal Cash Flows | | Discounted Cash Flow | | | | 12.2 - 15.3 | (13.2) | | | 27.50% (27.50 | %) |
Discounted Cash Flows | | Discounted Cash Flow | | | | 1.3 - 14.2 | (3.8) | | | 27.50% (27.50 | %) |
(in thousands) | | | | | | | | | | | | |
| Asset | | Investment | | | | | |
| Management | | Portfolio | | Corporate | | Total | |
September 30, 2019 | | $ | 1,448 | | | $ | 196,886 | | | $ | 11,645 | | | $ | 209,979 | |
December 31, 2018 | | | 1,488 | | | | 245,866 | | | | 12,046 | | | | 259,400 | |
NOTE 15.16. RELATED PARTY TRANSACTIONS
Management Agreement
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:
· | One-twelfth of 1.5% of the first $250 million of the Orchid's equity, as defined in the management agreement, |
· | One-twelfth of 1.25% of the Orchid's equity that is greater than $250 million and less than or equal to $500 million, and |
· | One-twelfth of 1.00% of the Orchid's equity that is greater than $500 million. |
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 20, 2018 and provides for automatic one-year extension options thereafter. Should Orchid terminate the management agreement without cause, it will 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 current automatic renewal term.
The following table summarizes the advisory services revenue from Orchid for the nine and three months ended September 30, 2017 and 2016.
(in thousands) | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Management fee | | $ | 4,230 | | | $ | 2,968 | | | $ | 1,528 | | | $ | 1,052 | |
Allocated overhead | | | 1,168 | | | | 963 | | | | 412 | | | | 336 | |
Total | | $ | 5,398 | | | $ | 3,931 | | | $ | 1,940 | | | $ | 1,388 | |
At September 30, 2017 and December 31, 2016, the net amount due from Orchid was approximately $0.8 million and $0.6 million, respectively, and such amounts are included in "other assets" in the consolidated balance sheets. Orchid accrued cash and equity compensation payable to officers and employees of Bimini of $0.4 million and $0.2 million during the nine and three months ended September 30, 2017, respectively and $0.6 million and $0.2 million during the nine and three months ended September 30, 2016, respectively. This compensation is not included in the consolidated statements of operations.
Other Relationships with Orchid
At both September 30, 20172019 and December 31, 2016,2018, the Company owned 1,520,036 and 1,395,036 shares of Orchid common stock, respectively, representing approximately 3.4%2.4% and 4.2%3.1% of theOrchid’s outstanding shares, respectively.common stock on such dates. The Company received dividends on this common stock investment of approximately $1.9$1.1 million and $0.6$0.4 million during the nine and three months ended September 30, 2017,2019, respectively, and approximately $1.8$1.3 million and $0.6$0.4 million during the nine and three months ended September 30, 2016,2018, respectively.
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation from Orchid, and owns shares of common stock of Orchid. In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid'sOrchid’s Board of Directors, receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our independent directors, each own shares of common stock of Orchid.
NOTE 17. REAL PROPERTY HELD FOR SALE
In order to generate additional cash to be invested in the MBS portfolio, in August 2019, the Company moved to dispose of one its real estate properties. The Company expects to complete the sale of this property within one year. The Company has recorded an impairment charge of approximately $0.7 million in the nine and three months ended September 30, 2019. After the impairment charge, the asset has a carrying value of approximately $0.5 million and is presented separately in the consolidated balance sheets.
NOTE 18. SUBSEQUENT EVENTS
Long-Term Debt Incurred
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly installments of approximately $4,500, including interest at 4.89%, through October 30, 2039. The note is secured by a mortgage on the Company’s office building.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under "Risk Factors"“Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 20032003. The Company’s principal wholly-owned operating subsidiaries are Bimini Advisors Holdings, LLC and Royal Palm Capital, LLC. We operate in two business segments: the asset management segment, which includes the investment advisory services provided by Bimini Advisors to investOrchid, and the investment portfolio segment, which includes the investment activities conducted by Bimini Capital and Royal Palm.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), are collectively referred to as “Bimini Advisors.” Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and expense reimbursements. As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. In addition, the Company receives dividends from its investment in Orchid common shares.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as “Royal Palm”) maintains an investment portfolio, consisting primarily inof residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS ("PT MBS") and (ii) structured Agency MBS, 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 MBS.
The Company also serves asStock Repurchase Plan
On March 26, 2018, the external managerBoard of Directors of the portfolio“Company approved a Stock Repurchase Plan (“Repurchase Plan”). Pursuant to Repurchase Plan, we may purchase up to 500,000 shares of Orchid Island Capital, Inc. ("Orchid"),the Company’s Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. Share repurchases may be executed through its wholly owned subsidiary, Bimini Advisors Holdings, LLC ("Bimini Advisors"). From this arrangement,various means, including, without limitation, open market transactions. The Repurchase Plan does not obligate the Company receives managementto purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended by the Board of Directors until November 15, 2020. The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.
Through September 30, 2019, we repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.
Tender Offer
In July 2019, we completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and expense reimbursements. As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuantrelated expenses, to the termsrepurchase 1.1 million shares of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors isour Class A common stock at all times subject to the supervision and oversighta price of Orchid's board of directors and has only such functions and authority as delegated to it. In addition, the Company receives dividends from its investment in Orchid common shares.$2.00 per share.
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:
•the difference between Agency MBS yields and our funding and hedging costs;
•competition for, and supply of, investments in Agency MBS;
•actions taken by the newU.S. government, including the presidential administration, the Federal Reserve (the "Fed"“Fed”), the Federal Open Market Committee (the “FOMC”), the Federal Housing Financing Agency (the “FHFA”) and the U.S. Treasury;
prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; and
•the equity markets and the ability of Orchid to raise additional capital; and
•other market developments.
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:
our ability to manage the portfolio of Orchid and maintain our role as manager.
Described below are the Company'sCompany’s results of operations for the nine and three months ended September 30, 2017,2019, as compared to the nine and three months ended September 30, 2016.2018.
Net Income (Loss) Summary
Consolidated net income for the nine months ended September 30, 20172019 was $1.9$0.3 million, or $0.15$0.03 basic and diluted income per share of Class A Common Stock, as compared to consolidated net incomeloss of $2.2 million, or $0.17 basic and diluted incomeloss per share of Class A Common Stock, for the nine months ended September 30, 2016.2018.
Consolidated net incomeloss for the three months ended September 30, 20172019 was $1.5$0.8 million, or $0.12$0.07 basic and diluted incomeloss per share of Class A Common Stock, as compared to consolidated net income of $1.2$0.9 million, or $0.09$0.07 basic and diluted income per share of Class A Common Stock, for the three months ended September 30, 2016.2018.
The components of net income (loss) for the nine and three months ended September 30, 20172019 and 2016,2018, along with the changes in those components are presented in the table below:
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Net portfolio interest | | $ | 2,965 | | | $ | 2,454 | | | $ | 511 | | | $ | 1,010 | | | $ | 913 | | | $ | 97 | |
Interest expense on junior subordinated notes | | | (914 | ) | | | (818 | ) | | | (96 | ) | | | (316 | ) | | | (278 | ) | | | (38 | ) |
(Losses) gains on MBS and derivative instruments | | | (1,126 | ) | | | (1,683 | ) | | | 557 | | | | 149 | | | | 163 | | | | (14 | ) |
Net portfolio income (loss) | | | 925 | | | | (47 | ) | | | 972 | | | | 843 | | | | 798 | | | | 45 | |
Other income | | | 6,846 | | | | 8,473 | | | | (1,627 | ) | | | 3,166 | | | | 3,176 | | | | (10 | ) |
Expenses, including income taxes | | | (5,835 | ) | | | (6,199 | ) | | | 364 | | | | (2,508 | ) | | | (2,795 | ) | | | 287 | |
Net income | | $ | 1,936 | | | $ | 2,227 | | | $ | (291 | ) | | $ | 1,501 | | | $ | 1,179 | | | $ | 322 | |
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | Change | |
Advisory services revenues | | $ | 5,052 | | | $ | 5,933 | | | $ | (881 | ) | | $ | 1,791 | | | $ | 1,873 | | | $ | (82 | ) |
Interest and dividend income | | | 7,065 | | | | 7,397 | | | | (332 | ) | | | 2,011 | | | | 2,434 | | | | (423 | ) |
Interest expense | | | (4,850 | ) | | | (3,893 | ) | | | (957 | ) | | | (1,391 | ) | | | (1,437 | ) | | | 46 | |
Net revenues | | | 7,267 | | | | 9,437 | | | | (2,170 | ) | | | 2,411 | | | | 2,870 | | | | (459 | ) |
Other expense | | | (1,155 | ) | | | (7,405 | ) | | | 6,250 | | | | (1,039 | ) | | | (172 | ) | | | (867 | ) |
Expenses | | | (4,825 | ) | | | (4,886 | ) | | | 61 | | | | (1,606 | ) | | | (1,496 | ) | | | (110 | ) |
Net income (loss) before income tax provision (benefit) | | | 1,287 | | | | (2,854 | ) | | | 4,141 | | | | (234 | ) | | | 1,202 | | | | (1,436 | ) |
Income tax provision (benefit) | | | 942 | | | | (676 | ) | | | 1,618 | | | | 538 | | | | 329 | | | | 209 | |
Net income (loss) | | $ | 345 | | | $ | (2,178 | ) | | $ | 2,523 | | | $ | (772 | ) | | $ | 873 | | | $ | (1,645 | ) |
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note ("T-Note"(“T-Note”) futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
We have not elected to designatedesignated our derivative holdings forfinancial instruments as hedge accounting treatment under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging.relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our 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.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on specificcertain derivative instruments the Company uses that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on allthese derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.
We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter in 20172019 and 2016.
2018.
Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP) | |
(in thousands) | | | | | | | | | |
| | | | | Junior | | | | |
| | Repurchase | | | Subordinated | | | | |
Three Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | (13 | ) | | $ | (6 | ) | | $ | (19 | ) |
June 30, 2017 | | | (581 | ) | | | (251 | ) | | | (832 | ) |
March 31, 2017 | | | 15 | | | | 7 | | | | 22 | |
December 31, 2016 | | | 496 | | | | 1,037 | | | | 1,533 | |
September 30, 2016 | | | 326 | | | | 182 | | | | 508 | |
June 30, 2016 | | | (353 | ) | | | (404 | ) | | | (757 | ) |
March 31, 2016 | | | (787 | ) | | | (513 | ) | | | (1,300 | ) |
| | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | |
| | | | | | Junior | | | | | |
| | Repurchase | | | Subordinated | | | | | |
Nine Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | (579 | ) | | $ | (250 | ) | | $ | (829 | ) |
September 30, 2016 | | | (814 | ) | | | (735 | ) | | | (1,549 | ) |
Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP) | |
(in thousands) | | | | | | | | | | | | |
| | Recognized in | | | | | | | | | | |
| | Statement of | | | TBA | | | | | | Junior | |
| | Operations | | | Securities | | | Repurchase | | | Subordinated | |
Three Months Ended | | (GAAP) | | | Income (Loss) | | | Agreements | | | Debt | |
September 30, 2019 | | $ | (483 | ) | | $ | (204 | ) | | $ | (279 | ) | | $ | - | |
June 30, 2019 | | | (3,364 | ) | | | (734 | ) | | | (2,441 | ) | | | (189 | ) |
March 31, 2019 | | | (2,258 | ) | | | (1,067 | ) | | | (971 | ) | | | (220 | ) |
December 31, 2018 | | | (3,835 | ) | | | (1,214 | ) | | | (2,184 | ) | | | (437 | ) |
September 30, 2018 | | | 948 | | | | 349 | | | | 478 | | | | 121 | |
June 30, 2018 | | | 870 | | | | 194 | | | | 534 | | | | 142 | |
March 31, 2018 | | | 1,740 | | | | (524 | ) | | | 1,849 | | | | 415 | |
| | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | | | | | |
| | Recognized in | | | | | | | | | | | | | |
| | Statement of | | | TBA | | | | | | | Junior | |
| | Operations | | | Securities | | | Repurchase | | | Subordinated | |
Nine Months Ended | | (GAAP) | | | Income (Loss) | | | Agreements | | | Debt | |
September 30, 2019 | | $ | (6,105 | ) | | $ | (2,005 | ) | | $ | (3,691 | ) | | $ | (409 | ) |
September 30, 2018 | | | 3,558 | | | | 19 | | | | 2,861 | | | | 678 | |
Losses on Derivative Instruments - Attributed to Current Period (Non-GAAP) | |
(in thousands) | | | | | | | | | |
| | | | | Junior | | | | |
| | Repurchase | | | Subordinated | | | | |
Three Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | (162 | ) | | $ | (40 | ) | | $ | (202 | ) |
June 30, 2017 | | | (152 | ) | | | (37 | ) | | | (189 | ) |
March 31, 2017 | | | (116 | ) | | | (60 | ) | | | (176 | ) |
December 31, 2016 | | | (122 | ) | | | (57 | ) | | | (179 | ) |
September 30, 2016 | | | (92 | ) | | | (55 | ) | | | (147 | ) |
June 30, 2016 | | | (60 | ) | | | (77 | ) | | | (137 | ) |
March 31, 2016 | | | (45 | ) | | | (80 | ) | | | (125 | ) |
| | | | | | | | | | | | |
Gains (Losses) on Derivative Instruments - Attributed to Current Period (Non-GAAP) | |
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Attributed to Current Period (Non-GAAP) | | | Attributed to Future Periods (Non-GAAP) | |
| | | | | Junior | | | | | | | | | Junior | | | | |
| | Repurchase | | | Subordinated | | | | | | Repurchase | | | Subordinated | | | | |
Three Months Ended | | Agreements | | | Debt | | | Total | | | Agreements | | | Debt | | | Total | |
September 30, 2019 | | $ | (124 | ) | | $ | 61 | | | $ | (63 | ) | | $ | (155 | ) | | $ | (61 | ) | | $ | (216 | ) |
June 30, 2019 | | | (226 | ) | | | 43 | | | | (183 | ) | | | (2,215 | ) | | | (232 | ) | | | (2,447 | ) |
March 31, 2019 | | | 5 | | | | 65 | | | | 70 | | | | (976 | ) | | | (285 | ) | | | (1,261 | ) |
December 31, 2018 | | | 134 | | | | 68 | | | | 202 | | | | (2,318 | ) | | | (505 | ) | | | (2,823 | ) |
September 30, 2018 | | | (35 | ) | | | 11 | | | | (24 | ) | | | 513 | | | | 110 | | | | 623 | |
June 30, 2018 | | | (108 | ) | | | (19 | ) | | | (127 | ) | | | 642 | | | | 161 | | | | 803 | |
March 31, 2018 | | | (153 | ) | | | (33 | ) | | | (187 | ) | | | 2,002 | | | | 448 | | | | 2,451 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Junior | | | | | | | | | | | Junior | | | | | |
| | Repurchase | | | Subordinated | | | | | | | Repurchase | | | Subordinated | | | | | |
Nine Months Ended | | Agreements | | | Debt | | | Total | | | Agreements | | | Debt | | | Total | |
September 30, 2019 | | $ | (345 | ) | | $ | 169 | | | $ | (176 | ) | | $ | (3,348 | ) | | $ | (578 | ) | | $ | (3,926 | ) |
September 30, 2018 | | | (296 | ) | | | (41 | ) | | | (338 | ) | | | 3,157 | | | | 719 | | | | 3,877 | |
Economic Net Portfolio Interest Income | |
(in thousands) | |
| | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | Effect of | | | | | | Interest Income | |
| | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
September 30, 2019 | | $ | 1,646 | | | $ | 1,002 | | | $ | (124 | ) | | $ | 1,126 | | | $ | 644 | | | $ | 520 | |
June 30, 2019 | | | 2,134 | | | | 1,340 | | | | (226 | ) | | | 1,566 | | | | 794 | | | | 568 | |
March 31, 2019 | | | 2,190 | | | | 1,313 | | | | 5 | | | | 1,308 | | | | 877 | | | | 882 | |
December 31, 2018 | | | 2,227 | | | | 1,235 | | | | 134 | | | | 1,101 | | | | 992 | | | | 1,126 | |
September 30, 2018 | | | 2,054 | | | | 1,049 | | | | (35 | ) | | | 1,084 | | | | 1,005 | | | | 970 | |
June 30, 2018 | | | 2,001 | | | | 938 | | | | (108 | ) | | | 1,046 | | | | 1,063 | | | | 955 | |
March 31, 2018 | | | 2,080 | | | | 809 | | | | (153 | ) | | | 962 | | | | 1,271 | | | | 1,118 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | |
| | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | | Effect of | | | | | | | Interest Income | |
| | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
September 30, 2019 | | $ | 5,970 | | | $ | 3,655 | | | $ | (345 | ) | | $ | 4,000 | | | $ | 2,315 | | | $ | 1,970 | |
September 30, 2018 | | | 6,135 | | | | 2,796 | | | | (296 | ) | | | 3,092 | | | | 3,339 | | | | 3,043 | |
(in thousands) | | | | | | | | | |
| | | | | Junior | | | | |
| | Repurchase | | | Subordinated | | | | |
Nine Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | (430 | ) | | $ | (137 | ) | | $ | (567 | ) |
September 30, 2016 | | | (197 | ) | | | (212 | ) | | | (409 | ) |
Gains (Losses) on Derivative Instruments - Attributed to Future Periods (Non-GAAP) | |
(in thousands) | | | | | | | | | |
| | | | | Junior | | | | |
| | Repurchase | | | Subordinated | | | | |
Three Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | 149 | | | $ | 34 | | | $ | 183 | |
June 30, 2017 | | | (429 | ) | | | (214 | ) | | | (643 | ) |
March 31, 2017 | | | 131 | | | | 67 | | | | 198 | |
December 31, 2016 | | | 618 | | | | 1,094 | | | | 1,712 | |
September 30, 2016 | | | 418 | | | | 237 | | | | 655 | |
June 30, 2016 | | | (293 | ) | | | (327 | ) | | | (620 | ) |
March 31, 2016 | | | (742 | ) | | | (433 | ) | | | (1,175 | ) |
| | | | | | | | | | | | |
(in thousands) | | | | | | | | | | | | |
| | | | | | Junior | | | | | |
| | Repurchase | | | Subordinated | | | | | |
Nine Months Ended | | Agreements | | | Debt | | | Total | |
September 30, 2017 | | $ | (149 | ) | | $ | (113 | ) | | $ | (262 | ) |
September 30, 2016 | | | (617 | ) | | | (523 | ) | | | (1,140 | ) |
Economic Net Portfolio Interest Income | |
(in thousands) | |
| | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | Effect of | | | | | | Interest Income | |
| | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
September 30, 2017 | | $ | 1,514 | | | $ | 504 | | | $ | (162 | ) | | $ | 666 | | | $ | 1,010 | | | $ | 848 | |
June 30, 2017 | | | 1,269 | | | | 324 | | | | (152 | ) | | | 476 | | | | 945 | | | | 793 | |
March 31, 2017 | | | 1,293 | | | | 283 | | | | (116 | ) | | | 399 | | | | 1,010 | | | | 894 | |
December 31, 2016 | | | 1,285 | | | | 251 | | | | (122 | ) | | | 373 | | | | 1,034 | | | | 912 | |
September 30, 2016 | | | 1,108 | | | | 195 | | | | (92 | ) | | | 287 | | | | 913 | | | | 821 | |
June 30, 2016 | | | 1,025 | | | | 174 | | | | (60 | ) | | | 234 | | | | 851 | | | | 791 | |
March 31, 2016 | | | 817 | | | | 127 | | | | (45 | ) | | | 172 | | | | 690 | | | | 645 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | |
| | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | | Effect of | | | | | | | Interest Income | |
| | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
September 30, 2017 | | $ | 4,076 | | | $ | 1,111 | | | $ | (430 | ) | | $ | 1,541 | | | $ | 2,965 | | | $ | 2,535 | |
September 30, 2016 | | | 2,950 | | | | 496 | | | | (197 | ) | | | 693 | | | | 2,454 | | | | 2,257 | |
(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 portfolio interest income. |
Economic Net Interest Income | |
(in thousands) | |
| | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | | |
| | Interest Income | | | | | | Effect of | | | | | | Net Interest Income | |
| | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
September 30, 2017 | | $ | 1,010 | | | $ | 847 | | | $ | 316 | | | $ | (40 | ) | | $ | 356 | | | $ | 694 | | | $ | 491 | |
June 30, 2017 | | | 945 | | | | 793 | | | | 306 | | | | (37 | ) | | | 343 | | | | 639 | | | | 450 | |
March 31, 2017 | | | 1,010 | | | | 894 | | | | 292 | | | | (60 | ) | | | 352 | | | | 718 | | | | 542 | |
December 31, 2016 | | | 1,034 | | | | 912 | | | | 291 | | | | (57 | ) | | | 348 | | | | 743 | | | | 564 | |
September 30, 2016 | | | 913 | | | | 821 | | | | 278 | | | | (55 | ) | | | 333 | | | | 635 | | | | 488 | |
June 30, 2016 | | | 851 | | | | 791 | | | | 276 | | | | (77 | ) | | | 353 | | | | 575 | | | | 438 | |
March 31, 2016 | | | 690 | | | | 645 | | | | 264 | | | | (80 | ) | | | 344 | | | | 426 | | | | 301 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | |
| | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | | | | |
| | Interest Income | | | | | | | Effect of | | | | | | | Net Interest Income | |
| | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
September 30, 2017 | | $ | 2,965 | | | $ | 2,534 | | | $ | 914 | | | $ | (137 | ) | | $ | 1,051 | | | $ | 2,051 | | | $ | 1,483 | |
September 30, 2016 | | | 2,454 | | | | 2,257 | | | | 818 | | | | (212 | ) | | | 1,030 | | | | 1,636 | | | | 1,227 | |
Economic Net Interest Income | |
(in thousands) | |
| | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | | |
| | Interest Income | | | | | | Effect of | | | | | | Net Interest Income | |
| | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
September 30, 2019 | | $ | 644 | | | $ | 520 | | | $ | 390 | | | $ | 61 | | | $ | 329 | | | $ | 254 | | | $ | 191 | |
June 30, 2019 | | | 794 | | | | 568 | | | | 400 | | | | 43 | | | | 357 | | | | 394 | | | | 211 | |
March 31, 2019 | | | 877 | | | | 882 | | | | 406 | | | | 65 | | | | 341 | | | | 471 | | | | 541 | |
December 31, 2018 | | | 992 | | | | 1,126 | | | | 393 | | | | 68 | | | | 325 | | | | 599 | | | | 801 | |
September 30, 2018 | | | 1,005 | | | | 970 | | | | 388 | | | | 11 | | | | 377 | | | | 617 | | | | 593 | |
June 30, 2018 | | | 1,063 | | | | 955 | | | | 372 | | | | (19 | ) | | | 391 | | | | 691 | | | | 564 | |
March 31, 2018 | | | 1,271 | | | | 1,118 | | | | 337 | | | | (33 | ) | | | 370 | | | | 934 | | | | 748 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | |
| | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | �� | | | |
| | Interest Income | | | | | | | Effect of | | | | | | | Net Interest Income | |
| | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
September 30, 2019 | | $ | 2,315 | | | $ | 1,970 | | | $ | 1,196 | | | $ | 169 | | | $ | 1,027 | | | $ | 1,119 | | | $ | 943 | |
September 30, 2018 | | | 3,339 | | | | 3,043 | | | | 1,097 | | | | (41 | ) | | | 1,138 | | | | 2,242 | | | | 1,905 | |
(1) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
(2) | Reflects the effect of derivative instrument hedges for only the period presented. |
(3) | Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
(4) | Calculated by subtractingadding the effect of derivative instrument hedges attributed to the period presented fromto GAAP net interest income. |
Segment Information
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm. Segment information for the nine months ended September 30, 2019 and 2018 is as follows:
(in thousands) | | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 5,052 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,052 | |
Advisory services, other operating segments(1) | | | 200 | | | | - | | | | - | | | | (200 | ) | | | - | |
Interest and dividend income | | | - | | | | 7,064 | | | | 1 | | | | - | | | | 7,065 | |
Interest expense | | | - | | | | (3,655 | ) | | | (1,195 | )(2) | | | - | | | | (4,850 | ) |
Net revenues | | | 5,252 | | | | 3,409 | | | | (1,194 | ) | | | (200 | ) | | | 7,267 | |
Other | | | - | | | | (419 | ) | | | (736 | )(3) | | | - | | | | (1,155 | ) |
Operating expenses(4) | | | (2,019 | ) | | | (2,806 | ) | | | - | | | | - | | | | (4,825 | ) |
Intercompany expenses(1) | | | - | | | | (200 | ) | | | - | | | | 200 | | | | - | |
Income (loss) before income taxes | | $ | 3,233 | | | $ | (16 | ) | | $ | (1,930 | ) | | $ | - | | | $ | 1,287 | |
| | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2018 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 5,933 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,933 | |
Advisory services, other operating segments(1) | | | 185 | | | | - | | | | - | | | | (185 | ) | | | - | |
Interest and dividend income | | | - | | | | 7,396 | | | | 1 | | | | - | | | | 7,397 | |
Interest expense | | | - | | | | (2,796 | ) | | | (1,097 | )(2) | | | - | | | | (3,893 | ) |
Net revenues | | | 6,118 | | | | 4,600 | | | | (1,096 | ) | | | (185 | ) | | | 9,437 | |
Other | | | - | | | | (9,190 | ) | | | 1,785 | (3) | | | - | | | | (7,405 | ) |
Operating expenses(4) | | | (2,174 | ) | | | (2,712 | ) | | | - | | | | - | | | | (4,886 | ) |
Intercompany expenses(1) | | | - | | | | (185 | ) | | | - | | | | 185 | | | | - | |
Income (loss) before income taxes | | $ | 3,944 | | | $ | (7,487 | ) | | $ | 689 | | | $ | - | | | $ | (2,854 | ) |
Segment information for the three months ended September 30, 2019 and 2018 is as follows:
(in thousands) | | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 1,791 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,791 | |
Advisory services, other operating segments(1) | | | 63 | | | | - | | | | - | | | | (63 | ) | | | - | |
Interest and dividend income | | | - | | | | 2,011 | | | | - | | | | - | | | | 2,011 | |
Interest expense | | | - | | | | (1,002 | ) | | | (389 | )(2) | | | - | | | | (1,391 | ) |
Net revenues | | | 1,854 | | | | 1,009 | | | | (389 | ) | | | (63 | ) | | | 2,411 | |
Other | | | - | | | | (438 | ) | | | (601 | )(3) | | | - | | | | (1,039 | ) |
Operating expenses(4) | | | (754 | ) | | | (852 | ) | | | - | | | | - | | | | (1,606 | ) |
Intercompany expenses(1) | | | - | | | | (63 | ) | | | - | | | | 63 | | | | - | |
Income (loss) before income taxes | | $ | 1,100 | | | $ | (344 | ) | | $ | (990 | ) | | $ | - | | | $ | (234 | ) |
| | | | | | | | | | | | | | | |
| | Asset | | | Investment | | | | | | | | | | |
| | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
2018 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 1,873 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,873 | |
Advisory services, other operating segments(1) | | | 65 | | | | - | | | | - | | | | (65 | ) | | | - | |
Interest and dividend income | | | - | | | | 2,434 | | | | - | | | | - | | | | 2,434 | |
Interest expense | | | - | | | | (1,049 | ) | | | (388 | )(2) | | | - | | | | (1,437 | ) |
Net revenues | | | 1,938 | | | | 1,385 | | | | (388 | ) | | | (65 | ) | | | 2,870 | |
Other | | | - | | | | (1,651 | ) | | | 1,478 | (3) | | | - | | | | (173 | ) |
Operating expenses(4) | | | (653 | ) | | | (842 | ) | | | - | | | | - | | | | (1,495 | ) |
Intercompany expenses(1) | | | - | | | | (65 | ) | | | - | | | | 65 | | | | - | |
Income (loss) before income taxes | | $ | 1,285 | | | $ | (1,173 | ) | | $ | 1,090 | | | $ | - | | | $ | 1,202 | |
(1) | Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
(2) | Includes interest on junior subordinated note. |
(3) | Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
(4) | Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
Assets in each reportable segment were as follows:
(in thousands) | | | | | | | | | | | | |
| Asset | | Investment | | | | | |
| Management | | Portfolio | | Corporate | | Total | |
September 30, 2019 | | $ | 1,448 | | | $ | 196,886 | | | $ | 11,645 | | | $ | 209,979 | |
December 31, 2018 | | | 1,488 | | | | 245,866 | | | | 12,046 | | | | 259,400 | |
Asset Management Segment
Advisory Services Revenue
Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement. We receive a monthly management fee in the amount of:
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses incurred on its behalf and to pay to us an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 2020 and provides for automatic one-year extension options. Should Orchid terminate the management agreement without cause, it will be obligated to pay to us 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 automatic renewal term.
The following table summarizes the advisory services revenue received from Orchid in each quarter during 2019 and 2018 and in the nine months ended September 30, 2019 and 2018.
(in thousands) | | | | | | | | | | | | | | | |
| | Average | | | Average | | Advisory Services | |
| | Orchid | | | Orchid | | | Management | | | Overhead | | | | |
Three Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
September 30, 2019 | | $ | 3,674,087 | | | $ | 394,788 | | | $ | 1,440 | | | $ | 351 | | | $ | 1,791 | |
June 30, 2019 | | | 3,307,885 | | | | 363,961 | | | | 1,326 | | | | 327 | | | | 1,654 | |
March 31, 2019 | | | 3,051,509 | | | | 363,204 | | | | 1,285 | | | | 323 | | | | 1,607 | |
December 31, 2018 | | | 3,264,230 | | | | 395,911 | | | | 1,404 | | | | 434 | | | | 1,838 | |
September 30, 2018 | | | 3,601,776 | | | | 431,962 | | | | 1,482 | | | | 391 | | | | 1,873 | |
June 30, 2018 | | | 3,717,690 | | | | 469,974 | | | | 1,606 | | | | 361 | | | | 1,967 | |
March 31, 2018 | | | 3,745,298 | | | | 488,906 | | | | 1,712 | | | | 381 | | | | 2,093 | |
(in thousands) | | | | | | | | | | | | | | | | | | | | |
| | Average | | | Average | | Advisory Services | |
| | Orchid | | | Orchid | | | Management | | | Overhead | | | | | |
Nine Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
September 30, 2019 | | | 3,344,494 | | | | 373,984 | | | | 4,051 | | | | 1,001 | | | | 5,052 | |
September 30, 2018 | | | 3,688,255 | | | | 463,517 | | | | 4,800 | | | | 1,133 | | | | 5,933 | |
Investment Portfolio Segment
Net Portfolio Interest Income
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the nine months ended September 30, 2017, the Company2019, we generated $3.0$2.3 million of net portfolio interest income, consisting of $4.1$6.0 million of interest income from MBS assets offset by $1.1$3.7 million of interest expense on repurchase liabilities. For the comparable period ended September 30, 2016, the Company2018, we generated $2.5$3.3 million of net portfolio interest income, consisting of $3.0$6.1 million of interest income from MBS assets offset by $0.5$2.8 million of interest expense on repurchase liabilities. The $0.1 million decrease in interest income for the nine months ended September 30, 2019 was due to a 18 basis point ("bp") decrease in yields earned on the portfolio, offset by a $3.4 million increase in average MBS balances. The $0.9 million increase in interest expense for the nine months ended September 30, 2019 was due to a combination of a $2.0 million increase in average repurchase liabilities and an 57 bp increase in cost of funds.
Our economic interest expense on repurchase liabilities for the nine months ended September 30, 20172019 and 20162018 was $1.5$4.0 million and $0.7$3.1 million, respectively, resulting in $2.5$2.0 million and $2.3$3.0 million of economic net portfolio interest income, respectively.
During the three months ended September 30, 2017, the Company2019, we generated $1.0$0.6 million of net portfolio interest income, consisting of $1.5$1.6 million of interest income from MBS assets offset by $0.5$1.0 million of interest expense on repurchase liabilities. For the three months ended September 30, 2016, the Company2018, we generated $0.9$1.0 million of net portfolio interest income, consisting of $1.1$2.1 million of interest income from MBS assets offset by $0.2$1.0 million of interest expense on repurchase liabilities. The $0.5 million decrease in interest income for the three months ended September 30, 2019 was due to a $11.2 million decrease in average MBS balances, combined with a 62 bp decrease in yields earned on the portfolio.
The Company'sOur economic interest expense on repurchase liabilities for the three months ended September 30, 20172019 and 20162018 was $0.7$1.1 million and $0.3$1.1 million, respectively, resulting in $0.8$0.5 million and $0.8$1.0 million of economic net portfolio interest income, respectively.
There was a decrease of $24.3 million in average MBS balances in the third quarter of 2019, compared to the second quarter of 2019. In order to fund the share-repurchase, we sold MBS assets with an approximate fair market at time of sale, including accrued interest, of $44.0 million.
AverageOur average outstanding balances under repurchase agreements for the Company were $161.0$177.6 million and $114.9$189.6 million, generating interest expense of $0.5$1.0 million and $0.2$1.0 million for the three months ended September 30, 20172019 and 2016,2018, respectively. Our average cost of funds was 1.25%2.26% and 0.68%2.21% for three months ended September 30, 20172019 and 2016,2018, respectively. There was a 57 basis point5 bp increase in the average cost of funds and a $46.1$12.0 million increasedecrease in average outstanding repurchase agreements during the three months ended September 30, 2017,2019, compared to the three months ended September 30, 2016.2018.
The Company'sOur economic interest expense was $0.7$1.1 million and $0.3$1.1 million for the three months ended September 30, 20172019 and 2016,2018, respectively. There was a 66 basis point25 bp increase in the average economic cost of funds to 1.66%2.54% for the three months ended September 30, 20172019 from 1.00%2.29% for the three months ended September 30, 2016. The $0.4 million increase in economic interest expense was due to the $46.1 million increase in average outstanding repurchase agreements during the three months ended September 30, 2017, combined with the negative performance of our derivative agreements attributed to the current period.2018.
Because all of our repurchase agreements are short-term, changes in market rates directly affecthave a more immediate impact on our interest expense. The Company'sOur average cost of funds calculated on a GAAP basis was 5 basis points4 bps above the average one-month LIBOR and 20 basis points below the average six-month LIBOR for the quarter ended September 30, 2017. The Company's average economic cost of funds was 46 basis points above the average one-month LIBOR and 21 basis points8 bps above the average six-month LIBOR for the quarter ended September 30, 2017.2019. Our average economic cost of funds was 32 bps above the average one-month LIBOR and 36 bps above the average six-month LIBOR for the quarter ended September 30, 2019. The average term to maturity of the outstanding repurchase agreements increaseddecreased from 4031 days at December 31, 20162018 to 4814 days at September 30, 2017.2019.
The tables below present the consolidated average outstanding balances under our repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for the nine months ended September 30, 20172019 and 2016,2018, and for each quarter in 20172019 and 2016,2018, on both a GAAP and economic basis.
($ in thousands) | | | | | | | | | | | | | | | |
| | Average | | | | | | | | | | | | | |
| | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
September 30, 2019 | | $ | 177,566 | | | $ | 1,002 | | | $ | 1,126 | | | | 2.26 | % | | | 2.54 | % |
June 30, 2019 | | | 199,901 | | | | 1,340 | | | | 1,566 | | | | 2.68 | % | | | 3.13 | % |
March 31, 2019 | | | 199,771 | | | | 1,313 | | | | 1,308 | | | | 2.63 | % | | | 2.62 | % |
December 31, 2018 | | | 202,069 | | | | 1,235 | | | | 1,101 | | | | 2.44 | % | | | 2.18 | % |
September 30, 2018 | | | 189,582 | | | | 1,049 | | | | 1,084 | | | | 2.21 | % | | | 2.29 | % |
June 30, 2018 | | | 184,621 | | | | 938 | | | | 1,046 | | | | 2.03 | % | | | 2.27 | % |
March 31, 2018 | | | 197,001 | | | | 809 | | | | 962 | | | | 1.64 | % | | | 1.96 | % |
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | Average | | | | | | | | | | | | | | | | | |
| | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
September 30, 2019 | | $ | 192,413 | | | $ | 3,655 | | | $ | 4,000 | | | | 2.53 | % | | | 2.77 | % |
September 30, 2018 | | | 190,402 | | | | 2,796 | | | | 3,092 | | | | 1.96 | % | | | 2.17 | % |
| | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | Relative to Average | | | Relative to Average | |
| | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
Three Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
September 30, 2019 | | | 2.22 | % | | | 2.18 | % | | | 0.04 | % | | | 0.08 | % | | | 0.32 | % | | | 0.36 | % |
June 30, 2019 | | | 2.45 | % | | | 2.49 | % | | | 0.23 | % | | | 0.19 | % | | | 0.68 | % | | | 0.64 | % |
March 31, 2019 | | | 2.50 | % | | | 2.77 | % | | | 0.13 | % | | | (0.14 | )% | | | 0.12 | % | | | (0.15 | )% |
December 31, 2018 | | | 2.39 | % | | | 2.74 | % | | | 0.05 | % | | | (0.30 | )% | | | (0.21 | )% | | | (0.56 | )% |
September 30, 2018 | | | 2.17 | % | | | 2.55 | % | | | 0.04 | % | | | (0.34 | )% | | | 0.12 | % | | | (0.26 | )% |
June 30, 2018 | | | 1.99 | % | | | 2.48 | % | | | 0.04 | % | | | (0.45 | )% | | | 0.28 | % | | | (0.21 | )% |
March 31, 2018 | | | 1.69 | % | | | 2.11 | % | | | (0.05 | )% | | | (0.47 | )% | | | 0.27 | % | | | (0.15 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | �� | | | | | | Relative to Average | | | Relative to Average | |
| | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
Nine Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
September 30, 2019 | | | 2.39 | % | | | 2.48 | % | | | 0.14 | % | | | 0.05 | % | | | 0.38 | % | | | 0.29 | % |
September 30, 2018 | | | 1.95 | % | | | 2.38 | % | | | 0.01 | % | | | (0.42 | )% | | | 0.22 | % | | | (0.21 | )% |
Dividend Income
($ in thousands) | | | | | | | | | | | | | | | |
| | Average | | | | | | | | | | | | | |
| | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
September 30, 2017 | | $ | 161,003 | | | $ | 504 | | | $ | 666 | | | | 1.25 | % | | | 1.66 | % |
June 30, 2017 | | | 126,341 | | | | 324 | | | | 476 | | | | 1.02 | % | | | 1.51 | % |
March 31, 2017 | | | 119,938 | | | | 283 | | | | 399 | | | | 0.94 | % | | | 1.33 | % |
December 31, 2016 | | | 123,909 | | | | 251 | | | | 373 | | | | 0.81 | % | | | 1.20 | % |
September 30, 2016 | | | 114,858 | | | | 195 | | | | 287 | | | | 0.68 | % | | | 1.00 | % |
June 30, 2016 | | | 103,259 | | | | 174 | | | | 234 | | | | 0.67 | % | | | 0.91 | % |
March 31, 2016 | | | 90,014 | | | | 127 | | | | 172 | | | | 0.57 | % | | | 0.77 | % |
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | Average | | | | | | | | | | | | | | | | | |
| | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Nine Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
September 30, 2017 | | $ | 135,761 | | | $ | 1,111 | | | $ | 1,541 | | | | 1.09 | % | | | 1.51 | % |
September 30, 2016 | | | 102,710 | | | | 496 | | | | 693 | | | | 0.64 | % | | | 0.90 | % |
We have owned 1,520,036 shares of Orchid common stock since March 2017. Orchid paid total dividends of $0.72 per share and $0.24 per share during the nine and three months ended September 30, 2019, respectively, and $0.83 per share and $0.25 per share during the nine and three months ended September 30, 2018, respectively. During the nine and three months ended September 30, 2019, we received dividends on this common stock investment of approximately $1.1 million and $0.4 million, respectively, compared to $1.3 million and $0.4 million during the nine and three months ended September 30, 2018, respectively.
| | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | Relative to Average | | | Relative to Average | |
| | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
Three Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
September 30, 2017 | | | 1.20 | % | | | 1.45 | % | | | 0.05 | % | | | (0.20 | )% | | | 0.46 | % | | | 0.21 | % |
June 30, 2017 | | | 1.05 | % | | | 1.43 | % | | | (0.03 | )% | | | (0.41 | )% | | | 0.46 | % | | | 0.08 | % |
March 31, 2017 | | | 0.82 | % | | | 1.37 | % | | | 0.12 | % | | | (0.43 | )% | | | 0.51 | % | | | (0.04 | )% |
December 31, 2016 | | | 0.62 | % | | | 1.28 | % | | | 0.19 | % | | | (0.47 | )% | | | 0.58 | % | | | (0.08 | )% |
September 30, 2016 | | | 0.49 | % | | | 1.09 | % | | | 0.19 | % | | | (0.41 | )% | | | 0.51 | % | | | (0.09 | )% |
June 30, 2016 | | | 0.44 | % | | | 0.92 | % | | | 0.23 | % | | | (0.25 | )% | | | 0.47 | % | | | (0.01 | )% |
March 31, 2016 | | | 0.40 | % | | | 0.84 | % | | | 0.17 | % | | | (0.27 | )% | | | 0.37 | % | | | (0.07 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | | Relative to Average | | | Relative to Average | |
| | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
Nine Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
September 30, 2017 | | | 1.03 | % | | | 1.42 | % | | | 0.06 | % | | | (0.33 | )% | | | 0.48 | % | | | 0.09 | % |
September 30, 2016 | | | 0.44 | % | | | 0.95 | % | | | 0.20 | % | | | (0.31 | )% | | | 0.46 | % | | | (0.05 | )% |
Junior Subordinated Notes
Interest expense on the Company'sour junior subordinated debt securities was $0.9$1.2 million and $0.8$1.1 million for the nine months ended September 30, 20172019 and 2016,2018, respectively. The average rate of interest paid for the nine months ended September 30, 20172019 was 4.64%6.06% compared to 4.13%5.57% for the comparable period in 2016.2018.
Interest expense on the Company'sour junior subordinated debt securities was $0.3$0.4 million and $0.3$0.4 million for the three month periods ended September 30, 20172019 and 2016,2018, respectively. The average rate of interest paid for the three months ended September 30, 20172019 was 4.76%5.86% compared to 4.19%5.84% for the comparable period in 2016.2018.
The junior subordinated debt securities pay interest at a floating rate. The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. As of September 30, 2017,2019, the interest rate was 4.82%5.62%.
Gains or Losses and Other Income
The table below presents the Company'sour gains or losses and other income for the nine and three months ended September 30, 20172019 and 2016.
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | |
Realized (losses) gains on sales of MBS | | $ | (1 | ) | | $ | 180 | | | $ | (181 | ) | | $ | - | | | $ | (71 | ) | | $ | 71 | |
Unrealized (losses) gains on MBS | | | (296 | ) | | | (313 | ) | | | 17 | | | | 168 | | | | (274 | ) | | | 442 | |
Total (losses) gains on MBS | | | (297 | ) | | | (133 | ) | | | (164 | ) | | | 168 | | | | (345 | ) | | | 513 | |
(Losses) gains on derivative instruments | | | (829 | ) | | | (1,550 | ) | | | 721 | | | | (19 | ) | | | 508 | | | | (527 | ) |
Advisory services | | | 5,398 | | | | 3,931 | | | | 1,467 | | | | 1,940 | | | | 1,388 | | | | 552 | |
Gains on retained interests in securitizations | | | 390 | | | | 2,100 | | | | (1,710 | ) | | | 85 | | | | 1,021 | | | | (936 | ) |
Unrealized (losses) gains on | | | | | | | | | | | | | | | | | | | | | | | | |
Orchid Island Capital, Inc. common stock | | | (823 | ) | | | 684 | | | | (1,507 | ) | | | 502 | | | | 181 | | | | 321 | |
Orchid Island Capital, Inc. dividends | | | 1,880 | | | | 1,758 | | | | 122 | | | | 638 | | | | 586 | | | | 52 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
2018.
(in thousands) | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | Change | |
Realized gains (losses) on sales of MBS | | $ | 23 | | | $ | (577 | ) | | $ | 600 | | | $ | 23 | | | $ | (473 | ) | | $ | 496 | |
Unrealized gains (losses) on MBS | | | 6,227 | | | | (8,407 | ) | | | 14,634 | | | | 950 | | | | (1,593 | ) | | | 2,543 | |
Total gains (losses) on MBS | | | 6,250 | | | | (8,984 | ) | | | 15,234 | | | | 973 | | | | (2,066 | ) | | | 3,039 | |
(Losses) gains on derivative instruments | | | (6,105 | ) | | | 3,558 | | | | (9,663 | ) | | | (483 | ) | | | 948 | | | | (1,431 | ) |
Gains on retained interests in securitizations | | | 315 | | | | 1,105 | | | | (790 | ) | | | 40 | | | | 1,357 | | | | (1,317 | ) |
Unrealized losses on | | | | | | | | | | | | | | | | | | | | | | | | |
Orchid Island Capital, Inc. common stock | | | (973 | ) | | | (3,086 | ) | | | 2,113 | | | | (927 | ) | | | (410 | ) | | | (517 | ) |
We invest in MBS with the intent to earn net income from the realized yield on those assets over thetheir related funding and hedging costs, and not for purposesthe purpose of making short term gains from trading in these securities. 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 nine months ended September 30, 2017,2019 and 2018, the Company received proceeds of $1.7$44.0 million and $60.4 million from the sales of MBS. There were no sales of MBS during the three months ended September 30, 2017. During the nine and three months ended September 30, 2016, the Company received proceeds of $73.1 million and $31.3 million from the sales of MBS, respectively.
The fair value of the Company'sour MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are sensitive to changes in interest rates. The table below presents historical interest rate data for each quarter end during 20172019 and 2016.
2018.
| | | | | | | | 15 Year | | | 30 Year | | | Three | |
| | 5 Year | | | 10 Year | | | Fixed-Rate | | | Fixed-Rate | | | Month | |
| | Treasury Rate(1) | | | Treasury Rate(1) | | | Mortgage Rate(2) | | | Mortgage Rate(2) | | | Libor(3) | |
September 30, 2017 | | | 1.93 | % | | | 2.33 | % | | | 3.11 | % | | | 3.81 | % | | | 1.32 | % |
June 30, 2017 | | | 1.88 | % | | | 2.30 | % | | | 3.17 | % | | | 3.90 | % | | | 1.26 | % |
March 31, 2017 | | | 1.93 | % | | | 2.40 | % | | | 3.41 | % | | | 4.20 | % | | | 1.13 | % |
December 31, 2016 | | | 1.93 | % | | | 2.45 | % | | | 3.43 | % | | | 4.20 | % | | | 0.98 | % |
September 30, 2016 | | | 1.16 | % | | | 1.61 | % | | | 2.76 | % | | | 3.46 | % | | | 0.85 | % |
June 30, 2016 | | | 1.01 | % | | | 1.49 | % | | | 2.84 | % | | | 3.57 | % | | | 0.65 | % |
March 31, 2016 | | | 1.22 | % | | | 1.79 | % | | | 2.97 | % | | | 3.69 | % | | | 0.63 | % |
| | 5 Year | | | 10 Year | | | 15 Year | | | 30 Year | | | Three | |
| | U.S. Treasury | | | U.S. Treasury | | | Fixed-Rate | | | Fixed-Rate | | | Month | |
| | Rate(1) | | | Rate(1) | | | Mortgage Rate(2) | | | Mortgage Rate(2) | | | Libor(3) | |
September 30, 2019 | | | 1.55 | % | | | 1.68 | % | | | 3.12 | % | | | 3.61 | % | | | 2.13 | % |
June 30, 2019 | | | 1.76 | % | | | 2.00 | % | | | 3.24 | % | | | 3.80 | % | | | 2.40 | % |
March 31, 2019 | | | 2.24 | % | | | 2.41 | % | | | 3.72 | % | | | 4.27 | % | | | 2.61 | % |
December 31, 2018 | | | 2.51 | % | | | 2.69 | % | | | 4.09 | % | | | 4.64 | % | | | 2.80 | % |
September 30, 2018 | | | 2.95 | % | | | 3.06 | % | | | 4.08 | % | | | 4.63 | % | | | 2.40 | % |
June 30, 2018 | | | 2.73 | % | | | 2.85 | % | | | 4.04 | % | | | 4.57 | % | | | 2.34 | % |
March 31, 2018 | | | 2.56 | % | | | 2.74 | % | | | 3.91 | % | | | 4.44 | % | | | 2.31 | % |
(1) | Historical 5 Year and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange. |
(2) | Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac'sMac’s Primary Mortgage Market Survey. |
(3) | Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration Ltd. |
The retained interests in securitizations represent the residual net interest spread remaining after payments on the notes issued through the securitization. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve), the discount rate used to determine the present value of the residual cash flows and prepayment and loss estimates on the underlying mortgage loans. During the nine and three months ended September 30, 2017, the Company recorded gains on retained interests of $0.4 million and $0.1 million, respectively, compared to gains of $2.1 million and $1.0 million, respectively, for the nine and three months ended September 30, 2016.-37-
Advisory Services
Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement.
For the nine and three months ended September 30, 2017, the Company's2019, our total operating expenses were approximately $4.6$4.8 million and $1.5$1.6 million, respectively, compared to approximately $4.1$4.9 million and $1.4$1.5 million for the nine and three months ended September 30, 2016,2018, respectively. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 20172019 and 2016.2018.
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | |
| | 2017 | | | 2016 | | | Change | | | 2017 | | | 2016 | | | Change | | | 2019 | | | 2018 | | | Change | | | 2019 | | | 2018 | | | Change | |
Compensation and related benefits | | $ | 2,684 | | | $ | 2,274 | | | $ | 410 | | | $ | 869 | | | $ | 723 | | | $ | 146 | | | $ | 3,075 | | | $ | 3,071 | | | $ | 4 | | | $ | 987 | | | $ | 969 | | | $ | 18 | |
Legal fees | | | 81 | | | | 144 | | | | (63 | ) | | | 40 | | | | 40 | | | | - | | | 120 | | | 71 | | | 49 | | | 24 | | | (35 | ) | | 59 | |
Accounting, auditing and other professional fees | | | 266 | | | | 308 | | | | (42 | ) | | | 80 | | | | 118 | | | | (38 | ) | | 261 | | | 276 | | | (15 | ) | | 73 | | | 84 | | | (11 | ) |
Directors' fees and liability insurance | | | 498 | | | | 467 | | | | 31 | | | | 165 | | | | 155 | | | | 10 | | |
Directors’ fees and liability insurance | | | 491 | | | 482 | | | 9 | | | 169 | | | 161 | | | 8 | |
Administrative and other expenses | | | 1,022 | | | | 888 | | | | 134 | | | | 364 | | | | 321 | | | | 43 | | | | 878 | | | | 986 | | | | (108 | ) | | | 353 | | | | 317 | | | | 36 | |
| | $ | 4,551 | | | $ | 4,081 | | | $ | 470 | | | $ | 1,518 | | | $ | 1,357 | | | $ | 161 | | | $ | 4,825 | | | $ | 4,886 | | | $ | (61 | ) | | $ | 1,606 | | | $ | 1,496 | | | $ | 110 | |
In September 2019, the Florida Department of Revenue announced a reduction in the corporate income tax rate from 5.5% to 4.458% retroactive to January 1, 2019. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted, so accordingly, the Company’s tax provision for the nine and three months ended September 30, 2019 included a charge of $0.6 million due to a remeasurement of deferred tax assets and liabilities resulting from the tax rate reduction.
Financial Condition:
Mortgage-Backed Securities
As of September 30, 2017, the Company's2019, our MBS portfolio consisted of $198.0$163.2 million of agency or government MBS at fair value and had a weighted average coupon of 4.23%4.28%. During the nine months ended September 30, 2017, the Company2019, we received principal repayments of $7.7$14.8 million compared to $10.3$19.6 million for the comparable period ended September 30, 2016.2018. The average prepayment speeds for the quarters ended September 30, 20172019 and 20162018 were 8.3%10.5% and 13.6%9.5%, respectively.
The following table presents the 3-month constant prepayment rate ("CPR"(“CPR”) experienced on the Company'sour structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
| | | | | Structured | | | | |
| | PT MBS | | | MBS | | | Total | |
Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
September 30, 2017 | | | 5.2 | | | | 18.8 | | | | 8.3 | |
June 30, 2017 | | | 5.9 | | | | 20.4 | | | | 9.9 | |
March 31, 2017 | | | 4.8 | | | | 18.8 | | | | 8.8 | |
December 31, 2016 | | | 5.5 | | | | 27.3 | | | | 11.1 | |
September 30, 2016 | | | 9.4 | | | | 19.7 | | | | 13.6 | |
June 30, 2016 | | | 7.8 | | | | 20.4 | | | | 12.6 | |
March 31, 2016 | | | 11.8 | | | | 16.6 | | | | 14.3 | |
| | | | | Structured | | | | |
| | PT MBS | | | MBS | | | Total | |
Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
September 30, 2019 | | | 9.5 | | | | 16.2 | | | | 10.5 | |
June 30, 2019 | | | 9.9 | | | | 14.6 | | | | 10.5 | |
March 31, 2019 | | | 5.7 | | | | 13.4 | | | | 6.8 | |
December 31, 2018 | | | 5.5 | | | | 11.7 | | | | 6.6 | |
September 30, 2018 | | | 8.6 | | | | 13.5 | | | | 9.5 | |
June 30, 2018 | | | 13.4 | | | | 11.6 | | | | 13.1 | |
March 31, 2018 | | | 7.2 | | | | 16.8 | | | | 8.6 | |
The following tables summarize certain characteristics of the Company'sour PT MBS and structured MBS as of September 30, 20172019 and December 31, 2016:2018:
($ in thousands) | | | | | | |
| | | | | Weighted | |
| | | Percentage | | Average | |
| | | of | Weighted | Maturity | |
| | Fair | Entire | Average | in | Longest |
Asset Category | | Value | Portfolio | Coupon | Months | Maturity |
September 30, 2017 | | | | | | |
Fixed Rate MBS | $ | 195,151 | 98.6% | 4.23% | 326 | 1-Sep-47 |
Total PT MBS | | 195,151 | 98.6% | 4.23% | 326 | 1-Sep-47 |
Interest-Only Securities | | 1,643 | 0.8% | 3.44% | 232 | 25-Dec-39 |
Inverse Interest-Only Securities | | 1,196 | 0.6% | 5.32% | 281 | 25-Apr-41 |
Total Structured MBS | | 2,839 | 1.4% | 4.23% | 253 | 25-Apr-41 |
Total MBS | $ | 197,990 | 100.0% | 4.23% | 325 | 1-Sep-47 |
December 31, 2016 | | | | | | |
Fixed Rate MBS | $ | 124,299 | 95.4% | 4.24% | 347 | 1-Oct-46 |
Total PT MBS | | 124,299 | 95.4% | 4.24% | 347 | 1-Oct-46 |
Interest-Only Securities | | 2,654 | 2.0% | 3.48% | 245 | 25-Dec-39 |
Inverse Interest-Only Securities | | 3,349 | 2.6% | 5.52% | 325 | 25-Dec-46 |
Total Structured MBS | | 6,003 | 4.6% | 4.62% | 290 | 25-Dec-46 |
Total MBS | $ | 130,302 | 100.0% | 4.26% | 344 | 25-Dec-46 |
($ in thousands) | | | | | | |
| | | | | Weighted | |
| | | Percentage | | Average | |
| | | of | Weighted | Maturity | |
| | Fair | Entire | Average | in | Longest |
Asset Category | | Value | Portfolio | Coupon | Months | Maturity |
September 30, 2019 | | | | | | |
Fixed Rate MBS | $ | 161,538 | 99.0% | 4.28% | 332 | 1-May-49 |
Interest-Only MBS | | 1,136 | 0.7% | 3.69% | 288 | 15-Jul-48 |
Inverse Interest-Only MBS | | 553 | 0.3% | 4.54% | 257 | 25-Apr-41 |
Total MBS Portfolio | $ | 163,227 | 100.0% | 4.28% | 332 | 1-May-49 |
December 31, 2018 | | | | | | |
Fixed Rate MBS | $ | 209,675 | 98.7% | 4.26% | 327 | 1-Aug-48 |
Interest-Only MBS | | 2,021 | 1.0% | 3.69% | 293 | 15-Jul-48 |
Inverse Interest-Only MBS | | 728 | 0.3% | 4.06% | 272 | 25-Apr-41 |
Total MBS Portfolio | $ | 212,424 | 100.0% | 4.25% | 327 | 1-Aug-48 |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | | December 31, 2016 | | | September 30, 2019 | | | December 31, 2018 | |
| | | | | Percentage of | | | | | | Percentage of | | | | | | Percentage of | | | | | | Percentage of | |
Agency | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | |
Fannie Mae | | $ | 171,565 | | | | 86.7 | % | | $ | 120,961 | | | | 92.8 | % | | $ | 148,279 | | | 90.8 | % | | $ | 193,437 | | | 91.1 | % |
Freddie Mac | | | 26,201 | | | | 13.2 | % | | | 8,870 | | | | 6.8 | % | | 14,917 | | | 9.1 | % | | 18,881 | | | 8.9 | % |
Ginnie Mae | | | 224 | | | | 0.1 | % | | | 471 | | | | 0.4 | % | | | 31 | | | | 0.1 | % | | | 106 | | | | 0.0 | % |
Total Portfolio | | $ | 197,990 | | | | 100.0 | % | | $ | 130,302 | | | | 100.0 | % | | $ | 163,227 | | | | 100.0 | % | | $ | 212,424 | | | | 100.0 | % |
| | September 30, 2017 | | | December 31, 2016 | | | September 30, 2019 | | | December 31, 2018 | |
Weighted Average Pass-through Purchase Price | | $ | 109.33 | | | $ | 110.31 | | | $ | 106.50 | | | $ | 106.81 | |
Weighted Average Structured Purchase Price | | $ | 6.02 | | | $ | 6.74 | | | $ | 6.39 | | | $ | 6.39 | |
Weighted Average Pass-through Current Price | | $ | 108.00 | | | $ | 107.54 | | | $ | 108.19 | | | $ | 103.87 | |
Weighted Average Structured Current Price | | $ | 7.38 | | | $ | 10.40 | | | $ | 6.58 | | | $ | 8.67 | |
Effective Duration (1) | | | 3.867 | | | | 4.769 | | | | 2.607 | | | | 3.935 | |
(1) | Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 3.8672.607 indicates that an interest rate increase of 1.0% would be expected to cause a 3.867%2.607% decrease in the value of the MBS in the Company'sour investment portfolio at September 30, 2017.2019. An effective duration of 4.7693.935 indicates that an interest rate increase of 1.0% would be expected to cause a 4.769%3.935% decrease in the value of the MBS in the Company'sour investment portfolio at December 31, 2016.2018. These figures include the structured securities in the portfolio but do include the effect of the Company's funding costour hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. |
The following table presents a summary of the Company'sour portfolio assets acquired during the nine months ended September 30, 20172019 and 2016.2018.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2019 | | 2018 | |
| | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | |
PT MBS | | $ | 77,295 | | | $ | 107.68 | | | | 2.70 | % | | $ | 133,100 | | | $ | 110.31 | | | | 2.42 | % | | $ | 3,285 | | | $ | 104.12 | | | | 3.35 | % | | $ | 91,578 | | | $ | 104.72 | | | | 3.67 | % |
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. The CompanyWe generally seeksseek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, the Company strives to maintain a hedged PT MBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying the Company'sour portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from the Company'sour investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages, and loan payoffs in connection with home sales.sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.
The duration of the Company'sour IO and IIO portfolio 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'sIO’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 IIO'sIIO’s similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causecauses 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 the Company'sour MBS can alter the timing of the cash flows from the underlying loans to the Company.received by us. As a result, the Company gaugeswe gauge the interest rate sensitivity of its 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.
The Company facesWe face the risk that the market value of itsour PT MBS assets will increase or decrease at different rates than that of itsour structured MBS or liabilities, including itsour hedging instruments. Accordingly, the Company assesses itswe assess our interest rate risk by estimating the duration of itsour assets and the duration of itsour liabilities. The CompanyWe generally calculatescalculate duration and effective duration using various third-party models or obtainsobtain these quotes from third parties. 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 September 30, 2017,2019, assuming rates instantaneously fall 100 basis points ("bps"),bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency MBS'MBS’ effective duration to movements in interest rates.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair | | | $ Change in Fair Value | | | % Change in Fair Value | | | Fair | | | $ Change in Fair Value | | | % Change in Fair Value | |
MBS Portfolio | | Value | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | | | Value | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
Fixed Rate MBS | | $ | 195,151 | | | $ | 6,177 | | | $ | (10,066 | ) | | $ | (22,189 | ) | | | 3.17 | % | | | (5.16 | )% | | | (11.37 | )% | | $ | 161,538 | | | $ | 3,671 | | | $ | (5,911 | ) | | $ | (13,883 | ) | | 2.27 | % | | (3.66 | )% | | (8.59 | )% |
Interest-Only MBS | | | 1,643 | | | | (621 | ) | | | 465 | | | | 735 | | | | (37.77 | )% | | | 28.31 | % | | | 44.75 | % | | 1,136 | | | (291 | ) | | 362 | | | 637 | | | (25.59 | )% | | 31.86 | % | | 56.01 | % |
Inverse Interest-Only MBS | | | 1,196 | | | | (134 | ) | | | (51 | ) | | | (256 | ) | | | (11.17 | )% | | | (4.27 | )% | | | (21.37 | )% | | | 553 | | | | (25 | ) | | | (6 | ) | | | (73 | ) | | | (4.49 | )% | | | (1.08 | )% | | | (13.18 | )% |
Total MBS Portfolio | | $ | 197,990 | | | $ | 5,422 | | | $ | (9,652 | ) | | $ | (21,710 | ) | | | 2.74 | % | | | (4.88 | )% | | | (10.96 | )% | | $ | 163,227 | | | $ | 3,355 | | | $ | (5,555 | ) | | $ | (13,319 | ) | | | 2.06 | % | | | (3.40 | )% | | | (8.16 | )% |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | Notional | | | $ Change in Fair Value | | | % Change in Fair Value | |
| | Amount(1) | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
Eurodollar Futures Contracts | | | | | | | | | | | | | | | | | | | | | |
Repurchase Agreement Hedges | | $ | 1,020,000 | | | $ | (1,701 | ) | | $ | 2,550 | | | $ | 5,100 | | | | (0.68 | )% | | | 1.02 | % | | | 2.04 | % |
Junior Subordinated Debt Hedges | | | 442,000 | | | | (737 | ) | | | 1,105 | | | | 2,210 | | | | (0.68 | )% | | | 1.02 | % | | | 2.04 | % |
| | $ | 1,462,000 | | | $ | (2,438 | ) | | $ | 3,655 | | | $ | 7,310 | | | | (0.68 | )% | | | 1.02 | % | | | 2.04 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Totals | | | | | | $ | 2,984 | | | $ | (5,997 | ) | | $ | (14,400 | ) | | | | | | | | | | | | |
($ in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | Notional | | | $ Change in Fair Value | | | % Change in Fair Value | |
| | Amount(1) | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
Eurodollar Futures Contracts | | | | | | | | | | | | | | | | | | | | | |
Repurchase Agreement Hedges | | $ | 102,222 | | | $ | (2,300 | ) | | $ | 2,300 | | | $ | 4,600 | | | | (1.02 | )% | | | 1.02 | % | | | 2.03 | % |
Junior Subordinated Debt Hedges | | | 20,800 | | | | (260 | ) | | | 260 | | | | 520 | | | | (1.02 | )% | | | 1.02 | % | | | 2.04 | % |
Treasury Futures | | | 20,000 | | | | (1,218 | ) | | | 1,056 | | | | 2,134 | | | | (5.11 | )% | | | 2.09 | % | | | 4.43 | % |
TBA Contracts | | | 50,000 | | | | (496 | ) | | | 1,576
| | | | 4,357
| | | | (0.97 | )% | | | 3.07 | % | | | 8.49
| % |
| | $ | 193,022
| | | $ | (4,274 | ) | | $ | 5,192 | | | $ | 11,611 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Totals | | | | | | $ | (919 | ) | | $ | (363
| ) | | $ | (1,708 | ) | | | | | | | | | | | | |
(1) | Represents the total cumulativeaverage contract/notional amount of Eurodollar futures contracts. |
In addition to changes in interest rates, other factors impact the fair value of the Company'sour interest rate-sensitive investments and hedging instruments, 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 the Company'sour assets would likely differ from that shown above and such difference might be material and adverse to the Company'sour stockholders.
Repurchase Agreements
As of September 30, 2017, the Company2019, 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 fivesix of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company.us. These borrowings are secured by the Company'sour MBS.
As of September 30, 2017, the Company2019, we had obligations outstanding under the repurchase agreements of approximately $187.4$154.5 million with a net weighted average borrowing cost of 1.35%2.34%. The remaining maturity of the Company'sour outstanding repurchase agreement obligations ranged from 113 to 8978 days, with a weighted average maturity of 4814 days. Securing the repurchase agreement obligation as of September 30, 20172019 are MBS with an estimated fair value, including accrued interest, of $198.2$163.8 million and a weighted average maturity of 326333 months. Through November 3, 2017, the Company has8, 2019, we have been able to maintain itsour repurchase facilities with comparable terms to those that existed at September 30, 20172019 with maturities through January 29, 2018.
The table below presents information about our period-end, maximum and average repurchase agreement obligations for each quarter in 20172019 and 2016.2018.
($ in thousands) | |
| | | | | | | | Difference Between Ending | |
| | Ending Balance | | | Average Balance | | | Repurchase Agreements and | |
| | of Repurchase | | | of Repurchase | | | Average Repurchase Agreements | |
Three Months Ended | | Agreements | | | Agreements | | | Amount | | | Percent | |
September 30, 2017 | | $ | 187,374 | | | $ | 161,003 | | | $ | 26,371 | | | | 16.38 | %(1) |
June 30, 2017 | | | 134,633 | | | | 126,341 | | | | 8,292 | | | | 6.56 | % |
March 31, 2017 | | | 118,049 | | | | 119,938 | | | | (1,889 | ) | | | (1.57 | )% |
December 31, 2016 | | | 121,828 | | | | 123,909 | | | | (2,081 | ) | | | (1.68 | )% |
September 30, 2016 | | | 125,991 | | | | 114,858 | | | | 11,133 | | | | 9.69 | % |
June 30, 2016 | | | 103,725 | | | | 103,259 | | | | 466 | | | | 0.45 | % |
March 31, 2016 | | | 102,794 | | | | 90,014 | | | | 12,780 | | | | 14.20 | %(2) |
($ in thousands) | |
| | Ending | | | Maximum | | | Average | | | Difference Between Ending | |
| | Balance | | | Balance | | | Balance | | | Repurchase Agreements and | |
| | of Repurchase | | | of Repurchase | | | of Repurchase | | | Average Repurchase Agreements | |
Three Months Ended | | Agreements | | | Agreements | | | Agreements | | | Amount | | | Percent | |
September 30, 2019 | | $ | 154,475 | | | $ | 200,552 | | | $ | 177,566 | | | $ | (23,091 | ) | | | (13.00 | )% |
June 30, 2019 | | | 200,656 | | | | 200,776 | | | | 199,901 | | | | 755 | | | | 0.38 | % |
March 31, 2019 | | | 199,146 | | | | 200,113 | | | | 199,771 | | | | (625 | ) | | | (0.31 | )% |
December 31, 2018 | | | 200,396 | | | | 203,746 | | | | 202,069 | | | | (1,673 | ) | | | (0.83 | )% |
September 30, 2018 | | | 203,742 | | | | 204,988 | | | | 189,582 | | | | 14,160 | | | | 7.47 | % |
June 30, 2018 | | | 175,422 | | | | 193,753 | | | | 184,621 | | | | (9,199 | ) | | | (4.98 | )% |
March 31, 2018 | | | 193,820 | | | | 204,998 | | | | 197,001 | | | | (3,181 | ) | | | (1.61 | )% |
(1) | The higher ending balance relative to the average balance during the quarter ended September 30, 2017 reflects the growth of the portfolio, on a leveraged basis. During the quarter ended September 30, 2017, the Company's investment in PT MBS increased $56.1 million. |
-41-
(2) | The higher ending balance relative to the average balance during the quarter ended March 31, 2016 reflects the repositioning of the portfolio. During the quarter ended March 31, 2016, the Company's investment in PT MBS increased $26.2 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 and fulfill margin calls. Our principal immediate sources of liquidity include cash balances, unencumbered assets, the availability to borrow under repurchase agreements, and fees and dividends received from Orchid. 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 MBS portfolio, and from cash flows received from the retained interests and the collection of servicing advances.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 MBS portfolio, (b) the repayments on borrowings, (c) the payment of overhead and operating expenses, and (d) the payment of other accrued obligations.
Our strategy for hedging our funding costsstrategy typically involves taking short positions in Eurodollar futures, T-Note futures, swaptionsTBAs 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.
As discussed above, we invest a portion of our capital in structured MBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in the structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured MBS strategy has been a core element of the Company'sCompany’s overall investment strategy since 2008. However, we have and may continue to pledge a portion of our structured MBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.
In future periods we expect to continue to finance our activities through repurchase agreements. As of September 30, 2017, the Company2019, we had cash and cash equivalents of $5.2$7.8 million. We generated cash flows of $11.5$20.9 million from principal and interest payments on our MBS portfolio and $0.9 million from retained interests and had average repurchase agreements outstanding of $135.8$192.4 million during the nine months ended September 30, 2017.2019. In addition, during the nine months ended September 30, 2017, the Company2019, we received approximately $5.3$5.1 million in management fees and expense reimbursements as manager of Orchid and approximately $1.9$1.1 million in dividends from itsour investment in Orchid common stock.
In July 2019, we completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of our Class A common stock at a price of $2.00 per share. In order to fund the share-repurchase we sold MBS assets with an approximate fair market at time of sale, including accrued interest, of $44.0 million.
In order to generate additional cash to be invested in our MBS portfolio, on October 30, 2019, we obtained a $680,000 loan secured by a mortgage on the Company’s office property. The loan is payable in equal monthly installments of approximately $4,500, including interest at 4.89%, through October 30, 2039. Net loan proceeds were approximately $651,000. We are also seeking to sell a second real property that is not used in the Company’s business. As of September 30, 2019, that property had a carrying value of $450,000. When that property is sold, we intend to invest the net sale proceeds in our MBS portfolio.
The table below summarizes the effect that certain future contractual obligations existing as of September 30, 20172019 will have on our liquidity and cash flows.
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Obligations Maturing | | | Obligations Maturing | |
| | Within One Year | | | One to Three Years | | | Three to Five Years | | | More than Five Years | | | Total | | | Within One Year | | | One to Three Years | | | Three to Five Years | | | More than Five Years | | | Total | |
Repurchase agreements | | $ | 187,374 | | | $ | - | | | $ | - | | | $ | - | | | $ | 187,374 | | | $ | 154,475 | | | $ | - | | | $ | - | | | $ | - | | | $ | 154,475 | |
Interest expense on repurchase agreements(1) | | | 521 | | | | - | | | | - | | | | - | | | | 521 | | | 381 | | | - | | | - | | | - | | | 381 | |
Junior subordinated notes(2) | | | - | | | | - | | | | - | | | | 26,000 | | | | 26,000 | | | - | | | - | | | - | | | 26,000 | | | 26,000 | |
Interest expense on junior subordinated notes(1) | | | 1,326 | | | | 2,545 | | | | 2,541 | | | | 16,793 | | | | 23,205 | | | 1,546 | | | 2,962 | | | 2,966 | | | 16,609 | | | 24,083 | |
Litigation settlement | | | 250 | | | | 250 | | | | - | | | | - | | | | 500 | | |
Totals | | $ | 189,471 | | | $ | 2,795 | | | $ | 2,541 | | | $ | 42,793 | | | $ | 237,600 | | | $ | 156,402 | | | $ | 2,962 | | | $ | 2,966 | | | $ | 42,609 | | | $ | 204,939 | |
(1) | Interest expense on repurchase agreements and junior subordinated notes are based on current interest rates as of September 30, 20172019 and the remaining term of liabilities existing at that date. |
(2) | The Company holdsWe hold a common equity interest in Bimini Capital Trust II. The amount presented represents theour net cash outlay of the Company.outlay. |
Outlook
Orchid Island Capital Inc.
To the extent Orchid is able to increase its capital base over time, we will benefit via increased management fees. In addition, Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid'sOrchid’s pro rata share of overhead as defined in the management agreement. As a stockholder of Orchid, we will also continue to share in distributions, if any, paid by Orchid to its stockholders. Our operating results are also impacted by changes in the market value of our holdings of Orchid common shares, although these market value changes do not impact our cash flows from Orchid.
The independent Board of Directors of Orchid has the ability to terminate the management agreement and thus end our ability to collect management fees and share overhead costs. Should Orchid terminate the management agreement without cause, it will be obligated to pay us 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 current automatic renewal term.
Interest Rates and the MBS Market
In many respects theThe third quarter of 2019 was a repeat ofvery volatile period. As 2018 came to a close, the first and second. Economic and market developments continued the trend in place since March. Inflation data continued to come in below market expectations. Optimism stemming from the surprise outcomedomestic economy of the U.S. Presidential election last Novemberwas quite strong and the markets' expectations for progress on health care, regulatory and tax reform, infrastructure spending, etc. were not realized. In contrast, events in Washington were chaotic at times asFed was still removing accommodation from the Trump Administration struggled with a Republican party rife with internal struggles and political infighting inside the White House itself. Efforts to repeal and replace the Affordable Care Act seemed to come to an end and the continued in-fighting among Republicans called into question the ability of the Trump Administration to accomplish anything meaningful. The Federal Reserve (the "Fed") raised their target foreconomy, raising the Federal Funds (the “Fed Funds”) target range 25 bps at their December 2018 meeting. The trajectory of the economy and Fed monetary policy has changed dramatically since. The Fed has lowered the Fed Funds target range 25 bps at the July, September, and just last week, the October 2019 meetings. Global growth has continued to decelerate and domestic growth, at least the manufacturing side of the economy, has clearly slowed. Contributing to the global growth slow down has been the escalating trade war, particularly between the U.S. and China. The Trump administration has continued to increase both the dollar amount of goods imported from China that will be subject to tariffs and the magnitude of the tariffs that will be imposed. The most recent increase was announced on August 1st and was the largest in both the dollar amount of goods affected and the rate of the tariffs. The markets reacted violently, and risk-taking sentiment plummeted. Global stock markets declined and interest rates across the globe declined.
After a period of relative calm in MarchJuly 2019, the escalation in the trade war triggered by the new tariff announcement in August brought about several meaningful developments for the global rates markets. In Germany, the 10-year Bund yield hit a new all-time low of -0.716% on August 28, 2019. The dollar amount of global debt trading at negative yields hit a new all-time high of $17.037 trillion on August 29, 2019. Domestically, the 10-year U.S. Treasury term premium reached -1.3273 on August 28, 2019, the 30-year government bond yield declined below 2% for the first time ever during August and June,the spread between the 3-month U.S. Treasury bill and announced a tapering of their asset purchases in September.the 10-year U.S. Treasury reached -0.5044 on August 27, 2019. In short, it was an unsettling month. However, the market remained skeptical the Fed would be able to followvolatility continued through with as many additional hikes as the Fed was expecting as core inflation readings continued to show year over year declines, with many of the elements of the index exhibiting persistent weakness. Geopolitical events – particularly with respect to North Korea – keep the world and markets on edge. The yield on the 10-year US Treasury rate hit its year to date low on September 7, 2017, closing at 2.04%, and nearly broke below the psychologically important 2% level intra-day. Mother nature had a hand in shaping developments in the markets as well, as three major hurricanes made landfall – one each in Texas, Florida and Puerto Rico. In the case of Texas, Hurricane Harvey caused unprecedented flooding and disrupted the Nation's oil refining capacity for several days.
However, there was a perceptible change in market sentiment in early September, and the market reversed course into the end of the third quarter and early fourth quarter. Geo-political events calmed down, removing the flight-to-quality induced demand for safe-haven assets, and economic news strengthened. Events in Washington turned mildly positive as the Trump Administration pivoted away from health care reform to tax reform, with what the market perceived to be slightly better prospects for success. Inflation data finally met expectations and showed signs of reversing its decline when the August data was released on September 14th. Finally, on September 20th, Fed Chairwomen Yellen sounded quite hawkish and reiterated her belief that recent inflation data represented temporary or transitory effects and would reverse soon enough back towards their 2% target. It was quite clear the Fed intended to raise the Federal Funds rate again in December. The market responded as Fed Funds futures pricing implied a 70-80% probability of a 25 basis point increase in the Federal Funds rate in December. The September
Domestic economic data released in early October has also been very strong,September was not as bad as feared and the anticipated short-term effectsrates markets reversed violently again, with the yield on the 10-year U.S. Treasury rising from a low of 1.458% on September 3, 2019 – within 11 bps of the hurricanes appearall-time lowest yield for the 10-year – to have been less than feared. Further,just under 1.90% on September 13, 2019. This was a 44 bp move in just 8 trading days. On September 14th, there was a missile attack on substantial portions of Saudi Arabian oil productions facilities which turned the repair work associatedmarket around yet again. Developments during the period were not limited to the equity and rates markets. During September, the House of Representatives launched an impeachment inquiry into President Trump’s dealing with the hurricanes should put evenpresident of Ukraine. Finally, on September 16th, disruptions in the over-night funding markets caused the Fed Funds rate to trade outside of the 25 bps band established by the Fed, and over-night repo rates to spike towards 7%. The spike was caused more upward pressure on economic activity.
Asby a lack of available funding versus an unwillingness to lend, which would be consistent with credit related fears present in the market. The Fed intervened rather quickly by initially providing overnight repo facilities and eventually term funding over quarter end to calm markets. The Fed took additional steps in October to address pressures in the over-night funding markets. These steps are described more fully below under “Recent Regulatory Developments”. In summary, the third quarter was very volatile and as we movehead into the fourth quarter, the markets are anxious for calm to return. So far in October, there have been positive developments. The U.S. and China reached a tentative agreement on October 11, 2019 that, among other things, prevented tariffs on $300 billion of goods from increasing on October 15, 2019 as originally scheduled. There are not many details of the tentative agreement available yet, but the market pricing of additional policy accommodation removal is far less thansenses the trade war, while not about to end, will not continue to escalate either, and appears to be thawing somewhat. A potential deal on Brexit has also been reached, which may prevent the United Kingdom from leaving the European Union without a deal. These recent developments led the Fed anticipates. The latest reads on inflation returned to its aforementioned stringannounce at the conclusion of below expectations readings. The perceived lack of meaningful inflation, coupled with a hawkish Fed, has causedtheir October 30, 2019 meeting that they expect the U.S. Treasury curve to flatten,current policy rate will be appropriate as long as the spread between 5-year Treasury Notes and 30-year Treasury Bondseconomy continues to evolve in a manner that is at multi-year lows. The market is also facedconsistent with uncertainty surrounding President Trump's appointmenttheir outlook. This means monetary policy will be on hold barring an evolution of the next Fed chair, with many ofeconomy above or below the leading candidates perceived to be more hawkish by the markets than the current chairwoman, even though she remains a candidate herself. Regardless of the uncertainty in the bond market, the equity markets,Fed’s outlook for growth and risk markets generally, continue to hit all-time high closes almost daily, and the combination of robust economic data, low inflation and the prospects for tax reform make for an ideal environment for risk assets.inflation.
In response to these developments, the markets expect continued accommodation on the part of the various central banks and this appears to be what the banks intend to deliver. The mortgage market closedEuropean Central Bank is under new leadership since November 1, 2019, and both the quarter withoutgoing president and his replacement have made clear their intentions to maintain adequate policy accommodation. This is the case as well in China and Japan. In the U.S., the picture is less clear. The Fed stated at the conclusion of their October 30, 2019 meeting that the current coupon, 30-year fixedstance of monetary policy is appropriate as long as the economy continues to evolve in a manner consistent with their outlook. In other words, there will be no further adjustments to the Fed Funds rate Agency MBS trading atabsent a change in the tightest spreadperformance of the economy or inflation. However, there appears to comparable duration U.S. Treasuries sincebe a divide within the Fed over both the outlook for the economy and what the focus of the Fed should be. Domestic data – outside of manufacturing – has remained firm. Data released in early 2014. As has beenOctober indicated this may not be the case for much longer. However, the data is far from weak. Outside of the year, lower couponU.S. the picture is far less cloudy. There is clear evidence of a global growth slow down. The question that the Fed is grappling with relates to which matters most to the Fed for setting monetary policy. Is it solely the state of the domestic economy or should the Fed respond to developments abroad, usually manifesting themselves in the rates and equities markets. The level of inflation and inflation expectations also matter. Currently, inflation is running below the Fed target of 2%, but has been moving closer to target of late. Inflation consistently below the Fed’s target would justify additional accommodation, but this may not be the case in the near future if inflation continues to move higher. Public comments by the Fed chairman and policy decision voting reveal the lack of consensus. The markets await resolution of the matter.
The Agency MBS outperformed high coupon MBSmarket total return for the quarter was 1.4%, although the return was -0.2% versus their comparableequivalent duration swaps and LIBOR per data by Bank of America Merrill Lynch/ICE Data Indices. With interest rates declining to near all-time low levels, prepayment activity accelerated and is expected to continue to remain high. The spread of the current-coupon 30-year mortgage to the 10-year U.S. Treasury benchmarks.reached 98.07 bps on August 27, 2019, the highest spread since 2012. Total returns across the Agency MBS sector followed durations to some extent, as 30-year returns exceeded returns to 15-year MBS and Ginnie Mae securities, although within the coupon stack, this trend did not hold. As we approachprepayment performance was worst among the winter months3.5% and 4.0% coupons, these securities generally trailed higher with lower coupons on a total return basis. With prepayment activity elevated and the seasonal slowdowncontinued poor quality of generic, TBA collateral, specified pools continue to outperform.
In June 2019, the Uniform MBS (“UMBS”) began trading. UMBS are passthrough securities representing an interest in a pool of residential mortgages that are issued and guaranteed by either Fannie Mae or Freddie Mac. The UMBS were designed to eliminate differences in underwriting, servicing and trading levels between Fannie Mae and Freddie Mac securities and to increase liquidity in the TBA market. TBA trades can now be settled through delivery of either Fannie Mae or Freddie Mac UMBS. Also, resecuritizations of Fannie Mae or Freddie Mac collateral can be commingled, and commingled passthrough securities can be used to settle UMBS TBA trades. It remains to be seen how effective the UMBS program will be at accomplishing these objectives. As mentioned, the deterioration in the TBA market continues to be a significant obstacle for Agency MBS performance, both on an outright return basis and compared to other sectors of the fixed income universe. Refinancing activity has increased and all agency loans outside of the specified pool market continue to exhibit very poor prepayment activity, coupledbehavior. The collateral generally has historically high gross weighted average coupons for any given coupon, higher loan balances and higher FICO scores – all consistent with thehigher prepayment expectations. This has led to a material increase in premiums charged for pools with more desirable prepayment characteristics. While these premiums have increased, and are very high for the current level of rates, that began in early September, speeds should continue to moderatethe all-in price for specified securities is historically low for the level of rates. This is because the dollar prices for the various TBA securities is very low for the level of rates – reflecting the very poor prepayment characteristics of the TBA collateral.
Recent Regulatory Developments
In September 2017, the FOMC announced that it would implement a balance sheet normalization policy by gradually decreasing the Fed’s reinvestment of U.S. Treasuries and Agency RMBS. More specifically, principal payments received by the Fed will be reinvested only to the extent they exceed gradually rising caps until the FOMC determines that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively. In October 2017, the FOMC commenced this balance sheet normalization program. At the conclusion of the March 2019 FOMC meeting, the Fed said that the FOMC intends to slow the pace of the decline in its holdings of U.S. Treasuries and Agency RMBS over coming quarters provided that the economy and money market conditions evolve about as expected. The Fed specified that the FOMC intends to reduce the run-off of its holdings of U.S. Treasury securities by reducing the cap on monthly redemptions from the previous level of $30 billion to $15 billion beginning in May 2019, and continue to allow its holdings of Agency RMBS to decline, consistent with the aim of holding primarily U.S. Treasury securities in the long run. In October 2019, the Fed began reinvesting principal payments from Agency RMBS or agency debt in U.S. Treasury securities, subject to a maximum of $20 billion per month, with any principal payments in excess of that maximum reinvested in Agency RMBS.
On October 11, 2019, the Fed commenced purchases of up to $60 billion treasury bills per month through the second quarter of 2020. The Fed is also conducting overnight repo operations of $75 billion, initially, and 2-week term repo operations of at least $35 billion twice a week through January of 2020. Their goal is to maintain reserve balances over time at or above the levels that prevailed in early September 2019.
In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new SOFR, a rate based on U.S. repo trading. The new benchmark rate will be based on overnight Treasury General Collateral repo rates. The rate-setting process will be managed and published by the Fed and the Treasury’s Office of Financial Research. Many banks believe that it may take four to five years to complete the transition to SOFR, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will likely become the new benchmark for hedges and a range of interest rate investments.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve. Although the Trump administration has made statements of its intentions to reform housing finance, and tax policy, many of these potential policy changes will require congressional action. In addition, the Fed has made statements regarding additional increases to the Federal Funds Rate over the balance of 2017 and beyond. The Fed also announced that it will begin to reduce its holdings of Agency MBS and U.S. treasuries.
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 MBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, an increase in guarantee fees would increase our costs. In addition, the elimination of the guarantee structure of Agency MBS may cause us to change our investment strategy to focus on non-Agency MBS, 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 MBS 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 MBS. 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 MBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency MBS, 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, itprepayment proceeds may not be possibleable to reinvest prepayment proceedsbe reinvested in similar-yielding assets. Agency MBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency MBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the discount accretionyields earned on those assets, and increase the yields earned, which would increase our net income.
Higher long-term rates can also affect the value of our Agency MBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency MBS declines. Some of the instruments the Company uses to hedge our Agency MBS assets, such as Euro Dollar futures, swaps, interest rate futures and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency MBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. We believe this makes interest only securities desirable hedge instruments for pass-through Agency MBS.
As the economy has rebounded from the financial crisis, the Fed has taken steps to remove the considerable accommodation that was employed to combat the crisis. At the conclusion of its meeting in September 2017, the Fed announced it would implement caps on the amount of Agency MBS assets it would allow to run off, or not be re-invested, starting in October 2017. Previously the Fed would re-invest all of the principal repayments it received each month on the Agency MBS assets it had acquired during its quantitative easing programs. By capping the amount they would allow to run off each month, the Fed was effectively limiting the amount it would re-invest. Per the Fed’s September 2017 announcement, the cap reached $20 billion per month in October 2018. At the time of the Fed’s announcement in September 2017, its monthly re-investments were approximately $20 billion per month as well, so this implied the Fed would stop, or nearly stop, re-investing its monthly pay-downs beyond October 2018. The purchases each month by the Fed have been a significant source of demand in the Agency MBS market and as it was reduced slowly over the course of 2018 and essentially eliminated beyond October 2018, the removal of this source of demand negatively impacted Agency MBS prices. The extent this negatively impacts the Agency MBS market was a function of the level of supply each month – as the supply/demand balance affects the price of any asset – and whether or not another source of demand was present to replace the Fed. At the conclusion of the March 2019 FOMC meeting, the Fed said that the FOMC intends to slow the pace of the decline in its holdings of U.S. Treasuries and Agency MBS over coming quarters provided that the economy and money market conditions evolve about as expected. The Fed specified that the FOMC intends to reduce the run-off of its holdings of U.S. Treasury securities by reducing the cap on monthly redemptions from the previous level of $30 billion to $15 billion beginning in May 2019, and continue to allow its holdings of Agency MBS to decline, consistent with the aim of holding primarily U.S. Treasury securities in the long run. Beginning in October 2019 principal payments from Agency MBS or agency debt were to be reinvested in U.S. Treasury securities subject to a maximum of $20 billion per month, with any principal payments in excess of that maximum reinvested in Agency MBS.
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 MBS with shorter durations, such as short-term fixed and floating rate CMOs.durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT MBS, particularly PT MBS backed by fixed-rate mortgages.
If Fannie Mae and Freddie Mac were to modify or end their repurchase programs, our investment portfolio could be negatively impacted.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS 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 Fed Funds Rate and LIBOR.short term interest rate markets. An increase in the Fed Funds Raterate 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 MBS 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 sufficient borrowing capacity to support our MBS portfolio.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which effectivelyeconomically 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
As we entered the firstThe third quarter of 2017, risk assets were performing2019 proved to be a very well asturbulent period for the markets. As the global economy continued its slowdown that started in 2018 and the domestic manufacturing segment continued to cool, the markets expected the Fed would need to ease monetary policy in 2019. Contributing to the slowdown, both globally and domestically, was the trade war between the U.S. and China. The trade war was meaningfully escalated when on August 1, 2019, the Trump administration took officeannounced substantial increases to both the dollar amount of goods that would be subject to tariffs and appeared to be very pro-business.the size of the tariffs themselves. The markets looked forwardreacted violently and several key market indicators reached new extreme levels – such as the yield on the German 10-year Bund, the 30-year U.S. Treasury yield and many others. These extreme levels were reached in late August and early September before the market once again pivoted and reversed course, as the yield on the 10-year U.S. Treasury note increased 44 bps in a mere 8 trading days. Not surprisingly, the markets would reverse a few more times as one development after another buffeted the market – including a major attack on Saudi oil fields, the possible impeachment of President Trump, a major disruption in the over-night funding markets and finally, in October, a potential end to the Brexit crisis and a roll backtentative trade deal between the U.S. and China. In between all of recently expanding regulationsthe events, volatility levels were elevated, risk markets gyrated wildly and Agency MBS assets performed poorly.
The Agency MBS market total return for the quarter was 1.4%, although the return was -0.2% versus equivalent duration swaps and LIBOR (per data by Bank of America Merrill Lynch/ICE Data Indices). With rates declining to near all-time low levels, prepayment activity accelerated and is expected to continue to remain high. The spread of the current-coupon 30-year mortgage to the 10-year U.S. Treasury reached 98.07 bps on August 27, 2019, the highest spread since 2012. Total returns across many industries,the Agency MBS universe followed durations to some extent, as 30-year returns exceeded returns to 15-year MBS and Ginnie Mae securities, although within the coupon stack, this trend did not hold. As prepayment performance was worst among the 3.5% and 4.0% coupons, these securities generally trailed higher with lower coupons on a newtotal return basis. With prepayment activity elevated and hopefully improved health care act, tax reformthe continued poor quality of generic, TBA collateral, specified pools continue to outperform. Agency MBS asset performance trailed that of other structured products outside of RMBS and possibly much needed infrastructure spendinginvestment grade corporates. High yield corporates generated returns similar to refurbishAgency MBS of 1.2% and -0.1% versus comparable duration swaps and LIBOR. As we enter the nation's aging roads, highways, bridges and airports. While the Administration made bold promises, therefourth quarter of 2019, Agency MBS performance has been very little delivered. Market optimism was quickly replaceddirectional – with pessimism. Political infighting amongpoor performance when the Administrationrates markets rally (yields lower) and congressional republicans has generally beenpositive performance when rates increase. Even with the cause, as has turmoil withinincrease in rates since the White House itself. Geopolitical events surfaced in early April, specifically the Korean peninsula. These events kept the market on edge and induced sporadic flight to quality rallies as headlines hit the market from time to time. Incoming inflation data since March was below expectations. In the caseend of the core Consumer Price Index, ("CPI") measure, the year over year figure moved from 2.3% in January 2017third quarter, available mortgage rates are still very low by historical standards and prepayment activity is expected to 1.7% by May and has stayed there through September. Despite these readings, the Federal Reserve remains convinced these readings are being driven by temporary or transitory phenomenon and that inflation will reverse and head back towards their two percent target over the medium term. To wit, the Fed appears as if they will hike their target rate again at the December meeting baring surprise outcomes to the downside. The market accepts this outcome as highly likely – as reflected in Fed Funds futures pricing. However, using the same measure, the market does not expect the Fed to raise rates in 2018 and beyond to the extent the Fed expects to. As a result, the combination of benign inflation readings currently coupled with hawkish Fed expectation has caused the yield curve to flatten significantly – to multi-year lows. A second order effect of these developments has occurred in the equity and risk markets as they continue to perform exceedingly well. The major equity indices in the US make record new highs almost daily.
The MBS market has performed well in this environment as the resulting low volatility, tight trading spreads across most comparable asset classes and with demand from asset managers and REIT's easily replacing the lost demand expected from the Fed's tapering of their asset purchases. Current coupon, 30-year fixed rate mortgage are trading at their tightest spread to comparable duration treasuries since early 2014. If these conditions persist we do not believe that the market will be likely to suffer a material widening of spreads to comparable duration U.S. treasuries, even as the Fed has started to trim their asset purchases. The risk to this outcome appears to be inflation exceeding market expectations which should allow the Fed to carry out their professed intentions to raise rates three times in 2018 and more so in the years after. This would also put upward pressure on volatility and longer-term rates, both negatively impacting MBS performance.
Critical Accounting PoliciesEstimates
Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our condensed consolidated financial statements. These condensedOur consolidated financial statements are prepared in accordance with GAAP. The Company's significant accounting policies are described in Note 1 to the Company's accompanying condensed consolidated financial statements.
GAAP requires the Company'sour management to make some complex and subjective decisions and assessments. The Company'sOur most critical accounting policies involve decisions and assessments which could significantly affect reported assets, and liabilities, as well as reported revenues and expenses. The Company believes that all of the decisions and assessments upon which its financial statements are based were reasonable at the time made based upon information available to it at that time. There have been no changes to our critical accounting policiesestimates as discussed in our annual report on Form 10-K for the year ended December 31, 2016.2018.
Capital Expenditures
At September 30, 2017,2019, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At September 30, 2017,2019, we did not have any off-balance sheet arrangements.
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 activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
-49-
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the "evaluation date"“evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the "CEO"“CEO”) and Chief Financial Officer (the "CFO"“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"(the “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 subsidiaries 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 itsour periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC'sSEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company'sCompany’s internal control over financial reporting that occurred during the Company'sCompany’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.
There have been no material changes from the risk factors disclosed in the "Risk Factors"“Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March 8, 2017.20, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.The table below presents the Company’s share repurchase activity for the three months ended September 30, 2019.
| | | | | | | | Shares Purchased | | | Maximum Number | |
| | Total Number | | | Weighted-Average | | | as Part of Publicly | | | of Shares That May Yet | |
| | of Shares | | | Price Paid | | | Announced | | | Be Repurchased Under | |
| | Repurchased | | | Per Share | | | Programs(2) | | | the Authorization(2) | |
July 1, 2019 - July 31, 2019 | | | 1,100,000 | (1) | | $ | 2.00 | (1) | | | - | | | | 429,596 | |
August 1, 2019 - August 31, 2019 | | | - | | | | - | | | | - | | | | 429,596 | |
September 1, 2019 - September 30, 2019 | | | - | | | | - | | | | - | | | | 429,596 | |
Totals / Weighted Average | | | 1,100,000 | | | $ | 2.00 | | | | - | | | | 429,596 | |
(1) | In July 2019, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of Bimini Capital’s Class A common stock at a price of $2.00 per share. The tender offer was announced on May 29, 2019. |
(2) | On March 26, 2018, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Class A common stock. The authorization expires on November 15, 2020. |
The Company did not have any unregistered sales of its equity securities during the three months ended September 30, 2019.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. OTHER INFORMATION
None.
-51-
ITEM 6. EXHIBITS
Exhibit No
| *** | 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.
BIMINI CAPITAL MANAGEMENT, INC.
Date:November 3, 20178, 2019 | | By: | /s/ Robert E. Cauley
| |
| | | Robert E. Cauley Chairman and Chief Executive Officer |
Date:November 3, 20178, 2019 | | By: | /s/ G. Hunter Hass,Haas, IV
| |
| | | G. Hunter Haas IV President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
-53-