Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10‑Q


10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2017


March 31, 2023

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

THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to ___________


Commission File Number: 001-32171


logosm.jpg

Bimini Capital Management, Inc.

(Exact name of registrant as specified in its charter)

Maryland

 

72-1571637

Maryland72-1571637

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)


3305 Flamingo Drive, Vero Beach, Florida 32963

(Address of principal executive offices) (Zip Code)


(772) 231-1400

(Registrant'sRegistrant’s telephone number, including area code)




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

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

☐ 

Smaller reporting company

☒

  

Emerging growth company

☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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


☒         

Indicate the number of shares outstanding of each of the Registrant'sRegistrant’s classes of common stock, as of the latest practicable date:

Title of each Class

Latest Practicable Date

Shares Outstanding

Class A Common Stock, $0.001 par value

November 3, 2017

May 12, 2023

12,631,627

10,019,888

Class B Common Stock, $0.001 par value

November 3, 2017

May 12, 2023

31,938

Class C Common Stock, $0.001 par value

November 3, 2017May 12, 2023

31,938

Table of Contents

BIMINI CAPITAL MANAGEMENT, INC.


TABLE OF CONTENTS



 

Page

  

PART I. FINANCIAL INFORMATION

  
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

1

ITEM 1. Condensed Financial Statements1

Condensed Consolidated Balance Sheets (unaudited)

1

Condensed Consolidated Statements of Operations (unaudited)

2

Condensed Consolidated Statement of Stockholders'Stockholders’ Equity (unaudited)

3

Condensed Consolidated Statements of Cash Flows (unaudited)

4

Notes to Condensed Consolidated Financial Statements (unaudited)

5

ITEM 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

24

18

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

43

36

ITEM 4. Controls and Procedures

44

37

  

PART II. OTHER INFORMATION

  
PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

45

37

ITEM 1A. Risk Factors

45

37

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

37

ITEM 3. Defaults Upon Senior Securities

45

37

ITEM 4. Mine Safety Disclosures

45

37

ITEM 5. Other Information

45

37

ITEM 6. Exhibits

46

38

SIGNATURES

39

47

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM1. CONDENSED FINANCIAL STATEMENTS

BIMINI CAPITAL MANAGEMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

  

(Unaudited)

     
  March 31, 2023  December 31, 2022 

ASSETS:

        

Mortgage-backed securities, at fair value:

        

Pledged to counterparties

 $45,468,172  $45,716,793 

Unpledged

  171,760   176,643 

Total mortgage-backed securities

  45,639,932   45,893,436 

Cash and cash equivalents

  4,655,242   6,010,799 

Restricted cash

  433,600   763,000 

Orchid Island Capital, Inc. common stock, at fair value

  6,106,132   5,975,248 

Accrued interest receivable

  199,702   204,018 

Property and equipment, net

  1,978,191   1,997,313 

Deferred tax assets

  22,838,634   23,178,243 

Due from affiliates

  1,229,257   1,130,713 

Other assets

  1,308,435   1,164,181 

Total Assets

 $84,389,125  $86,316,951 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES:

        

Repurchase agreements

 $43,091,999  $43,817,999 

Long-term debt

  27,410,274   27,416,239 

Accrued interest payable

  202,025   194,629 

Other liabilities

  555,275   2,764,005 

Total Liabilities

  71,259,573   74,192,872 
         

COMMITMENTS AND CONTINGENCIES (Note 9)

        
         

STOCKHOLDERS' EQUITY:

        

Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; no shares issued and outstanding as of March 31, 2023 and December 31, 2022

  -   - 

Class A Common stock, $0.001 par value; 98,000,000 shares designated: 10,019,888 shares issued and outstanding as of March 31, 2023 and December 31, 2022

  10,020   10,020 

Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2023 and December 31, 2022

  32   32 

Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2023 and December 31, 2022

  32   32 

Additional paid-in capital

  329,828,268   329,828,268 

Accumulated deficit

  (316,708,800)  (317,714,273)

Stockholders’ Equity

  13,129,552   12,124,079 

Total Liabilities and Stockholders' Equity

 $84,389,125  $86,316,951 
BIMINI CAPITAL MANAGEMENT, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
       
  (Unaudited)    
   September 30, 2017  December 31, 2016 
ASSETS:      
Mortgage-backed securities, at fair value      
Pledged to counterparties $197,515,121  $129,582,386 
Unpledged  475,282   719,603 
Total mortgage-backed securities  197,990,403   130,301,989 
Cash and cash equivalents  5,211,532   4,429,459 
Restricted cash  936,420   1,221,978 
Orchid Island Capital, Inc. common stock, at fair value  15,489,167   15,108,240 
Retained interests in securitizations  557,659   1,113,736 
Accrued interest receivable  711,030   512,760 
Property and equipment, net  3,378,516   3,407,040 
Deferred tax assets, net  62,632,660   63,833,063 
Other assets  2,921,694   2,942,139 
Total Assets $289,829,081  $222,870,404 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
LIABILITIES:        
Repurchase agreements $187,373,780  $121,827,586 
Junior subordinated notes due to Bimini Capital Trust II  26,804,440   26,804,440 
Accrued interest payable  247,596   114,199 
Other liabilities  1,298,472   1,977,281 
Total Liabilities  215,724,288   150,723,506 
         
COMMITMENTS AND CONTINGENCIES        
         
STOCKHOLDERS' EQUITY:        
Preferred stock, $0.001 par value; 10,000,000 shares authorized;  100,000 shares        
designated Series A Junior Preferred Stock, 9,900,000 shares undesignated;        
no shares issued and outstanding as of September 30, 2017 and December 31, 2016  -   - 
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 12,631,627        
shares issued and outstanding as of September 30, 2017 and December 31, 2016  12,632   12,632 
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares        
issued and outstanding as of September 30, 2017 and December 31, 2016  32   32 
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares        
issued and outstanding as of September 30, 2017 and December 31, 2016  32   32 
Additional paid-in capital  334,872,353   334,850,838 
Accumulated deficit  (260,780,256)  (262,716,636)
Stockholders' Equity  74,104,793   72,146,898 
Total Liabilities and Stockholders' Equity $289,829,081  $222,870,404 
See Notes to Condensed Consolidated Financial Statements 

See Notes to Condensed Consolidated Financial Statements

- 1 -
Table of Contents
 

BIMINI CAPITAL MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the Three Months Ended March 31, 2023 and 2022

  

Three Months Ended March 31,

 
  

2023

  

2022

 

Revenues:

        

Advisory services

 $3,382,410  $3,075,362 

Interest income

  557,388   491,389 

Dividend income from Orchid Island Capital, Inc. common stock

  273,154   402,280 

Total revenues

  4,212,952   3,969,031 

Interest expense

        

Repurchase agreements

  (508,070)  (31,242)

Long-term debt

  (546,135)  (256,066)

Net revenues

  3,158,747   3,681,723 
         

Other income (expense):

        

Unrealized gains (losses) on mortgage-backed securities

  658,119   (3,114,204)

Unrealized gains (losses) on Orchid Island Capital Inc. common stock

  130,884   (3,244,197)

Losses on derivative instruments

  (273,875)  - 

Other income

  64   97 

Total other income (expense)

  515,192   (6,358,304)
         

Expenses:

        

Compensation and related benefits

  1,363,696   1,343,956 

Direct advisory services costs

  453,046   208,258 

Directors' fees and liability insurance

  206,498   195,898 

Audit, legal and other professional fees

  129,230   144,689 

Administrative and other expenses

  176,387   132,678 

Total expenses

  2,328,857   2,025,479 
         

Net income (loss) before income tax provision (benefit)

  1,345,082   (4,702,060)

Income tax provision (benefit)

  339,609   (1,222,476)
         

Net income (loss)

 $1,005,473  $(3,479,584)
         

Basic and Diluted Net Income (Loss) Per Share of:

        

CLASS A COMMON STOCK

        

Basic and Diluted

 $0.10  $(0.33)

CLASS B COMMON STOCK

        

Basic and Diluted

 $0.10  $(0.33)

Weighted Average Shares Outstanding:

        

CLASS A COMMON STOCK

        

Basic and Diluted

  10,019,888   10,624,563 

CLASS B COMMON STOCK

        

Basic and Diluted

  31,938   31,938 
BIMINI CAPITAL MANAGEMENT, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited) 
For the Nine and Three Months Ended September 30, 2017 and 2016 
             
   Nine Months Ended September 30,  Three Months Ended September 30, 
  2017  2016  2017  2016 
Interest income $4,075,160  $2,950,323  $1,513,511  $1,107,783 
Interest expense  (1,110,387)  (496,512)  (503,632)  (194,539)
Net interest income, before interest on junior subordinated notes  2,964,773   2,453,811   1,009,879   913,244 
Interest expense on junior subordinated notes  (914,055)  (818,169)  (316,176)  (278,196)
Net interest income  2,050,718   1,635,642   693,703   635,048 
Unrealized (losses) gains on mortgage-backed securities  (296,002)  (312,987)  168,034   (273,830)
Realized (losses) gains on mortgage-backed securities  (689)  179,667   -   (71,306)
(Losses) gains on derivative instruments, net  (828,825)  (1,549,638)  (18,813)  507,838 
Net portfolio income (loss)  925,202   (47,316)  842,924   797,750 
                 
Other income:                
Advisory services  5,398,019   3,930,533   1,939,974   1,387,997 
Gains on retained interests in securitizations  389,568   2,100,367   85,451   1,020,500 
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock  (823,308)  683,568   501,612   181,355 
Orchid Island Capital, Inc. dividends  1,880,245   1,757,745   638,415   585,915 
Other income  1,223   892   366   432 
Total other income  6,845,747   8,473,105   3,165,818   3,176,199 
                 
Expenses:                
Compensation and related benefits  2,683,872   2,273,714   868,924   722,697 
Directors' fees and liability insurance  498,140   466,573   165,040   155,498 
Audit, legal and other professional fees  346,999   452,695   120,419   157,545 
Administrative and other expenses  1,022,377   887,982   364,058   321,428 
Total expenses  4,551,388   4,080,964   1,518,441   1,357,168 
                 
Net income before income tax provision  3,219,561   4,344,825   2,490,301   2,616,781 
Income tax provision  1,283,181   2,117,899   989,081   1,437,544 
                 
Net income $1,936,380  $2,226,926  $1,501,220  $1,179,237 
                 
                 
Basic and Diluted Net Income Per Share of:                
CLASS A COMMON STOCK                
Basic and Diluted $0.15  $0.17  $0.12  $0.09 
CLASS B COMMON STOCK                
Basic and Diluted $0.15  $0.17  $0.12  $0.09 
Weighted Average Shares Outstanding:                
CLASS A COMMON STOCK                
Basic and Diluted  12,701,627   12,694,762   12,701,627   12,708,464 
CLASS B COMMON STOCK                
Basic and Diluted  31,938   31,938   31,938   31,938 
See Notes to Condensed Consolidated Financial Statements 

See Notes to Condensed Consolidated Financial Statements

- 2 -
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BIMINI CAPITAL MANAGEMENT, INC. 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 
(Unaudited) 
For the Nine Months Ended September 30, 2017 
             
 Stockholders' Equity   
  Common Additional Accumulated   
  Stock Paid-in Capital Deficit Total 
Balances, January 1, 2017 $12,696  $334,850,838  $(262,716,636) $72,146,898 
Net income  -   -   1,936,380   1,936,380 
Amortization of stock based compensation  -   21,515   -   21,515 
                 
Balances, September 30, 2017 $12,696  $334,872,353  $(260,780,256) $74,104,793 
See Notes to Condensed Consolidated Financial Statements 

BIMINI CAPITAL MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Three Months Ended March 31, 2023 and 2022

  

Stockholders' Equity

     
  

Common Stock

  

Additional

  

Accumulated

     
  

Shares

  

Par Value

  

Paid-in Capital

  

Deficit

  

Total

 

Balances, January 1, 2023

  10,083,764  $10,084  $329,828,268  $(317,714,273) $12,124,079 

Net income

  -   -   -   1,005,473   1,005,473 

Balances, March 31, 2023

  10,083,764  $10,084  $329,828,268  $(316,708,800) $13,129,552 
                     

Balances, January 1, 2022

  10,766,070  $10,766  $330,880,252  $(297,891,168) $32,999,850 

Net loss

  -   -   -   (3,479,584)  (3,479,584)

Class A common shares repurchased and retired

  (188,280)  (188)  (377,110)  -   (377,298)

Balances, March 31, 2022

  10,577,790  $10,578  $330,503,142  $(301,370,752) $29,142,968 
                     
                     
                     
                     

See Notes to Condensed Consolidated Financial Statements

- 3 -
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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.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Three Months Ended March 31, 2023 and 2022

  

2023

  

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income (loss)

 $1,005,473  $(3,479,584)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation

  19,122   17,312 

Deferred income tax provision (benefit)

  339,609   (1,222,476)

Unrealized (gains) losses on mortgage-backed securities

  (658,119)  3,114,204 

Unrealized (gains) losses on Orchid Island Capital, Inc. common stock

  (130,884)  3,244,197 

Changes in operating assets and liabilities:

        

Accrued interest receivable

  4,316   15,392 

Due from affiliates

  (98,544)  (3,453)

Other assets

  (144,254)  84,288 

Accrued interest payable

  7,396   16,187 

Other liabilities

  (2,208,730)  (2,164,072)

NET CASH USED IN OPERATING ACTIVITIES

  (1,864,615)  (378,005)
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

From mortgage-backed securities investments:

        

Principal repayments

  911,623   3,009,738 

Purchases of property and equipment

  -   (13,976)

NET CASH PROVIDED BY INVESTING ACTIVITIES

  911,623   2,995,762 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from repurchase agreements

  102,283,000   102,465,690 

Principal repayments on repurchase agreements

  (103,009,000)  (106,529,000)

Principal repayments on long-term debt

  (5,965)  (5,686)

Class A common shares repurchased and retired

  -   (377,298)

NET CASH USED IN FINANCING ACTIVITIES

  (731,965)  (4,446,294)
         

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

  (1,684,957)  (1,828,537)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period

  6,773,799   9,812,410 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period

 $5,088,842  $7,983,873 
         

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

        

Cash paid during the period for:

        

Interest expense

 $1,046,809  $271,121 

See Notes to Condensed Consolidated Financial Statements

- 4 -
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BIMINI CAPITAL MANAGEMENT,INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2023

(Unaudited)
September 30, 2017

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 subsidiary, Royal Palm Capital LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, 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

The accompanying consolidated financial statements include the accounts of Bimini Capital, its wholly-owned subsidiaries, Effective April 1, 2022, Bimini Advisors Holdings, LLC (formerly known asstarted providing certain repurchase agreement trading, clearing and administrative services to Orchid that were previously provided by a third party. Bimini Advisors Inc.) and also manages the MBS portfolio of Royal Palm Capital, LLC.

Royal Palm Capital, LLC (formerly known as MortCo TRS, LLC).   Bimini Advisors Holdings, LLCmaintains an investment portfolio, consisting primarily of MBS investments and shares of Orchid common stock, 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."

Segment Reporting

The Company’s operations are classified into two 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 the operating segments are the same as 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 13.

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.


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.

Basis of Presentation


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-Q10-Q and Article 8 of Regulation S-X.S-X. Accordingly, they do may 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-month period ended September 30, 2017March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.


2023.

The consolidated balance sheet at December 31, 20162022 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-K10-K for the year ended December 31, 2016.2022.

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Use of Estimates


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 consolidated 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 inand derivatives, the value of Orchid common shares, derivatives, retained interests,Common Stock, 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

Variable Interest Entities (“VIEs”)

A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of Comprehensive Income


In accordance with ASC Topic 220, Comprehensive Income, a statement of comprehensive income has the 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 been included as expected to result in the Company has no items of other comprehensive income (loss).  Comprehensive incomeobtaining 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 same as net income for all periods presented.

carrying value of the mortgage-backed securities. 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 7.

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.


(in thousands)      
 September 30, 2017 December 31, 2016 
Cash and cash equivalents $5,211,532  $4,429,459 
Restricted cash  936,420   1,221,978 
Total cash, cash equivalents and restricted cash $6,147,952  $5,651,437 

The following table presents the Company’s cash, cash equivalents and restricted cash as of March 31, 2023 and December 31, 2022.

  

March 31, 2023

  

December 31, 2022

 

Cash and cash equivalents

 $4,655,242  $6,010,799 

Restricted cash

  433,600   763,000 

Total cash, cash equivalents and restricted cash

 $5,088,842  $6,773,799 

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$250,000 per depositor at each financial institution. At September 30, 2017, the Company's cash deposits exceeded federally insured limits by approximately $3.3 million. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The Company limits uninsured balances to only large, well-known 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.


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. Revenues from management fees are recognized over the period of time in which the service is performed in accordance with FASB Accounting Standards Codification ("ASC") Topic 606,Revenue from Contracts with Customers. Further information regarding the management agreement is presented in Note 2 to the consolidated financial statements.

Mortgage-Backed Securities


The Company invests primarily in mortgage pass-through ("PT"(“PT”) certificates,mortgage-backed securities issued by Freddie Mac, Fannie Mae or Ginnie Mae (“MBS”), collateralized mortgage obligations and(“CMOs”), 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 refers to MBS and CMOs as PT MBS and IO and IIO securities as structured MBS. 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 ourthe Company’s operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.

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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 fair

Fair 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-partythird-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 and losses on MBS in the consolidated statements of operations. For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset'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 backedmortgage-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.


 Realized gains and losses on sales of MBS and U.S. Treasury Notes, using the specific identification method, are reported as a separate component of net portfolio income on the statement of operations.

Orchid Island Capital, Inc. Common Stock


The Company has elected the fair value optionaccounts for its investment in Orchid common shares.shares at fair value. 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 OrchidOrchid’s common shares 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'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

The Company holds retained interests in the subordinated tranches of securities created in securitization transactions were initiallytransactions. These retained interests currently have a recorded at their fair value when issued by Royal Palm. Subsequent adjustments to fair value are reflected in earnings. Quoted market prices for these assets are generally not available, soof zero, as the Company estimates fair value based on the present valueprospect of expected future cash flows using management's best estimatesbeing received is uncertain. Any cash received from the retained interests is reflected as a gain in the consolidated statements 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 useshas historically used 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") and Eurodollarinterest rate futures contracts, butand “to-be-announced” (“TBA”) securities transactions. The Company accounts for TBA securities as derivative instruments. Other types of derivative instruments may be used in the future. Gains and losses associated with derivative transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

During the three months ended March 31, 2023, the Company may enter into other transactions in the future.


only held T-Note futures contracts. The Company has elected not to treat anyrecorded losses of its derivative financialapproximately $0.3 million on these instruments as hedges in order to align the accounting treatment of its derivativeduring three months ended March 31, 2023.

Derivative instruments with the treatment of its portfolio assets under the fair value option.  FASB ASC Topic 815, Derivatives and Hedging, requires that all 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. Gains and losses on derivatives, except those that result in cash receipts or payments, are included in operating activities on the statements of cash flows. Cash payments and cash receipts from settlement of derivatives, including current period net cash settlements on interest rate swaps, are classified as an investing activity on the statements of cash flows. The Company's derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, related assets and liabilities are reported on a gross basis in the Company's consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the consolidated balance sheets. 

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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. ToThe Company’s derivative agreements require it to post or receive collateral to mitigate this risk,such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial banks as counterparties.


counterparties, monitors positions with individual counterparties and adjusts posted collateral as required. The Company’s futures contracts are exchange traded contracts that are valued based on exchange pricing with daily margin requirements. The margin requirement varies based on the market value of the open position and the equity retained in the account. Margin posted is treated as settlement of the outstanding value of the futures contract. Any margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s balance sheets. The Company realizes gains and losses on these contracts upon expiration equal to the difference between the current fair value of the underlying asset and the contractual price of the futures contract.

Financial Instruments


ASC Topic 825, Financial Instruments, requires disclosure of the

The fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the consolidated 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 1412 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 Level 2 assets under the fair value hierarchy as of September 30, 2017March 31, 2023 and December 31, 2016,2022, due to the short-term nature of these financial instruments.


It is impractical to estimate the

The fair value of the Company'sCompany’s junior subordinated notes.  Currently, theredebt approximates its carrying value. The carrying value is a limited market for these typesreasonable estimate of instruments andfair value since the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. Informationinstrument carries a floating rate that resets frequently. Further information regarding carrying amount and effective interest rate for these instrumentsthis instrument is presented in Note 87 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 buildingsour building and its improvements with depreciable lives of 30 years. Property and equipment is recorded at acquisition cost and depreciated to their respective salvage values using the straight-line method over the estimated useful lives of the assets.


Depreciation is included in administrative and other expenses in the consolidated statement of operations.

Repurchase Agreements


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.



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'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.

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-classtwo-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-classtwo-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.


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Income Taxes


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, 2014 2019 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.



The Company measures, recognizes For tax filing purposes, Bimini Capital and presents its uncertainincludable subsidiaries, and Royal Palm and its includable subsidiaries, file as separate tax positions in accordance with ASC Topic 740, Income Taxes.  Under that guidance, thepaying entities.

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 consolidated 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 November 2016, March 2020, the FASB issued Accounting Standards Update ("ASU"(“ASU”) 2016-18, Statement2020-04 “Reference Rate Reform (Topic 848): Facilitation of Cash Flows – (Topic 230): Restricted Cash. the Effects of Reference Rate Reform on Financial Reporting.” ASU 2016-18 requires2020-04 provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that restricted cashdoes not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is optional and restricted cash equivalents may be included elected over time, through December 31, 2022, 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 reference rate reform activities occur. In 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, 2022, the FASB issued ASU 2016-15, Statement of Cash Flows –2022-06 “Reference Rate Reform (Topic 230): Classification of Certain Cash Receipts and Cash Payments.848)," deferring the sunset date provided in 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 2020-04 from December 15, 2017.  Early application is permitted.  31, 2022 to December 31, 2024. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.

In June 2016, January 2021, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses2021-01 “Reference Rate Reform (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)848)”. ASU 2016-132021-01 expands the scope of ASC 848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for margining, discounting or contract price alignment of certain derivatives as a result of reference rate reform initiatives and extends optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. The guidance in ASU 2021-01 is effective for fiscal years,immediately and for interim periods within those years, beginning after available generally through 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.31, 2024, as reference rate reform activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.



NOTE 2.   MORTGAGE-BACKED SECURITIES


The following table presents the Company's MBS portfolio as of September 30, 2017 and December 31, 2016:

(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 

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)       
SeriesIssue Date September 30, 2017  December 31, 2016 
HMAC 2004-2May 10, 2004 $20  $143 
HMAC 2004-3June 30, 2004  148   364 
HMAC 2004-4August 16, 2004  290   463 
HMAC 2004-5September 28, 2004  100   144 
              Total  $558  $1,114 

NOTE 4.   REPURCHASE AGREEMENTS

As of September 30, 2017, 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.


As of September 30, 2017 and December 31, 2016, the Company's repurchase agreements had remaining maturities as summarized below:

($ in thousands)               
   OVERNIGHT  BETWEEN 2  BETWEEN 31  GREATER    
   (1 DAY OR  AND  AND  THAN    
  LESS)  30 DAYS  90 DAYS  90 DAYS  TOTAL 
September 30, 2017               
Fair value of securities pledged, including accrued               
interest receivable $-  $75,619  $122,589  $-  $198,208 
Repurchase agreement liabilities associated with                    
these securities $-  $71,261  $116,113  $-  $187,374 
Net weighted average borrowing rate  -   1.35%  1.34%  -   1.35%
December 31, 2016                    
Fair value of securities pledged, including accrued                    
interest receivable $-  $71,565  $41,334  $17,172  $130,071 
Repurchase agreement liabilities associated with                    
these securities $-  $66,919  $38,733  $16,176  $121,828 
Net weighted average borrowing rate  -   1.01%  0.96%  0.98%  0.99%

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, 2017 and December 31, 2016, 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 million and $8.4 million, respectively.  The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company's equity at September 30, 2017 or December 31, 2016.

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.

As of September 30, 2017 and December 31, 2016, such instruments were comprised entirely of Eurodollar futures contracts.  Eurodollar futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company's account on a daily basis and reflected in earnings as they occur. A minimum balance, or "margin", is required to be maintained in the account on a daily basis. 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's Eurodollar futures positions at September 30, 2017 and December 31, 2016.

($ in thousands)            
As of September 30, 2017            
  Repurchase Agreement Funding Hedges 
  Average  Weighted  Weighted    
  Contract  Average  Average    
  Notional  Entry  Effective  Open 
Expiration Year Amount  Rate  Rate  
Equity(1)
 
2017 $60,000   1.58%  1.48% $(14)
2018  60,000   1.90%  1.73%  (100)
2019  60,000   2.32%  1.98%  (207)
2020  60,000   2.60%  2.14%  (278)
2021  60,000   2.80%  2.29%  (306)
Total / Weighted Average $60,000   2.36%  2.00% $(905)

($ in thousands)            
As of September 30, 2017            
  Junior Subordinated Debt Funding Hedges 
  Average  Weighted  Weighted    
  Contract  Average  Average    
  Notional  Entry  Effective  Open 
Expiration Year 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 
2020  26,000   1.95%  2.14% $50 
2021  26,000   2.22%  2.29% $18 
Total / Weighted Average $26,000   1.92%  2.00% $87 

($ in thousands)            
As of December 31, 2016            
  Repurchase Agreement Funding Hedges 
  Average  Weighted  Weighted    
  Contract  Average  Average    
  Notional  Entry  Effective  Open 
Expiration Year 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)
2020  60,000   2.60%  2.45% $(88)
2021  60,000   2.80%  2.64% $(93)
Total / Weighted Average $60,000   2.19%  2.08% $(325)


($ in thousands)            
As of December 31, 2016            
  Junior Subordinated Debt Funding Hedges 
  Average  Weighted  Weighted    
  Contract  Average  Average    
  Notional  Entry  Effective  Open 
Expiration Year 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 
2020  26,000   1.95%  2.45% $132 
2021  26,000   2.22%  2.64% $110 
Total / Weighted Average $26,000   1.91%  2.08% $217 

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

(Losses) Gains On Derivative Instruments, Net

The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations 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 
Eurodollar futures contracts (short positions) $(829) $(1,550) $(19) $508 
(Losses) gains on derivative instruments $(829) $(1,550) $(19) $508 

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 obtaining its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company's derivative instruments are included in restricted cash on the consolidated balance sheets.


NOTE 6. PLEDGED ASSETS

Assets Pledged to Counterparties

The tables below summarize our assets pledged as collateral under our repurchase agreements and derivative agreements pledged related to securities sold but not yet settled, as of September 30, 2017 and December 31, 2016.

($ in thousands)         
As of September 30, 2017         
  Repurchase  Derivative    
Assets Pledged to Counterparties Agreements  Agreements  Total 
PT MBS - at fair value $195,151  $-  $195,151 
Structured MBS - at fair value  2,364   -   2,364 
Accrued interest on pledged securities  693   -   693 
Cash  391   545   936 
Total $198,599  $545  $199,144 

($ 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 assets pledged to us from counterparties under our repurchase agreements as of September 30, 2017 and December 31, 2016. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements in the consolidated balance sheets.

($ in thousands)      
Assets Pledged to Bimini September 30, 2017  December 31, 2016 
Cash $8  $- 
Total $8  $- 


NOTE 7. OFFSETTING ASSETS AND LIABILITIES

The Company's derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions.  The Company reports its assets and liabilities subject to these arrangements on a gross basis.  The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of September 30, 2017 and December 31, 2016.

(in thousands)                  
Offsetting of Liabilities 
          Gross Amount Not Offset in the    
       Net Amount Consolidated Balance Sheet    
   Gross Amount of Liabilities Financial     
 Gross Amount Offset in the Presented in the Instruments Cash   
 of Recognized Consolidated Consolidated Posted as Posted as Net 
 Liabilities Balance Sheet Balance Sheet Collateral Collateral Amount 
September 30, 2017                  
Repurchase Agreements $187,374  $-  $187,374  $(186,983) $(391) $- 
December 31, 2016                        
Repurchase Agreements $121,828  $-  $121,828  $(121,372) $(456) $- 

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.  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, ADVISORY SERVICES

Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II ("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, 2017 and December 31, 2016, 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, the interest rate was 4.82%. 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 adequate decision making ability over BCTII's activities. Since Bimini Capital's investment in BCTII'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 to Bimini Capital's Class A Common Stock issued during the nine and three months ended September 30, 2017 and 2016.

  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, 2017 and 2016.

NOTE 10.    STOCK INCENTIVE PLANS

On August 12, 2011, Bimini Capital's shareholders approved the 2011 Long Term Compensation Plan (the "2011 Plan") to assist the Company in recruiting and retaining employees, directors and other service providers by enabling them to participate in the success of Bimini Capital and to associate their interests with those of the Company and its stockholders.  The 2011 Plan is intended to permit the grant of stock options, stock appreciation rights ("SARs"), stock awards, performance units and other equity-based and incentive awards.  The maximum aggregate number of shares of common stock that may be issued under the 2011 Plan pursuant to the exercise of options and SARs, the grant of stock awards or other equity-based awards and the settlement of incentive awards and performance units is equal to 4,000,000 shares.

Share Awards

During the three months ended March 31, 2016, the Compensation Committee of the Board of Directors of Bimini Capital (the "Committee") approved certain performance bonuses for members of management.  These bonuses were awarded primarily in recognition of service in 2015.  The bonuses consisted of cash of approximately $0.5 million and 258,333 fully vested shares of the Company's Class A Common Stock with an approximate value of $0.2 million, or $0.75 per share.  The shares were issued under the 2011 Plan. For purposes of these bonuses, shares of the Company's common stock were valued based on the closing price of the Company's Class A Common Stock on January 15, 2016, the bonus date. The expense related to this bonus was accrued at December 31, 2015 and does not affect the results of operations for the nine and three months ended September 30, 2016.

Performance Units

The Committee may issue Performance Units under the 2011 Plan to certain officers and employees.  "Performance Units" represent the participant's right to receive an amount, based on the value of a specified number of shares of common stock, if the terms and conditions prescribed by the Committee are satisfied.  The Committee will determine the requirements that must be satisfied before Performance Units are earned, including but not limited to any applicable performance period and performance goals.  Performance goals may relate to the Company's financial performance or the participant's performance or such other criteria determined by the Committee, including goals stated with reference to the performance measures discussed below.  If Performance Units are earned, they will be settled in cash, shares of common stock or a combination thereof.


The following table presents the activity related to Performance Units during the nine months ended September 30, 2017 and 2016:

($ in thousands, except per share data)            
  Nine Months Ended September 30, 
  2017  2016 
     Weighted     Weighted 
     Average     Average 
     Grant Date     Grant Date 
     Fair Value     Fair Value 
  Shares  Per Share Shares  Per Share 
Unvested, beginning of period  70,000  $1.23   77,500  $1.22 
Granted  -   -   -   - 
Forfeited  -   -   (1,000)  0.84 
Vested and issued  -   -   -   - 
Unvested, end of period  70,000  $1.23   76,500  $1.23 
                 
Compensation expense during the period     $22      $23 
Unrecognized compensation expense at period end     $17      $50 
Weighted-average remaining vesting term (in years)      0.8       1.8 
Intrinsic value of unvested shares at period end     $195      $191 

NOTE 11.  COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any significant reported or unreported contingencies at September 30, 2017.

NOTE 12.  INCOME TAXES

The total income tax provision recorded for the nine months ended September 30, 2017 and 2016 was $1.3 million and $2.1 million, respectively, on consolidated pre-tax book income of $3.2 million and $4.3 million in the nine months ended September 30, 2017 and 2016, respectively. The total income tax provision recorded for the three months ended September 30, 2017 and 2016 was $1.0 million and $1.4 million, respectively, on consolidated pre-tax book income of $2.5 million and $2.6 million in the three months ended September 30, 2017 and 2016, respectively.

The Company's tax provision is based on a projected effective rate based annualized amounts and includes the expected realization of a portion of the tax benefits of federal and state net operating losses carryforwards ("NOLs"). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The Company currently provides a valuation allowance against a portion of the NOLs since the Company believes that it is more likely than not that some of the benefits will not be realized in the future. The Company will continue to assess the need for a valuation allowance at each reporting date.

NOTE 13.   EARNINGS PER SHARE

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 on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. Following the provisions of FASB ASC 260, the Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPSAdvisors serves as the conditionsmanager and advisor for conversion to Class A common stock were not met at September 30, 2017 and 2016.

Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at September 30, 2017 and 2016.

The Company has dividend eligible stock incentive plan shares that were outstanding during the nine and three months ended September 30, 2017. The basic and diluted per share computations include these unvested incentive plan shares if there is income available to Class A common stock, as they have dividend participation rights. The stock incentive plan shares have no contractual obligation to share in losses. Because there is no such obligation, the incentive plan shares are not included in the basic and diluted EPS computations when no income is available to Class A common stock even though they are considered participating securities.

The table below reconciles the numerator and denominator of EPS for the nine and three months ended September 30, 2017 and 2016.

(in thousands, except per-share information)            
    Nine Months Ended September 30,  Three Months Ended September 30, 
  2017  2016  2017  2016 
Basic and diluted EPS per Class A common share:            
Income attributable to Class A common shares:            
Basic and diluted $1,931  $2,221  $1,497  $1,176 
Weighted average common shares:                
Class A common shares outstanding at the balance sheet date  12,632   12,632   12,632   12,632 
Unvested dividend-eligible stock incentive plan shares                
outstanding at the balance sheet date  70   77   70   77 
Effect of weighting  -   (14)  -   (1)
Weighted average shares-basic and diluted  12,702   12,695   12,702   12,708 
Income per Class A common share:                
Basic and diluted $0.15  $0.17  $0.12  $0.09 

(in thousands, except per-share information)            
   Nine Months Ended September 30,  Three Months Ended September 30, 
  2017  2016  2017  2016 
Basic and diluted EPS per Class B common share:            
Income attributable to Class B common shares:            
Basic and diluted $5  $6  $4  $3 
Weighted average common shares:                
Class B common shares outstanding at the balance sheet date  32   32   32   32 
Weighted average shares-basic and diluted  32   32   32   32 
Income per Class B common share:                
Basic and diluted $0.15  $0.17  $0.12  $0.09 


NOTE 14.   FAIR VALUE

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

·Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),
·Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
·Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company's own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

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

MBS, Orchid common stock, retained interests and futures contracts were all recorded at fair value on a recurring basis during the nine and three months ended September 30, 2017 and 2016. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets.  When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.  Fair value measurements for the retained interests are generated by a model that requires management to make a significant number of assumptions.


The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016:

(in thousands)            
     Quoted Prices       
     in Active  Significant    
     Markets for  Other  Significant 
     Identical  Observable  Unobservable 
  Fair Value  Assets  Inputs  Inputs 
  Measurements  (Level 1)  (Level 2)  (Level 3) 
September 30, 2017            
Mortgage-backed securities $197,990  $-  $197,990  $- 
Orchid Island Capital, Inc. common stock  15,489   15,489   -   - 
Retained interests in securitizations  558   -   -   558 
December 31, 2016                
Mortgage-backed securities $130,302  $-  $130,302  $- 
Orchid Island Capital, Inc. common stock  15,108   15,108   -   - 
Retained interests in securitizations  1,114   -   -   1,114 

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, 2017 and 2016:

(in thousands)      
  Retained Interests in Secuitizations 
  Nine Months Ended September 30, 
  2017  2016 
Balances, January 1 $1,114  $1,124 
Gain included in earnings  390   2,100 
Collections  (946)  (1,758)
Balances, September 30 $558  $1,466 

During the nine months ended September 30, 2017 and 2016, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

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.


The following table summarizes the significant quantitative information about our level 3 fair value measurements as of September 30, 2017.

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%)

NOTE 15. 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:

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·One-twelfth

●

One-twelfth of 1.5%1.50% of the first $250$250 million of the Orchid'sOrchid’s month-end equity, as defined in the management agreement,

·One-twelfth

●

One-twelfth of 1.25% of the Orchid'sOrchid’s month-end equity that is greater than $250$250 million and less than or equal to $500$500 million, and

·One-twelfth

●

One-twelfth of 1.00% of the Orchid'sOrchid’s month-end equity that is greater than $500$500 million.

On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been previously provided by a third party. In consideration for such services, Orchid will pay the following fees to the Company:

●

A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and


●

A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.

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. Orchid is required to pay Bimini Advisors by the 15th day of the month following the month the services are performed. The management agreement has been renewed through February 20, 2018 2024 and provides for automatic one-yearone-year extension options thereafter. 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 automaticapplicable renewal term.


The following table summarizes the advisory services revenue from Orchid for the nine and three months ended September 30, 2017 March 31, 2023 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 

2022.

(in thousands)

        
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Management fee

 $2,641  $2,634 

Allocated overhead

  576   441 

Repurchase, Clearing and Administrative Fee

  165   - 

Total

 $3,382  $3,075 

At September 30, 2017March 31, 2023 and December 31, 2016,2022, the net amount due from Orchid was approximately $0.8$1.2 million and $0.6$1.1 million, respectively,respectively.

NOTE 3. MORTGAGE-BACKED SECURITIES

The following table presents the Company’s MBS portfolio as of March 31, 2023 and December 31, 2022:

(in thousands)

        
  

March 31, 2023

  

December 31, 2022

 

Fixed-rate MBS

 $42,849  $42,974 

Structured MBS

  2,791   2,919 

Total

 $45,640  $45,893 

NOTE 4. REPURCHASE AGREEMENTS

The Company pledges certain of its MBS 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 March 31, 2023, the Company had met all margin call requirements.

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As of March 31, 2023 and December 31, 2022, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)

                    
  

OVERNIGHT

  

BETWEEN 2

  

BETWEEN 31

  

GREATER

     
  

(1 DAY OR

  

AND

  

AND

  

THAN

     
  

LESS)

  

30 DAYS

  

90 DAYS

  

90 DAYS

  

TOTAL

 

March 31, 2023

                    

Fair value of securities pledged, including accrued interest receivable

 $-  $45,665  $-  $-  $45,665 

Repurchase agreement liabilities associated with these securities

 $-  $43,092  $-  $-  $43,092 

Net weighted average borrowing rate

  -   4.87%  -   -   4.87%

December 31, 2022

                    

Fair value of securities pledged, including accrued interest receivable

 $-  $42,553  $3,364  $-  $45,917 

Repurchase agreement liabilities associated with these securities

 $-  $40,492  $3,326  $-  $43,818 

Net weighted average borrowing rate

  -   4.50%  4.29%  -   4.48%

In addition, cash pledged to counterparties for repurchase agreements was approximately $0.1 million and $0.5 million as of March 31, 2023 and December 31, 2022, 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 amounts are includedlender, including the accrued interest receivable, and cash posted by the Company as collateral, if any. At March 31, 2023 and December 31, 2022, 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 $2.6 million and $2.5 million, respectively. As of March 31, 2023 and December 31, 2022, the Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity.

NOTE 5. PLEDGED ASSETS

Assets Pledged to Counterparties

The table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of March 31, 2023 and December 31, 2022.

($ in thousands)

                        
  

March 31, 2023

  

December 31, 2022

 
  

Repurchase

  

Derivative

      

Repurchase

  

Derivative

     
  

Agreements

  

Agreements

  

Total

  

Agreements

  

Agreements

  

Total

 

PT MBS - at fair value

 $42,849  $-  $42,849  $42,975  $-  $42,975 

Structured MBS - at fair value

  2,619   -   2,619   2,742   -   2,742 

Accrued interest on pledged securities

  197   -   197   200   -   200 

Restricted cash

  102   332   434   454   309   763 

Total

 $45,767  $332  $46,099  $46,371  $309  $46,680 

Assets Pledged from Counterparties

The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements as of March 31, 2023 and December 31, 2022. Cash received as margin is recognized in "other assets"cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements in the consolidated balance sheets.  Orchid accrued cash

($ in thousands)

        

Assets Pledged to Bimini

 

March 31, 2023

  

December 31, 2022

 

Cash

 $592  $148 

Total

 $592  $148 

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NOTE 6. OFFSETTING ASSETS AND LIABILITIES

The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2023 and December 31, 2022.

(in thousands)

                        

Offsetting of Liabilities

 
              

Gross Amount Not Offset in the

     
          

Net Amount

  

Consolidated Balance Sheet

     
      

Gross Amount

  

of Liabilities

  

Financial

         
  

Gross Amount

  

Offset in the

  

Presented in the

  

Instruments

  

Cash

     
  

of Recognized

  

Consolidated

  

Consolidated

  

Posted as

  

Posted as

  

Net

 
  

Liabilities

  

Balance Sheet

  

Balance Sheet

  

Collateral

  

Collateral

  

Amount

 

March 31, 2023

                        

Repurchase Agreements

 $43,092  $-  $43,092  $(42,990) $(102) $- 
  $43,092  $-  $43,092  $(42,990) $(102) $- 

December 31, 2022

                        

Repurchase Agreements

 $43,818  $-  $43,818  $(43,364) $(454) $- 
  $43,818  $-  $43,818  $(43,364) $(454) $- 

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. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.

NOTE 7. LONG-TERM DEBT

Long-term debt at March 31, 2023 and December 31, 2022 is summarized as follows:

(in thousands)

        
  

March 31, 2023

  

December 31, 2022

 

Junior subordinated debt

 $26,804  $26,804 

Secured note payable

  606   612 

Total

 $27,410  $27,416 

Junior Subordinated Debt

During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) of which 100% of the common equity compensation payableis owned by Bimini Capital. It was formed for the purpose of issuing trust preferred capital securities to officersthird-party investors and employeesinvesting 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 $0.4BCTII.

As of March 31, 2023 and December 31, 2022, 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 March 31, 2023, the interest rate was 8.37%. 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. After June 30, 2023, the interest rate on the junior subordinated notes will be determined based on SOFR. The Company does not expect this transition to have a material impact on its accounting and disclosures.

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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.

Secured Note Payable

On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $5,000 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.

The table below presents the future scheduled principal payments on the Company’s long-term debt.

(in thousands)

    

Last nine months of 2023

 $17 

For the years ended:

    

2024

  25 

2025

  26 

2026

  28 

2027

  29 

After 2027

  27,285 

Total

 $27,410 

NOTE 8. COMMON STOCK

There were no issuances of Bimini Capital's Class A Common Stock, Class B Common Stock or Class C Common Stock during the three months ended March 31, 2023 and 2022.

Stock Repurchase Plans

On March 26, 2018, the Board of Directors of the Company (the “Board”) approved a Stock Repurchase Plan (the “2018 Repurchase Plan”). Pursuant to the 2018 Repurchase Plan, the Company could 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. The 2018 Repurchase Plan was terminated on September 16, 2021.

On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases may be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan does not obligate the Company to purchase any shares, and it expires on September 16, 2023. The authorization for the 2021 Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. 

The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023.

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NOTE 9. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

In April 2020 and November 2021, the Company received demands for payment from Citigroup, Inc. in the total amount of $33.3 million related to the indemnification provisions of various mortgage loan purchase agreements entered into prior to the date Royal Palm’s mortgage origination operations ceased in 2007. The Company believes the demands are without merit and intends to defend against the demands vigorously if pursued by Citigroup. No provision or accrual has been recorded related to the Citigroup demands.

Management is not aware of any other significant reported or unreported contingencies at March 31, 2023.

NOTE 10. INCOME TAXES

The total income tax provision (benefit) recorded for the three months ended March 31, 2023 and 2022 was $0.3 million and $0.2$(1.2) million, respectively, on consolidated pre-tax book income (loss) of $1.3 million and $(4.7) million in the three months ended March 31, 2023 and 2022, respectively. 

The Company’s tax provision is based on a projected effective rate based on annualized amounts applied to actual income to date and includes the expected realization of a portion of the tax benefits of federal and state net operating losses carryforwards (“NOLs”). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The Company currently provides a valuation allowance against a portion of the NOLs since the Company believes that it is more likely than not that some of the benefits will not be realized in the future. The Company will continue to assess the need for, and the amount of, the valuation allowance at each reporting date.

NOTE 11. EARNINGS PER SHARE

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 on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. The Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at March 31, 2023 and 2022.

Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at March 31, 2023 and 2022.

The table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2023 and 2022.

(in thousands, except per-share information)

        
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Basic and diluted EPS per Class A common share:

        

Income (loss) attributable to Class A common shares:

        

Basic and diluted

 $1,002  $(3,470)

Weighted average common shares:

        

Class A common shares outstanding at the balance sheet date

  10,020   10,514 

Effect of weighting

  -   111 

Weighted average shares-basic and diluted

  10,020   10,625 

Income (loss) per Class A common share:

        

Basic and diluted

 $0.10  $(0.33)

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Table of Contents
 

(in thousands, except per-share information)

        
  

Three Months Ended March 31,

 
  

2023

  

2022

 

Basic and diluted EPS per Class B common share:

        

Income (loss) attributable to Class B common shares:

        

Basic and diluted

 $3  $(10)

Weighted average common shares:

        

Class B common shares outstanding at the balance sheet date

  32   32 

Weighted average shares-basic and diluted

  32   32 

Income (loss) per Class B common share:

        

Basic and diluted

 $0.10  $(0.33)

NOTE 12. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:

●

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

●

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

●

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

MBS, Orchid common stock, retained interests and TBA securities were all recorded at fair value on a recurring basis during the nine and three months ended September 30, 2017, respectively March 31, 2023 and $0.6 million2022. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and $0.2 million duringconsiders assumptions that market participants would use when pricing the nineasset. When possible, the Company looks to active and three months ended September 30, 2016, respectivelyobservable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds), spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). This compensationThe appropriate spread pricing method used is not includedbased on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.

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The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2 valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model. Retained interests have a recorded fair value of zero as of March 31, 2023 and December 31, 2022, as the prospect of future cash flows is uncertain based on a Level 3 valuation analysis. Any cash received from the retained interests is reflected as a gain in the consolidated statements of operations.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:

(in thousands)

                
      

Quoted Prices

         
      

in Active

  

Significant

     
      

Markets for

  

Other

  

Significant

 
      

Identical

  

Observable

  

Unobservable

 
  

Fair Value

  

Assets

  

Inputs

  

Inputs

 
  

Measurements

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

March 31, 2023

                

Mortgage-backed securities

 $45,640  $-  $45,640  $- 

Orchid Island Capital, Inc. common stock

  6,106   6,106   -   - 

December 31, 2022

                

Mortgage-backed securities

 $45,893  $-  $45,893  $- 

Orchid Island Capital, Inc. common stock

  5,975   5,975   -   - 

During the three months ended March 31, 2023 and 2022, there were no transfers of financial assets or liabilities between levels 1,2 or 3.

NOTE 13. SEGMENT INFORMATION

The Company’s operations.

are classified into two principal reportable segments: the asset 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 three months ended March 31, 2023 and 2022, were approximately $3.4 million and $3.1 million, respectively, accounting for approximately 80% and 77% 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 for the three months ended March 31, 2023 and 2022 is as follows:

(in thousands)

                    
  

Asset

  

Investment

             
  

Management

  

Portfolio

  

Corporate

  

Eliminations

  

Total

 

2023

                    

Advisory services, external customers

 $3,382  $-  $-  $-  $3,382 

Advisory services, other operating segments(1)

  27   -   -   (27)  - 

Interest and dividend income

  -   831   -   -   831 

Interest expense(2)

  -   (508)  (546)  -   (1,054)

Net revenues

  3,409   323   (546)  (27)  3,159 

Other revenue

  -   515   -   -   515 

Operating expenses(3)

  (1,837)  (492)  -   -   (2,329)

Intercompany expenses(1)

  -   (27)  -   27   - 

Income (loss) before income taxes

 $1,572  $319  $(546) $-  $1,345 


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Other
Table of Contents
 
  

Asset

  

Investment

             
  

Management

  

Portfolio

  

Corporate

  

Eliminations

  

Total

 

2022

                    

Advisory services, external customers

 $3,075  $-  $-  $-  $3,075 

Advisory services, other operating segments(1)

  30   -   -   (30)  - 

Interest and dividend income

  -   894   -   -   894 

Interest expense(2)

  -   (31)  (256)  -   (287)

Net revenues

  3,105   863   (256)  (30)  3,682 

Other revenue (expenses)

  -   (6,358)  -   -   (6,358)

Operating expenses(3)

  (1,543)  (483)  -   -   (2,026)

Intercompany expenses(1)

  -   (30)  -   30   - 

Income (loss) before income taxes

 $1,562  $(6,008) $(256) $-  $(4,702)

(1)

Includes fees paid by Royal Palm to Bimini Advisors for advisory services.

(2)

Includes interest on repurchase agreements in the Investment Portfolio column and long-term debt in the Corporate column.

(3)

Corporate expenses are allocated based on each segment’s proportional share of total revenues.

Assets in each reportable segment as of March 31, 2023 and December 31, 2022 were as follows:

(in thousands)

                
  

Asset

  

Investment

         
  

Management

  

Portfolio

  

Corporate

  

Total

 

March 31, 2023

 $2,228  $75,309   6,852  $84,389 

December 31, 2022

  1,970   77,483   6,864   86,317 

NOTE 14. RELATED PARTY TRANSACTIONS

Relationships with Orchid


At September 30, 2017both March 31, 2023 and December 31, 2016,2022, the Company owned 1,520,036  and 1,395,036569,071 shares of Orchid common stock, respectively, representing approximately 3.4%1.5% and 4.2%1.6%, respectively, of theOrchid’s outstanding shares, respectively.common stock on such dates. The Company received dividends on this common stock investment of approximately $1.9$0.3 million and $0.6$0.4 million during the nine and three months ended September 30, 2017, respectively,March 31, 2023 and approximately $1.8 million and $0.6 million during the nine and three months ended September 30, 2016,2022, 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, receivesis eligible to receive 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, who are the Company's independent directors, each own shares of common stock of Orchid.

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


The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated 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 subsidiary is Royal Palm Capital, LLC. We operate in two business segments: the asset management segment, which includes (a) the investment advisory services provided by Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC, to invest primarily in residential mortgage-backed securities ("MBS") issuedOrchid, and guaranteed(b) the investment portfolio segment, which includes the investment activities conducted by a federally chartered corporation or agency ("Agency MBS"). OurRoyal Palm.

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment strategy focuses on,advisor registered with the Securities and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS ("PT MBS") and (ii) structured Agency MBS, suchExchange Commission), are collectively referred to 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“Bimini Advisors.” Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"), through its wholly owned subsidiary, Bimini Advisors Holdings, LLC ("Bimini Advisors"). From this arrangement, the Company receives management fees and expense reimbursements. As Manager,manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations.operations and, commencing April 1. 2022, provides certain repurchase agreement trading, clearing and administrative services. 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.

Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as “Royal Palm”) maintains an investment portfolio, consisting primarily of residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS. In addition, the CompanyRoyal Palm receives dividends from its investment in Orchid common shares.

Stock Repurchase Plan

On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, we may purchase shares of our Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases may be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan does not obligate the Company to purchase any shares, and it expires on September 16, 2023. The authorization for the 2021 Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. From the commencement of the 2021 Repurchase Plan, through March 31, 2023, we repurchased a total of 774,593 shares at an aggregate cost of approximately $1.2 million, including commissions and fees, for a weighted average price of $1.61 per share. 

The Inflation Reduction Act of 2022, signed into law in August 2022, includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and other provisions. The excise tax is effective beginning in 2023. While we may complete transactions subject to the new excise tax, we do not expect this tax to have a material impact to our financial condition or result of operations.

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Factors that Affect our Results of Operations and Financial Condition


A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:


•interest rate trends;
•the difference between Agency MBS yields and our funding and hedging costs;
•competition for investments in Agency MBS;
•actions taken by the new presidential administration, the Federal Reserve (the "Fed") 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.

●

interest rate trends;

●increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Fed that occurred in 2022 and continue into 2023;

●

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 U.S. government, including the presidential administration, the U.S. Federal Reserve (the “Fed”), the Federal Open Market Committee (the “FOMC”), the Federal Housing Finance 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;

●

the equity markets and the ability of Orchid to raise additional capital;

●

geo-political events that affect the U.S. and international economies; and

●

other market developments.

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


our degree of leverage;
our access to funding and borrowing capacity;
our borrowing costs;
our hedging activities;
the market value of our investments;
the requirements to qualify for a registration exemption under the Investment Company Act;
our ability to use net operating loss carryforwards and net capital loss carryforwards to reduce our taxable income;
the impact of possible future changes in tax laws; and
our ability to manage the portfolio of Orchid and maintain our role as manager.

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our borrowing costs;

●

our hedging activities;

●

the market value of our investments;

●

the requirements to qualify for a registration exemption under the Investment Company Act;

●

our ability to use net operating loss carryforwards and other tax attributes to reduce our taxable income;

●

the impact of possible future changes in tax laws or tax rates;

●

our ability to manage the portfolio of Orchid and maintain our role as manager; and

●

the financial performance of Orchid and resulting changes in Orchid’s shareholders equity, the carrying value of our investment, dividend income and our advisory services revenue.

Results of Operations


Described below are the Company'sCompany’s results of operations for the nine and three months ended September 30, 2017,March 31, 2023, as compared to the nine and three months ended September 30, 2016.


March 31, 2022.

Net Income (Loss) Summary


Consolidated net income for the ninethree months ended September 30, 2017March 31, 2023 was $1.9$1.0 million, or $0.15$0.10 basic and diluted incomeloss per share of Class A Common Stock, as compared to a consolidated net incomeloss of $2.2$3.5 million, or $0.17 basic and diluted income per share of Class A Common Stock, for the nine months ended September 30, 2016.


Consolidated net income for the three months ended September 30, 2017 was $1.5 million, or $0.12 basic and diluted income per share of Class A Common Stock, as compared to consolidated net income of $1.2 million, or $0.09$0.33 basic and diluted income per share of Class A Common Stock, for the three months ended September 30, 2016.March 31, 2022.

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The components of net income (loss) for the nine and three months ended September 30, 2017March 31, 2023 and 2016,2022, 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 

below.

(in thousands)

            
  

Three Months Ended March 31,

 
  

2023

  

2022

  

Change

 

Advisory services revenues

 $3,382  $3,075  $307 

Interest and dividend income

  831   894   (63)

Interest expense

  (1,054)  (287)  (767)

Net revenues

  3,159   3,682   (523)

Other revenue (expense)

  515   (6,358)  6,873 

Expenses

  (2,329)  (2,025)  (304)

Net income (loss) before income tax provision (benefit)

  1,345   (4,701)  6,046 

Income tax provision (benefit)

  340   (1,221)  1,561 

Net income (loss)

 $1,005  $(3,480) $4,485 

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 beenas reflected in our consolidated statements of operations, is 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 GAAP interest expense for the periods presented by the gains or losses on allthese derivative instruments wouldmay 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 derivative 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, which changes are reflective of the future periods covered by the derivative 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.

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The tables below present a reconciliation of the adjustments discussed above 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 20172023 and 2016.


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)

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)
             

(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 

2022.

Gains (Losses) on Derivative Instruments

(in thousands)

                            
  

Attributed to Current Period (Non-GAAP)

  

Attributed to Future Periods (Non-GAAP)

     
  

Repurchase

  

Long-Term

      

Repurchase

  

Long-Term

      

Statement of

 

Three Months Ended

 

Agreements

  

Debt

  

Total

  

Agreements

  

Debt

  

Total

  

Operations

 

March 31, 2023

 $(33) $-  $(33) $(241) $-  $(241) $(274)

December 31, 2022

  (185)  (48)  (233)  192   48   240   7 

September 30, 2022

  (184)  (48)  (232)  1,028   48   1,076   844 

June 30, 2022

  (186)  (48)  (234)  136   48   184   (50)

March 31, 2022

  (185)  (48)  (233)  185   48   233   - 

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)

 

March 31, 2023

 $557  $508  $33  $541  $49  $16 

December 31, 2022

  534   401   185   586   133   (52)

September 30, 2022

  445   210   184   394   235   51 

June 30, 2022

  392   73   186   259   319   133 

March 31, 2022

  491   31   185   216   460   275 

(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 Long-Term Debt

         
  

Interest Income

      

Effect of

      

Net Interest Income (Loss)

 
  

GAAP

  

Economic

  

GAAP

  

Non-GAAP

  

Economic

  

GAAP

  

Economic

 

Three Months Ended

 

Basis

  

Basis(1)

  

Basis

  

Hedges(2)

  

Basis(3)

  

Basis

  

Basis(4)

 

March 31, 2023

 $49  $16  $546  $-  $546  $(497) $(530)

December 31, 2022

  133   (52)  477   48   525   (344)  (577)

September 30, 2022

  235   51   379   48   427   (144)  (376)

June 30, 2022

  319   133   304   48   352   15   (219)

March 31, 2022

  460   275   256   48   304   204   (29)

(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.

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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 three months ended March 31, 2023 and 2022 is as follows:

(in thousands)

                    
  

Asset

  

Investment

             
  

Management

  

Portfolio

  

Corporate

  

Eliminations

  

Total

 

2023

                    

Advisory services, external customers

 $3,382  $-  $-  $-  $3,382 

Advisory services, other operating segments(1)

  27   -   -   (27)  - 

Interest and dividend income

  -   831   -   -   831 

Interest expense(2)

  -   (508)  (546)  -   (1,054)

Net revenues

  3,409   323   (546)  (27)  3,159 

Other revenue

  -   515   -   -   515 

Operating expenses(3)

  (1,837)  (492)  -   -   (2,329)

Intercompany expenses(1)

  -   (27)  -   27   - 

Income (loss) before income taxes

 $1,572  $319  $(546) $-  $1,345 

  

Asset

  

Investment

             
  

Management

  

Portfolio

  

Corporate

  

Eliminations

  

Total

 

2022

                    

Advisory services, external customers

 $3,075  $-  $-  $-  $3,075 

Advisory services, other operating segments(1)

  30   -   -   (30)  - 

Interest and dividend income

  -   894   -   -   894 

Interest expense(2)

  -   (31)  (256)  -   (287)

Net revenues

  3,105   863   (256)  (30)  3,682 

Other revenue (expenses)

  -   (6,358)  -   -   (6,358)

Operating expenses(3)

  (1,543)  (483)  -   -   (2,026)

Intercompany expenses(1)

  -   (30)  -   30   - 

Income (loss) before income taxes

 $1,562  $(6,008) $(256) $-  $(4,702)

(1)

Includes advisory services revenue received by Bimini Advisors from Royal Palm.

(2)

Includes interest expense on repurchase agreements in the Investment Portfolio column and long-term debt in the Corporate column.

(3)

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

 

March 31, 2023

 $2,228  $75,309   6,852  $84,389 

December 31, 2022

  1,970   77,483   6,864   86,317 

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 1.50% 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.

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On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, Orchid pays the following fees to the Company:

●

A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and

●

A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.

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 2024 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 applicable renewal term.

The following table summarizes the advisory services revenue received from Orchid in each quarter during 2023 and 2022.

(in thousands)

                        
          

Advisory Services

 
                  

Repurchase,

     
  

Average

  

Average

          

Clearing and

     
  

Orchid

  

Orchid

  

Management

  

Overhead

  

Administrative

     

Three Months Ended

 

MBS

  

Equity

  

Fee

  

Allocation

  

Fees

  

Total

 

March 31, 2023

 $3,769,954  $865,722  $2,641  $576  $165  $3,382 

December 31, 2022

  3,370,608   823,516   2,566   560   150   3,276 

September 30, 2022

  3,571,037   839,935   2,616   522   174   3,312 

June 30, 2022

  4,260,727   866,539   2,631   519   183   3,333 

March 31, 2022

  5,545,844   853,577   2,634   441   -   3,075 

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 ninethree months ended September 30, 2017, the CompanyMarch 31, 2023, we generated $3.0 million$49,000 of net portfolio interest income, consisting of $4.1 million$557,000 of interest income from MBS assets offset by $1.1 million$508,000 of interest expense on repurchase liabilities. For the comparable period ended September 30, 2016, the CompanyMarch 31, 2022, we generated $2.5 million$460,000 of net portfolio interest income, consisting of $3.0 million$491,000 of interest income from MBS assets offset by $0.5 million$31,000 of interest expense on repurchase liabilities.


The Company's economic$66,000 increase in interest income was due to a 147 basis point ("bp") increase in yields, which was partially offset by a $12.0 million decrease in average MBS holdings. There was a $477,000 increase in interest expense on repurchase liabilities for the nine months ended September 30, 2017 and 2016 was $1.5 million and $0.7 million, respectively, resulting in $2.5 million and $2.3 million of economic net portfolio interest income, respectively.

During the three months ended September 30, 2017, the Company generated $1.0 millionMarch 31, 2023 that was due to a 446 bp increase in cost of net portfolio interest income, consisting of $1.5 million of interest income from MBS assetsfunds which was partially offset by $0.5a $13.4 million of interest expense ondecrease in average repurchase liabilities.  For the three months ended September 30, 2016, the Company generated $0.9 million of net portfolio interest income, consisting of $1.1 million of interest income from MBS assets offset by $0.2 million of interest expense on repurchase liabilities.

The Company's

Our economic interest expense on repurchase liabilities for the three months ended September 30, 2017March 31, 2023 and 20162022 was $0.7 million$541,000 and $0.3 million,$216,000, respectively, resulting in $0.8 million$16,000 and $0.8 million$275,000 of economic net portfolio interest income, respectively.



The tables below provide consolidated information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for the ninethree months ended September 30, 2017March 31, 2023 and 20162022 and each quarter in 20172023 and 20162022 on both a GAAP and economic basis.

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Table of Contents
($ in thousands)                        
  Average     Yield on  Average  Interest Expense  Average Cost of Funds 
  MBS  Interest  Average  Repurchase  GAAP  Economic  GAAP  Economic 
Three Months Ended 
Held(1)
  
Income(2)
  MBS  
Agreements(1)
  Basis  
Basis(2)
  Basis  
Basis(3)
 
September 30, 2017 $170,237  $1,514   3.56% $161,003  $504  $666   1.25%  1.66%
June 30, 2017  134,188   1,269   3.78%  126,341   324   476   1.02%  1.51%
March 31, 2017  128,098   1,293   4.04%  119,938   283   399   0.94%  1.33%
December 31, 2016  131,952   1,285   3.89%  123,909   251   373   0.81%  1.20%
September 30, 2016  122,220   1,108   3.63%  114,858   195   287   0.68%  1.00%
June 30, 2016  110,017   1,025   3.73%  103,259   174   234   0.67%  0.91%
March 31, 2016  96,592   817   3.39%  90,014   127   172   0.57%  0.77%
                                 
($ in thousands)                                
  Average      Yield on  Average  Interest Expense  Average Cost of Funds 
  MBS  Interest  Average  Repurchase  GAAP  Economic  GAAP  Economic 
Nine Months Ended 
Held(1)
  
Income(2)
  MBS  
Agreements(1)
  Basis  
Basis(2)
  Basis  
Basis(3)
 
September 30, 2017 $144,174  $4,076   3.77% $135,761  $1,111  $1,541   1.09%  1.51%
September 30, 2016  109,610   2,950   3.59%  102,710   496   693   0.64%  0.90%

($ in thousands)            
  Net Portfolio  Net Portfolio 
  Interest Income  Interest Spread 
  GAAP  Economic  GAAP  Economic 
Three Months Ended Basis  
Basis(2)
  Basis  
Basis(4)
 
September 30, 2017 $1,010  $847   2.31%  1.90%
June 30, 2017  945   793   2.76%  2.27%
March 31, 2017  1,010   894   3.10%  2.71%
December 31, 2016  1,034   912   3.08%  2.69%
September 30, 2016  913   821   2.95%  2.63%
June 30, 2016  851   791   3.06%  2.82%
March 31, 2016  690   645   2.82%  2.62%
                 
($ in thousands)                
  Net Portfolio  Net Portfolio 
  Interest Income  Interest Spread 
  GAAP  Economic  GAAP  Economic 
Nine Months Ended Basis  
Basis(2)
  Basis  
Basis(4)
 
September 30, 2017 $2,965  $2,534   2.68%  2.26%
September 30, 2016  2,454   2,257   2.95%  2.69%

($ in thousands)

                                
  

Average

      

Yield on

  

Average

  

Interest Expense

  

Average Cost of Funds

 
  

MBS

  

Interest

  

Average

  

Repurchase

  

GAAP

  

Economic

  

GAAP

  

Economic

 

Three Months Ended

 

Held(1)

  

Income

  

MBS

  

Agreements(1)

  

Basis

  

Basis(2)

  

Basis

  

Basis(3)

 

March 31, 2023

 $45,767  $557   4.87% $43,455  $508  $541   4.68%  4.98%

December 31, 2022

  45,081   534   4.74%  43,656   401   586   3.68%  5.37%

September 30, 2022

  41,402   445   4.30%  40,210   210   394   2.09%  3.92%

June 30, 2022

  46,607   392   3.36%  45,870   73   259   0.63%  2.25%

March 31, 2022

  57,741   491   3.40%  56,846   31   216   0.22%  1.52%

($ in thousands)

                
  

Net Portfolio

  

Net Portfolio

 
  

Interest Income

  

Interest Spread

 
  

GAAP

  

Economic

  

GAAP

  

Economic

 

Three Months Ended

 

Basis

  

Basis(2)

  

Basis

  

Basis(4)

 

March 31, 2023

 $49  $16   0.19%  (0.11)%

December 31, 2022

  133   (52)  1.06%  (0.63)%

September 30, 2022

  235   51   2.21%  0.38%

June 30, 2022

  319   133   2.73%  1.11%

March 31, 2022

  460   275   3.18%  1.88%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 3032 and 3133 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances.

(2)

Economic interest expense and economic net interest income presented in the tables above and the tables on page 3133 include the effect of derivative instrument hedges for only the period presented.

(3)

Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS.

(4)

Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS.



Interest Income and Average Earning Asset Yield


Interest

Our interest income was approximately $557,000 for the Company was $4.1 millionthree months ended March 31, 2023 and $491,000 for the ninethree months ended September 30, 2017 and $3.0 million for the nine months ended September 30, 2016.March 31, 2022. Average MBS holdings were $144.2$45.8 million and $109.6 million for the nine months ended September 30, 2017 and 2016, respectively. The $1.1 million increase in interest income was due to combination of a 18 basis point increase in yields and a $34.6 million increase in average MBS holdings.


Interest income for the Company was $1.5$57.7 million for the three months ended September 30, 2017March 31, 2023 and $1.1 million for the three months ended September 30, 2016.  Average MBS holdings were $170.2 million and $122.2 million for the three months ended September 30, 2017 and 2016,2022, respectively. The $0.4 million$66,000 increase in interest income was due to a $48.0 million147 bp increase in average MBS holdings,yields, which was partially offset by a 7 basis point$12.0 million decrease in yields.

average MBS holdings.

The tables below present the consolidated average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and PT MBS, for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, and for each quarter during 20172023 and 2016.


($ in thousands)                           
  Average MBS Held  Interest Income  Realized Yield on Average MBS 
  PT  Structured     PT  Structured     PT  Structured    
Three Months Ended MBS  MBS  Total  MBS  MBS  Total  MBS  MBS  Total 
September 30, 2017 $167,081  $3,156  $170,237  $1,524  $(10) $1,514   3.65%  (1.28)%  3.56%
June 30, 2017  130,519   3,669   134,188   1,220   49   1,269   3.74%  5.33%  3.78%
March 31, 2017  123,163   4,935   128,098   1,210   83   1,293   3.93%  6.67%  4.04%
December 31, 2016  127,627   4,325   131,952   1,238   47   1,285   3.88%  4.32%  3.89%
September 30, 2016  119,411   2,809   122,220   1,092   16   1,108   3.66%  2.19%  3.63%
June 30, 2016  106,653   3,364   110,017   1,008   17   1,025   3.78%  2.05%  3.73%
March 31, 2016  92,365   4,227   96,592   783   34   817   3.39%  3.25%  3.39%
                                     
($ in thousands)                                    
  Average MBS Held  Interest Income  Realized Yield on Average MBS 
  PT  Structured      PT  Structured      PT  Structured     
Nine Months Ended MBS  MBS  Total  MBS  MBS  Total  MBS  MBS  Total 
September 30, 2017 $140,254  $3,920  $144,174  $3,954  $122  $4,076   3.76%  4.12%  3.77%
September 30, 2016  106,143   3,467   109,610   2,883   67   2,950   3.62%  2.58%  3.59%

2022.

($ in thousands)

                                    
  

Average MBS Held

  

Interest Income

  

Realized Yield on Average MBS

 
  

PT

  

Structured

      

PT

  

Structured

      

PT

  

Structured

     

Three Months Ended

 

MBS

  

MBS

  

Total

  

MBS

  

MBS

  

Total

  

MBS

  

MBS

  

Total

 

March 31, 2023

 $42,912  $2,855  $45,767  $500  $57  $557   4.66%  8.09%  4.87%

December 31, 2022

  42,125   2,956   45,081   473   61   534   4.49%  8.31%  4.74%

September 30, 2022

  38,384   3,018   41,402   383   62   445   3.99%  8.17%  4.30%

June 30, 2022

  43,568   3,039   46,607   333   59   392   3.06%  7.75%  3.36%

March 31, 2022

  54,836   2,905   57,741   472   19   491   3.45%  2.61%  3.40%

Interest Expense on Repurchase Agreements and the Cost of Funds


Average

Our average outstanding balances under repurchase agreements for the Company were $135.8$43.5 million and $102.7$56.9 million, generating interest expense of $1.1 millionapproximately $508,000 and $0.5 million$31,000 for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. Our average cost of funds was 1.09%4.68% and 0.64%0.22% for ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, respectively.  There was a 45 basis point446 bp increase in the average cost of funds and a $33.1$13.4 million increase in average outstanding repurchase agreements during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. 


The Company's economic interest expense was $1.5 million and $0.7 million for the nine months ended September 30, 2017 and 2016, respectively. There was a 61 basis point increase in the average economic cost of funds to 1.51% for the nine months ended September 30, 2017 from 0.90% for the nine months ended September 30, 2016.  The $0.8 million increase in economic interest expense was due to the $33.1 million increase in average outstanding repurchase agreements during the nine months ended September 30, 2017, combined with the negative performance of our derivative holdings attributed to the current period.


Average outstanding balances under repurchase agreements for the Company were $161.0 million and $114.9 million, generating interest expense of $0.5 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively.  Our average cost of funds was 1.25% and 0.68% for three months ended September 30, 2017 and 2016, respectively.  There was a 57 basis point increase in the average cost of funds and a $46.1 million increasedecrease in average outstanding repurchase agreements during the three months ended September 30, 2017,March 31, 2023, as compared to the three months ended September 30, 2016.  March 31, 2022. 

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Table of Contents
The Company's

Our economic interest expense was $0.7 million$541,000 and $0.3 million$216,000 for the three months ended September 30, 2017March 31, 2023 and 2016,2022, respectively. There was a 66 basis point346 bp increase in the average economic cost of funds to 1.66%4.98% for the three months ended September 30, 2017March 31, 2023 from 1.00%1.52% for the three months ended September 30, 2016.March 31, 2022. The $0.4 million$325,000 increase in economic interest expense was due to the $46.1$13.4 million increasedecrease in average outstanding repurchase agreements, combined with the increase in economic cost of funds during the three months ended September 30, 2017, combined with the negative performance of our derivative agreements attributed to the current period.


March 31, 2023.

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 pointsbps above the average one-month LIBORSOFR and 20 basis points below59 bps above the average six-month LIBORSOFR for the quarter ended September 30, 2017.  The Company'sMarch 31, 2023. Our average economic cost of funds was 46 basis points35 bps above the average one-month LIBORSOFR and 21 basis points89 bps above the average six-month LIBORSOFR for the quarter ended September 30, 2017.March 31, 2023. The average term to maturity of the outstanding repurchase agreements increased from 40was 15 days at both December 31, 2016 to 48 days at September 30, 2017.


2022 and March 31, 2023.

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 LIBORSOFR rates for the ninethree months ended September 30, 2017March 31, 2023 and 2016,2022, and for each quarter in 20172023 and 2016,2022, 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, 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%



        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)%

($ in thousands)

                    
  

Average

                 
  

Balance of

  

Interest Expense

  

Average Cost of Funds

 
  

Repurchase

  

GAAP

  

Economic

  

GAAP

  

Economic

 

Three Months Ended

 

Agreements

  

Basis

  

Basis

  

Basis

  

Basis

 

March 31, 2023

 $43,455  $508  $541   4.68%  4.98%

December 31, 2022

  43,656   401   586   3.68%  5.37%

September 30, 2022

  40,210   210   394   2.09%  3.92%

June 30, 2022

  45,870   73   259   0.63%  2.25%

March 31, 2022

  56,846   31   216   0.22%  1.52%

        

Average GAAP Cost of Funds

  

Average Economic Cost of Funds

 
        

Relative to Average

  

Relative to Average

 
  

Average SOFR

  

One-Month

  

Six-Month

  

One-Month

  

Six-Month

 

Three Months Ended

 

One-Month

  

Six-Month

  

SOFR

  

SOFR

  

SOFR

  

SOFR

 

March 31, 2023

 4.63% 4.09% 0.05% 0.59% 0.35% 0.89%

December 31, 2022

 4.06% 2.89% (0.38)% 0.79% 1.31% 2.48%

September 30, 2022

 2.47% 1.43% (0.38)% 0.66% 1.45% 2.49%

June 30, 2022

 1.09% 0.39% (0.46)% 0.24% 1.16% 1.86%

March 31, 2022

 0.16% 0.07% 0.06% 0.15% 1.36% 1.45%

Dividend Income from Orchid

During the three months ended March 31, 2023 and 2022, we owned 569,071  and 519,071 shares of Orchid common stock, respectively. Orchid paid total dividends of $0.480 and $0.775 per share during the three months ended March 31, 2023 and 2022, respectively, resulting in dividend income on this common stock investment of approximately $0.3 million and 0.4 million, respectively.

Long-Term Debt

Junior Subordinated Notes


Debt

Interest expense on the Company'sour junior subordinated debt securities was $0.9 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively.  The average rate of interest paid for the nine months ended September 30, 2017 was 4.64% compared to 4.13% for the comparable period in 2016.


Interest expense on the Company's junior subordinated debt securities was $0.3$0.5 million and $0.3 million for the three month periodsmonths ended September 30, 2017March 31, 2023 and 2016,2022, respectively. The average rate of interest paid for the three months ended September 30, 2017March 31, 2023 was 4.76%8.29% compared to 4.19%3.82% for the comparable period in 2016.

2022.

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,March 31, 2023, the interest rate was 4.82%8.37%. After June 30, 2023, the interest rate on the junior subordinated notes will be determined based on SOFR.

- 25 -

Table of Contents

Note Payable

On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $5,000 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.

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, 2017March 31, 2023 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 
                         

2022.

(in thousands)

            
  

Three Months Ended March 31,

 
  

2023

  

2022

  

Change

 

Unrealized gains (losses) on MBS

 $658  $(3,114) $3,772 

Losses on derivative instruments

  (274)  -   (274)

Unrealized gains (losses) on Orchid Island Capital, Inc. common stock

  131   (3,244) $3,375 

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, the Company received proceeds of $1.7 million from the sales of MBS.  There were no sales of MBS during the three months ended September 30, 2017. During the nineMarch 31, 2023 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.


March 31, 2022, we did not sell any MBS.

The fair value of the Company'sour MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are sensitive todriven by changes in yields and interest rates.rates, the spreads that MBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for MBS. The table below presents historical interest rate data as of the end of quarter during 2023 and 2022

The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are driven in part by changes in yields and interest rates, the spreads that MBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for MBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on MBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent MBS are carried at a discount to par, unrealized gains or losses on MBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 20172023 to date and 2016.


        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%

2022.

  

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)

  

SOFR(3)

 

March 31, 2023

 

3.61%

  

3.49%

  

5.56%

  

6.32%

  

4.51%

 

December 31, 2022

 

4.00%

  

3.88%

  

5.68%

  

6.42%

  

3.62%

 

September 30, 2022

 

4.04%

  

3.80%

  

5.96%

  

6.70%

  

2.13%

 

June 30, 2022

 

3.00%

  

2.97%

  

4.83%

  

5.70%

  

0.70%

 

March 31, 2022

 

2.42%

  

2.33%

  

3.83%

  

4.67%

  

0.09%

 

(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 3015 Year and 1530 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac'sMac’s Primary Mortgage Market Survey.

(3)

Historical LIBOR areSOFR is obtained from the Intercontinental Exchange Benchmark Administration Ltd.Federal Reserve Bank of New York.

- 26 -

The retained interests in securitizations represent the residual net interest spread remaining after payments on the notes issued through the securitization.  Fluctuations in value
Table of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve),Contents

Operating Expenses

For 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.


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.


Operating Expenses

For the nine and three months ended September 30, 2017, the Company'sMarch 31, 2023, our total operating expenses were approximately $4.6$2.3 million, and $1.5 million, respectively, compared to approximately $4.1 million and $1.4$2.0 million for the nine and three months ended September 30, 2016, respectively.March 31, 2022. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2017March 31, 2023 and 2016.

(in thousands)                  
  Nine Months Ended September 30,  Three Months Ended September 30, 
  2017  2016  Change  2017  2016  Change 
Compensation and related benefits $2,684  $2,274  $410  $869  $723  $146 
Legal fees  81   144   (63)  40   40   - 
Accounting, auditing and other professional fees  266   308   (42)  80   118   (38)
Directors' fees and liability insurance  498   467   31   165   155   10 
Administrative and other expenses  1,022   888   134   364   321   43 
  $4,551  $4,081  $470  $1,518  $1,357  $161 

2022.

(in thousands)

            
  

Three Months Ended March 31,

 
  

2023

  

2022

  

Change

 

Compensation and related benefits

 $1,364  $1,344  $20 

Direct advisory services costs

  453   208   245 

Legal fees

  18   35   (17)

Accounting, auditing and other professional fees

  111   110   1 

Directors’ fees and liability insurance

  206   196   10 

Administrative and other expenses

  176   133   43 
  $2,328  $2,026  $302 

Beginning with the second quarter of 2022, Bimini began providing certain repurchase agreement trading, clearing and administrative services to Orchid. Providing these services required Bimini to increase staffing and other resources, causing an increase in direct advisory services costs of approximately $255,000 for the three month period ended March 31, 2023, as compared to the three months ended March 31, 2022.

Income Tax Provision

We recorded an income tax provision (benefit) for the three months ended March 31, 2023 and 2022 of approximately $0.3 million and $(1.2) million, respectively, on consolidated pre-tax book income (loss) of $1.4 million and $(4.7) million, respectively.

Financial Condition:


Mortgage-Backed Securities


As of September 30, 2017, the Company'sMarch 31, 2023, our MBS portfolio consisted of $198.0$45.6 million of agency or government MBS at fair value and had a weighted average coupon of 4.23%3.67%. During the ninethree months ended September 30, 2017, the CompanyMarch 31, 2023, we received principal repayments of $7.7$0.9 million compared to $10.3$3.0 million for the comparable period ended September 30, 2016.March 31, 2022. The average prepayment speeds for the quarters ended September 30, 2017March 31, 2023 and 20162022 were 8.3%5.0% and 13.6%20.9%, respectively.


The following table presents the three-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 monththree-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

     

Structured

    
  

PT MBS

  

MBS

  

Total

 

Three Months Ended

 

Portfolio (%)

  

Portfolio (%)

  

Portfolio (%)

 

March 31, 2023

 2.4  10.3  5.0 

December 31, 2022

 8.2  8.4  8.3 

September 30, 2022

 13.1  7.5  10.8 

June 30, 2022

 17.2  22.9  20.0 

March 31, 2022

 18.5  25.6  20.9 

- 27 -
Table 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 


The following tables summarize certain characteristics of the Company'sour PT MBS and structured MBS as of September 30, 2017March 31, 2023 and December 31, 2016:


($ in thousands)      
     Weighted 
   Percentage Average 
   ofWeightedMaturity 
  FairEntireAverageinLongest
Asset Category ValuePortfolioCouponMonthsMaturity
September 30, 2017      
Fixed Rate MBS$195,15198.6%4.23%3261-Sep-47
Total PT MBS 195,15198.6%4.23%3261-Sep-47
Interest-Only Securities 1,6430.8%3.44%23225-Dec-39
Inverse Interest-Only Securities 1,1960.6%5.32%28125-Apr-41
Total Structured MBS 2,8391.4%4.23%25325-Apr-41
Total MBS$197,990100.0%4.23%3251-Sep-47
December 31, 2016      
Fixed Rate MBS$124,29995.4%4.24%3471-Oct-46
Total PT MBS 124,29995.4%4.24%3471-Oct-46
Interest-Only Securities 2,6542.0%3.48%24525-Dec-39
Inverse Interest-Only Securities 3,3492.6%5.52%32525-Dec-46
Total Structured MBS 6,0034.6%4.62%29025-Dec-46
Total MBS$130,302100.0%4.26%34425-Dec-46

($ in thousands)            
  September 30, 2017  December 31, 2016 
     Percentage of     Percentage of 
Agency Fair Value  Entire Portfolio  Fair Value  Entire Portfolio 
Fannie Mae $171,565   86.7% $120,961   92.8%
Freddie Mac  26,201   13.2%  8,870   6.8%
Ginnie Mae  224   0.1%  471   0.4%
Total Portfolio $197,990   100.0% $130,302   100.0%

  September 30, 2017  December 31, 2016 
Weighted Average Pass-through Purchase Price $109.33  $110.31 
Weighted Average Structured Purchase Price $6.02  $6.74 
Weighted Average Pass-through Current Price $108.00  $107.54 
Weighted Average Structured Current Price $7.38  $10.40 
Effective Duration (1)
  3.867   4.769 

2022:

($ in thousands)

                 
              

Weighted

  
      

Percentage

      

Average

  
      

of

  

Weighted

  

Maturity

  
  

Fair

  

Entire

  

Average

  

in

 

Longest

Asset Category

 

Value

  

Portfolio

  

Coupon

  

Months

 

Maturity

March 31, 2023

                 

Fixed Rate MBS

 $42,849   93.9%  4.07%  327 

1-Aug-52

Structured MBS

  2,791   6.1%  2.85%  297 

15-May-51

Total MBS Portfolio

 $45,640   100.0%  3.67%  325 

1-Aug-52

December 31, 2022

                 

Fixed Rate MBS

 $42,974   93.6%  4.07%  329 

1-Aug-52

Structured MBS

  2,919   6.4%  2.84%  300 

15-May-51

Total MBS Portfolio

 $45,893   100.0%  3.67%  327 

1-Aug-52

($ in thousands)

                
  

March 31, 2023

  

December 31, 2022

 
      

Percentage of

      

Percentage of

 

Agency

 

Fair Value

  

Entire Portfolio

  

Fair Value

  

Entire Portfolio

 

Fannie Mae

 $33,862   74.2% $33,883   73.8%

Freddie Mac

  11,778   25.8%  12,010   26.2%

Total Portfolio

 $45,640   100.0% $45,893   100.0%

  

March 31, 2023

  

December 31, 2022

 

Weighted Average Pass-through Purchase Price

 $105.30  $105.30 

Weighted Average Structured Purchase Price

 $4.48  $4.48 

Weighted Average Pass-through Current Price

 $97.06  $95.58 

Weighted Average Structured Current Price

 $13.23  $13.37 

Effective Duration (1)

  4.387   4.323 

(1)

Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 3.8674.387 indicates that an interest rate increase of 1.0% would be expected to cause a 3.867%4.387% decrease in the value of the MBS in the Company'sour investment portfolio at September 30, 2017.March 31, 2023. An effective duration of 4.7694.323 indicates that an interest rate increase of 1.0% would be expected to cause a 4.769%4.323% decrease in the value of the MBS in the Company'sour investment portfolio at December 31, 2016.2022. 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's portfolio assets acquired during the nine months ended September 30, 2017 and 2016.

($ in thousands)                  
 Nine Months Ended September 30, 
 2017 2016 
  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%

The Company's

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 durationsduration 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.

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Table of Contents

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 faces

We 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,March 31, 2023, 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 
MBS Portfolio Value  -100BPS  +100BPS  +200BPS  -100BPS  +100BPS  +200BPS 
Fixed Rate MBS $195,151  $6,177  $(10,066) $(22,189)  3.17%  (5.16)%  (11.37)%
Interest-Only MBS  1,643   (621)  465   735   (37.77)%  28.31%  44.75%
Inverse Interest-Only MBS  1,196   (134)  (51)  (256)  (11.17)%  (4.27)%  (21.37)%
Total MBS Portfolio $197,990  $5,422  $(9,652) $(21,710)  2.74%  (4.88)%  (10.96)%

($ 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)

                            
  

Fair

  

$ Change in Fair Value

  

% Change in Fair Value

 

MBS Portfolio

 

Value

  

-100BPS

  

+100BPS

  

+200BPS

  

-100BPS

  

+100BPS

  

+200BPS

 

Fixed Rate MBS

 $42,849  $1,955  $(2,195) $(4,548)  4.56%  (5.12)%  (10.61)%

Structured MBS

  2,791   (124)  60   70   (4.44)%  2.15%  2.51%

Total MBS Portfolio

 $45,640  $1,831  $(2,135) $(4,478)  4.01%  (4.68)%  (9.81)%
  

Notional

  

$ Change in Fair Value

  

% Change in Fair Value

 

Repurchase Agreement Hedges

 

Amount(1)

  

-100BPS

  

+100BPS

  

+200BPS

  

-100BPS

  

+100BPS

  

+200BPS

 

Treasury Futures Contracts

  14,400   (1,153)  1,033   2,010   (8.01)%  7.17%  13.96%

Gross Totals

     $678  $(1,102) $(2,468)            

(1)

Represents the total cumulativeaverage contract/notional amount of EurodollarU.S. Treasury 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 CompanyMarch 31, 2023, 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 five 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 CompanyMarch 31, 2023, we had obligations outstanding under the repurchase agreements of approximately $187.4$43.1 million with a net weighted average borrowing cost of 1.35%4.87%. The remaining maturity of the Company'sour outstanding repurchase agreement obligations ranged from 113 to 8928 days, with a weighted average maturity of 4815 days. Securing the repurchase agreement obligation as of September 30, 2017March 31, 2023 are MBS with an estimated fair value, including accrued interest, of $198.2$45.7 million and a weighted average maturity of 326 months. Through November 3, 2017, the Company hasMay 12, 2023, we have been able to maintain itsour repurchase facilities with comparable terms to those that existed at September 30, 2017March 31, 2023 with maturities through JanuaryJune 28, 2023.

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Table of Contents

The table below presents information about our period-end, maximum and average repurchase agreement obligations for each quarter in 20172023 and 2016.


($ 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)

(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.
(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.


2022.

  

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

 

March 31, 2023

 $43,092  $43,936  $43,455  $(363)  (0.84)%

December 31, 2022

  43,818   44,780   43,656   162   0.37%

September 30, 2022

  43,494   46,977   40,210   3,284   8.17%

June 30, 2022

  36,926   53,289   45,870   (8,944)  (19.50)%

March 31, 2022

  54,815   58,772   56,846   (2,031)  (3.57)%

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 immediateWe have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets the availabilityand our ability 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 earningsell encumbered assets varies.to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio and fromdividends we receive on our investment in Orchid common stock.

Internal Sources of Liquidity

Our internal sources of liquidity include our cash flows received from the retained interestsbalances, unencumbered assets and the collectionour ability to liquidate our encumbered security holdings. Our balance sheet also generated liquidity on an ongoing basis through payments of servicing advances.  Management believes thatprincipal and interest we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature ofreceive on our existing MBS portfolio (b) the repaymentsand dividends we receive on borrowings, (c) the payment of overhead and operating expenses, and (d) the payment of other accrued obligations.


Ourour investment in Orchid common stock.

We employ a hedging strategy for hedging our funding coststhat 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.


External Sources of Liquidity

Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements and (ii) use the TBA security market. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. 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 Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repo transaction basis. We did not experience any significant margin call activity in the quarter ended March 31, 2023.

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 repurchaserepo 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.

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Table of Contents

In future periods we expect to continue to finance our activities through repurchase agreements.agreements and through revenues from our advisory services business. As of September 30, 2017, the CompanyMarch 31, 2023, we had cash and cash equivalents of $5.2$4.7 million. We generated cash flows of $11.5$1.5 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$43.5 million during the ninethree months ended September 30, 2017.March 31, 2023. In addition, during the ninethree months ended September 30, 2017, the CompanyMarch 31, 2023, we received approximately $5.3$3.4 million in management fees and expense reimbursements as manager of Orchid and approximately $1.9$0.3 million in dividends from itsour investment in Orchid common stock.


The table below summarizes the effect that certain future contractual obligations existing as of September 30, 2017 will have on our liquidity and cash flows.

(in thousands)               
  Obligations Maturing 
  Within One Year  One to Three Years  Three to Five Years  More than Five Years  Total 
Repurchase agreements $187,374  $-  $-  $-  $187,374 
Interest expense on repurchase agreements(1)
  521   -   -   -   521 
Junior subordinated notes(2)
  -   -   -   26,000   26,000 
Interest expense on junior subordinated notes(1)
  1,326   2,545   2,541   16,793   23,205 
Litigation settlement  250   250   -   -   500 
Totals $189,471  $2,795  $2,541  $42,793  $237,600 

(1)Interest expense on repurchase agreements and junior subordinated notes are based on current interest rates as of September 30, 2017 and the remaining term of liabilities existing at that date.
(2)The Company holds a common equity interest in Bimini Capital Trust II.  The amount presented represents the net cash outlay of the Company.

Outlook


Orchid Island Capital Inc.


To

Orchid Island Capital reported a first quarter 2023 net income $3.5 million and its shareholders equity increased from $438.8 million to $451.4 million. The market conditions described below led to the extentgains as Orchid is able to increasereported gains on its capital base over time, we will benefit via increased management fees.  In addition,MBS of $53.9 million, outperforming its derivative losses of $41.2 million. 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.


The independent Board Our operating results are also impacted by changes in the market value of Directorsour holdings of Orchid hascommon shares, although these market value changes do not impact our cash flows from Orchid.

Economic Summary

As 2022 came to a close and the abilitycalendar turned 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 pay us a termination fee equal to three times the average annual management fee, as defined2023, there was clear divergence in the management agreement, before or onoutlook for monetary policy between the last day of the current automatic renewal term.


Interest Rates and the MBS Market

In many respects the third quarter was a repeat of 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 outcome of the U.S. Presidential election last November 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 as 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"“Fed”) raised their target forand the Federalmarket.  Market pricing in the Fed Funds futures market implied the Fed would increase the Fed Funds rate by 25 bps one or possibly two more times in early 2023 and then begin to lower the Fed Funds rate in Marchlate 2023 and June,continue doing so in 2024 as inflation moderated towards the Fed’s 2% target rate and announcedthe economy slowed.  The Fed, as reflected in their “dot plot” and frequent public statements, implied they would hold the Fed Funds rate steady throughout 2023 after the expected hikes early in the year.  The divergence persisted through January of 2023 and into early February until the incoming economic data began to change and clearly supported the Fed’s case that inflation was not slowing and that monetary policy would need to be restrictive until the data warranted such a taperingchange.

The January non-farm payroll report released on February 3, 2023 indicated the economy added over 500,000 jobs in January.  The inflation data released in late 2022 was revised higher. It was becoming clear that market pricing of their asset purchasesfuture Fed Funds levels was too optimistic and that the Fed had more work to do. Measures of inflation related to goods had clearly slowed, reflecting the easing of supply constraints brought about by the pandemic, coupled with a shift in September.consumption patterns away from goods and towards services. However, the Fed’s focus was on service-related inflation, particularly service-related inflation excluding shelter related costs.  This measure of inflation was not declining. In fact, data released in the first months of 2023 for this measure, what is now referred to as “super core” inflation, appears to have accelerated. Further, the Fed sees service inflation as being strongly influenced by wage pressures.  With the unemployment rate near historical lows and wage inflation high, there was no reason to believe service-related inflation was about to abruptly slow. Strong job growth will only exacerbate the problem. The market remained skepticalpricing for Fed Funds futures moved higher starting in early February and the terminal rate for Fed Funds moved above 5.5% in early March.

This was not the last time the outlook for the economy, inflation and Fed Funds levels would change during the first quarter. In early March there were two large regional bank failures that required the Federal Deposit Insurance Corporation (“FDIC”) to intervene.  The speed with which the banks failed caught the market by surprise and required rapid responses by monetary authorities.  The Fed introduced a bank term lending facility (“BTLF”) and the FDIC announced they would guarantee all deposits at both banks, regardless of size. The cause for both failures was deposit withdrawals.  With short-term rates having risen by nearly 500 bps in approximately 1 year, the banks that could not afford to pay correspondingly high rates on their deposits were vulnerable to losing previously cheap funding.  The market expected further problems across the industry and anticipated the Fed would not be able to follow through with as many additional hikes ascontinue to increase rates and risk exacerbating the problem.  Market pricing in the Fed was expectingFunds futures market moved from a terminal rate above 5.5% to pricing in multiple cuts to the Fed Funds rate by year-end.  Interest rates across the curve moved quickly lower. 

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Table of Contents

As the first quarter of 2023 came to a close it appeared the macroprudential policies imposed by the FDIC, U.S. Treasury and Fed were containing the deposit problem in the banking industry.  Once again, the market outlook shifted and the outlook for monetary pricing has shifted as corewell.  Economic data, particularly labor market and inflation readings continued to show year over year declines, with manyrelated data has remained supportive of the elementsnotion that the Fed would have to move policy to more restrictive levels and keep it there longer. Even the near collapse of another large regional bank in late April did not meaningfully alter market expectations for Fed monetary policy.  The Fed raised the target range for the Fed Funds rate again in early May, such that the high end of the index exhibiting persistent weakness.  Geopolitical events – particularly with respectrange is now 5.25% - exactly 500 basis points above its target range at the commencement of the tightening cycle in March of 2022. While this may be the last rate hike this cycle the Fed continues to North Korea – keepmaintain that they expect monetary policy to be maintained at this level throughout 2023. At present market pricing for the world and markets on edge.Fed funds rate at the end of 2023 is lower than the current level by approximately 70 basis points.

Interest Rates

The two-year U.S. Treasury note is the most sensitive to anticipated Fed Funds levels.  The yield on the 10-year US2-year U.S. Treasury note was approximately 4.43% on December 31, 2022, declined to just above 4% in early February, increased rapidly after the payroll report on February 3, 2023, to a high of 5.07% on March 8, 2023, then declined to a low of approximately 3.77% on March 24, 2023, after the two bank failures occurred. Since the first quarter ended, the 2-year yield has continued to move significantly from day to day as data and headlines dictate. The daily volatility in the rates market was near historical highs, particularly short-term rates.  Based solely on levels at the beginning and end of the quarter interest rates – nominal rates or SOFR swap levels – did not move materially.  All movements along the curve were plus or minus approximately 40 bps.  Rates/swaps were higher on shorter maturities (six-month maturities or less) and higher for 2-year maturities and longer.  However, this masks the extreme volatility during the quarter where daily movements of 20 bps occurred for several days at a time.  Interest rate hit itsvolatility is a significant driver of Agency MBS prices and performance.  With volatility so high during the quarter, performance was negatively impacted, particularly in March. 

Mortgage rates available to borrowers for Agency MBS were more stable during the first quarter of 2023.  The Mortgage Bankers Association 30-year survey rate averaged 6.45% for the quarter, with a high of 6.79% and a low of 6.18% for the quarter.  Note the first quarter is typically the seasonal trough for housing activity and, with rates still generally far above levels available to borrowers a year or more ago, refinancing activity during the first quarter was barely above the level that occurred in December of 2022, which in turn was the lowest level observed since the very early 2000s.

The Agency MBS Market

Treasuries and Agency MBS, and selling these would represent another source of downward pressure on Agency MBS. The relative performance across the Agency MBS universe was skewed in favor of higher coupon, 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large amounts by the Fed, and which may eventually be sold by the Fed, have performed the worst. These results are consistent with the relative duration of the securities, as higher coupons have shorter durations, or less sensitivity to date low on September 7, 2017, closing at 2.04%,movements in interest rates.

The Agency MBS market generated a total return of 2.5% for the first quarter of 2023.  The sector underperformed comparable duration SOFR swaps by 0.2% for the first quarter.  Performance for the quarter was meaningfully impacted by the extreme volatility in March.  For the month of March, the sector returns were 2.0% and nearly broke below-1.2% versus comparable duration SOFR swaps.  Performance across the psychologically important 2% level intra-day. Mother nature had a hand in shaping developments30-year sector versus comparable duration SOFR swaps was uneven, as lower (2.0% and 2.5% securities) and higher coupons (5.0% and 5.5% securities) underperformed intermediate coupon securities. 

Recent Legislative and Regulatory Developments

In response to the deterioration in the markets as well, as three major hurricanes made landfall – onefor U.S. Treasuries, Agency MBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November of 2021, it began tapering its net asset purchases each month and ended net asset purchases entirely by early March of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in Texas, Floridaaccordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and Puerto Rico. In$17.5 billion of Agency MBS each month. On September 21, 2022, the caseFOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of Texas, Hurricane Harvey caused unprecedented flooding$60 billion of U.S Treasuries and disrupted$35 billion of Agency MBS per month.

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On January 29, 2021, the Nation's oil refining capacityCDC issued guidance extending eviction moratoriums for several days.


However, there was a perceptible changecovered persons put in market sentiment in early September,place by the CARES Act through March 31, 2021. The FHFA subsequently extended the foreclosure moratorium for loans backed by Fannie Mae and Freddie Mac and the market reversed course intoeviction moratorium for real estate owned by Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development Department subsequently extended the FHA foreclosure and eviction moratoria to July 31, 2021, and September 30, 2021, respectively. Despite the expirations of these foreclosure moratoria, a final rule adopted by the CFPB on June 28, 2021, effectively prohibited servicers from initiating a foreclosure before January 1, 2022, in most instances. Foreclosure activity has risen since the end of the moratorium, with foreclosure starts in the third quarter and early fourth quarter. Geo-political events calmed down, removingof 2022 up 167% from the flight-to-quality induced demand for safe-haven assets, and economic news strengthened.  Eventscomparable period in Washington turned mildly positive as2021, but still remaining slightly below pre-pandemic levels.

In January 2019, the Trump Administration pivoted away from health care reformadministration made statements of its plans to tax reform,work with whatCongress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for 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% probabilitydevelopment of a 25 basis pointpolicy for comprehensive housing finance reform soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform. On June 30, 2020, the FHFA released a proposed rule on a new regulatory framework for the GSEs which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. The final rule on the new capital framework for the GSEs was published in the Federal Funds ratefederal register in December.  The September economic data released in early October has also been very strong, and the anticipated short-term effects of the hurricanes appear to have been less than feared. Further, the repair work associated with the hurricanes should put even more upward pressure on economic activity.


As we move into the fourth quarter, market pricing of additional policy accommodation removal is far less than the Fed anticipates. The latest reads on inflation returned to its aforementioned string of below expectations readings.  The perceived lack of meaningful inflation, coupled with a hawkish Fed, has causedDecember 2020. On January 14, 2021, the U.S. Treasury curveand the FHFA executed letter agreements allowing the GSEs to flatten,continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the GSE has common equity Tier 1 capital of at least 3% of its assets, (ii) the GSEs will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs in the U.S. mortgage market. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the GSE capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of a GSE’s adjusted total assets with a dynamic leverage buffer equal to 50% of a GSE’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the GSEs must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the GSEs announced that they will each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the GSE capital framework. Industry groups have expressed concern that this poses a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”), which could negatively impact liquidity and pricing in the market for TBA securities.

In 2017, policymakers announced that LIBOR will be replaced by December 31, 2021. 

On December 7, 2021, the CFPB released a final rule that amends Regulation Z, which implemented the Truth in Lending Act, aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and open-end (e.g., home equity line of credit) products. The rule, which mostly became effective in April of 2022, establishes requirements for the selection of replacement indices for existing LIBOR-linked consumer loans. Although the rule does not mandate the use of SOFR as the spread between 5-year Treasury Notesalternative rate, it identifies SOFR as a comparable rate for closed-end products and 30-year Treasury Bonds is at multi-year lows.  The market is also faced with uncertainty surrounding President Trump's appointmentstates that for open-end products, the CFPB has determined that ARRC’s recommended spread-adjusted indices based on SOFR for consumer products to replace the one-month, three-month, or six-month USD LIBOR index “have historical fluctuations that are substantially similar to those of the next Fed chair, with manyLIBOR indices that they are intended to replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement index to replace the one-year USD LIBOR until it obtained additional information.

On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the leading candidates perceivedConsolidated Appropriations Act, 2022 (H.R. 2471). The LIBOR Act provides for a statutory replacement benchmark rate for contracts that use LIBOR as a benchmark and do not contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR Act, SOFR becomes the new benchmark rate by operation of law for any such contract. The LIBOR Act establishes a safe harbor from litigation for claims arising out of or related to the use of SOFR as the recommended benchmark replacement. The LIBOR Act makes clear that it should not be construed to disfavor the use of any benchmark on a prospective basis.

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On July 28, 2022, the Fed published a proposed rule to implement the LIBOR Act, which was adopted on December 16, 2022.  The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and 12-month LIBOR contracts and provides mechanisms for converting most existing LIBOR contracts, including Agency MBS, to SOFR no later than June 30, 2023.

The LIBOR Act also attempts to forestall challenges that it is impairing contracts. It provides that the discontinuance of LIBOR and the automatic statutory transition to a replacement rate neither impairs or affects the rights of a party to receive payment under such contracts, nor allows a party to discharge their performance obligations or to declare a breach of contract. It amends the Trust Indenture Act of 1939 to state that the “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security shall not be deemed to be more hawkishimpaired or affected” by the markets than the current chairwoman, even though she remains a candidate herself.  Regardlessapplication of the uncertainty in the bond market, the equity markets, and risk markets generally, continueLIBOR Act 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.



The mortgage market closed the quarter with the current coupon, 30-year fixed rate Agency MBS trading at the tightest spread to comparable duration U.S. Treasuries since early 2014.  As has been the case for much of the year, lower coupon MBS outperformed high coupon MBS versus their comparable duration U.S. Treasury benchmarks.  As we approach the winter months and the seasonal slowdown in prepayment activity, coupled with the increase in rates that began in early September, speeds should continue to moderate

Recent Regulatory Developments

any indenture security.

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

Because of these potential policy changesexceptions, the GSEs believe based on prevailing assumptions and market conditions this change will require congressional action.  In addition,have only a marginal impact on prepayment speeds, in aggregate. Cohort level impacts may vary. For example, more than half of loans referred to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on delinquency levels, borrower response, and referral to foreclosure timelines.

The scope and nature of the actions the U.S. government or the Fed has made statements regarding additional increaseswill ultimately undertake are unknown and will continue 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.


evolve

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.

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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 interest rate futures, swaps 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. This makes interest only securities desirable hedge instruments for pass-through Agency MBS.

As described above, the Agency MBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency MBS market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its balance sheet could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions described above will likely delay potential defaults on loans that would otherwise be bought out of Agency MBS pools as described above. Depending on the ultimate resolution of the foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. To the extent the Company’s Agency MBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in question. To the extent they were acquired at a discount, this will tend to decrease the realized yield on the asset in question.

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. An increaseshort term interest rate markets. Increases in the Fed Funds Raterate, SOFR or LIBOR wouldtypically 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, Fed Funds and T-Note futures contracts or interest rate swaptions.


Summary


As we entered

The economy and the outlook for monetary policy during the first quarter were very volatile.  While it is likely we are nearing the end of 2017, risk assets were performing very well as the Trump administration took officeaccelerated policy removal period that began last March the outlook for monetary policy over the course of 2023 and appeared to be very pro-business.  The markets looked forward to a roll back of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbishbeyond changed multiple times during the nation's aging roads, highways, bridges and airports.  Whilequarter, generating significant interest rate volatility, particularly in March. 

As the Administration made bold promises, there has been very little delivered.  Market optimism was quickly replaced with pessimism.  Political infighting among the Administration and congressional republicans has generally been the cause, as has turmoil within the White House itself.   Geopolitical events surfaced in early April, specifically the Korean peninsula.  These events keptfirst quarter began 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 case of the core Consumer Price Index, ("CPI") measure, the year over year figure moved from 2.3% in January 2017 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 expectpricing, anticipated the Fed to raise rates in 2018 and beyond to the extentwould hike the Fed expects to.Funds rate one or possibly two more times in early 2023 and then pivot to easing later in the year as inflation moderated towards their long-term goal of 2%.  The incoming economic data in early February and for the balance of the quarter was strong, especially with respect to inflation, the labor market and wages.  The Fed, cognizant that goods inflation has already moderated significantly, is focused on services inflation, particularly services excluding housing or shelter related costs (what is currently referred to as “super core” inflation).  Readings on “super core” inflation accelerated during the quarter.  As the data was released over the balance of the quarter market pricing for Fed Funds over the course of the year continued to increase and the projected terminal rate eventually exceeded 5.5%.  Consistent with a result, the combination of benign inflation readings currently coupled with hawkish Fed expectation has causedpolicy rate that was likely to remain elevated for a considerable period, the yield curveon the 2-year U.S. Treasury reached 5.07% in early March.

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The volatility continued, and in fact increased, when a brief banking crisis occurred in early March.  Two banks failed and were taken over by the FDIC.  The FDIC, U.S. Treasury and Fed responded quickly and as we enter the second quarter it seems the macroprudential steps taken appear to flatten significantly – to multi-year lows.  A second order effecthave contained the crisis. That being said, in the immediate aftermath of these developments, has occurredthe market reaction was rapid and significant.  The two-year U.S. Treasury yield decreased by approximately 130 bps in a little over two weeks.  Market pricing of Fed Funds at the end of 2023 reflected three or four 25 bps cuts.  The December 2023 contract price moved nearly 175 bps in the equity and risk markets as they continue to perform exceedingly well.  week after the first failure of Silicon Valley Bank.  In sum, volatility across the entire rates market was extremely elevated, surpassing all previous periods since the 2008 financial crisis. 

The major equity indices inperformance for the US make record new highs almost daily.


TheAgency MBS market has performed wellwas in this environment asline with most sectors of the resulting lowfixed income markets during the first quarter of 2023 with the exception of investment grade and sub-investment grade corporate bonds.  However, the volatility tight trading spreads across mostdescribed above, which peaked during March, meaningfully impacted performance for the sector in March.  The return for the sector versus comparable asset classes and with demand from asset managers and REIT's easily replacingduration SOFR swaps was -1.2%.  Across the lost demand expected from the Fed's tapering of their asset purchases. Current coupon, 30-year, fixed rate mortgage are trading atsector of the Agency MBS market returns were uneven, as higher and lower coupons – over 4.5% and below 3.0% - trailed returns for the intermediate coupons.

The failure of Silicon Valley Bank and Signature Bank led to their tightest spread to comparable duration treasuries since early 2014.   If these conditions persist we do not believetakeover by the FDIC. The FDIC took possession of approximately $114 billion of securities held by the two banks that the marketFDIC needs to liquidate.  These sales will occur over the balance of 2023.  The magnitude of these sales in proportion to typical supply levels in the current rate environment represents a formidable risk to the performance of the sector over the near term.  The Agency MBS expected to be sold – predominantly lower coupon 30, 20 and 15-year securities, have underperformed higher coupon securities since the proposed liquidations were announced. The liquidation sales commenced on April 18, 2023, and are expected to continue for 30 to 40 more weeks. Both the Company’s and Orchid’s portfolios contain a significant allocation to some of the securities to be sold.  These securities have performed poorly since the announcement date of the liquidations and their poor relative performance may continue.  To the extent this trend continues the Company’s MBS portfolio performance will be likelyaffected absent changes in the construction of the portfolio or hedges. Likewise, Orchid’s MBS portfolio will also be affected.  This in turn could affect Orchid’s operating results, shareholders’ equity and thus the level of the management fees paid to suffer a material wideningBimini Advisors.  A continuation 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 intentionstrend could also affect Orchid’s ability to raise rates three times in 2018additional capital, which also affects the level of management fees paid to Bimini Advisors.  The positive aspect of the recent poor performance of Agency MBS resulting from the liquidations is that such securities currently offer very attractive returns over a long-term horizon and more so intherefore the years after. This would also put upward pressure on volatilitypotential for very attractive returns for both Royal Palm and longer-term rates, both negatively impacting MBS performance.



Orchid.

Critical Accounting Policies


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 condensedEstimates

Our 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 affectcan have a material impact on reported assets, and liabilities, as well as reported revenues and expenses. The Company believes that all of theexpenses, and these 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.can change each reporting period. There have been no changes to the processes used to determine our critical accounting policiesestimates as discussed in our annual report on Form 10-K for the year ended December 31, 2016.

2022.

Capital Expenditures


At September 30, 2017,March 31, 2023, we had no material commitments for capital expenditures.


Off-Balance Sheet Arrangements

At September 30, 2017, we did not have any off-balance sheet arrangements.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our 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.

As a a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide disclosure pursuant to this Item. However, we have elected to include much of the information in Item 7 above.


Not Applicable.
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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 ControlsControl over Financial Reporting


There were no significantmaterial 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


In April 2020 and November 2021, the Company received demands for payment from Citigroup, Inc. in the total amount of $33.3 million related to the indemnification provisions of various mortgage loan purchase agreements entered into prior to the date Royal Palm’s mortgage origination operations ceased in 2007. The Company believes the demands are without merit and intends to defend against the demands vigorously if pursued by Citigroup. No provision or accrual has been recorded related to the Citigroup demands.

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



ITEM 1A. RISK FACTORS.


There have been no material changes fromto the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 8, 2017.


10, 2023.

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


None.

On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million.

The Company did not repurchase shares of its common stock during the three months ended March 31, 2023.

The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2023.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4. MINE SAFETY DISCLOSURES.


Not Applicable.


ITEM 5. OTHER INFORMATION

None.


None.
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ITEM 6. EXHIBITS


Exhibit No


3.1

Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company'sCompany’s Form S-11/A, filed with the SEC on April 29, 2004

3.2

Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company'sCompany’s Current Report on Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005

3.3

Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company'sCompany’s Current Report on Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006

3.4

Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company'sCompany’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007

3.5

Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company'sCompany’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007

31.1

Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002*

31.2

Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002*

32.1

Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002**

32.2

Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002**

Exhibit 101.INS XBRL

101.INS

Inline XBRL Instance Document*Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.***

Exhibit 101.SCH XBRL

Taxonomy Extension Schema Document***

Exhibit 101.CAL XBRL

Taxonomy Extension Calculation Linkbase Document***

Exhibit 101.DEF XBRL

Additional Taxonomy Extension Definition Linkbase Document***

Exhibit 101.LAB XBRL

Taxonomy Extension Label Linkbase Document***

Exhibit 101.PRE XBRL

Taxonomy Extension Presentation Linkbase Document***


Exhibit 104*Cover Page Interactive Data File (embedded within the Inline XBRL document)Filed herewith.
**Furnished herewith
***Submitted electronically herewith.

*          Filed herewith.

**         Furnished herewith

***         Submitted electronically herewith.

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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, 2017
 By:BIMINI CAPITAL MANAGEMENT, INC.

Date:          May 12, 2023

 /s/

By:

/s/ Robert E. Cauley

 
  

Robert E. Cauley

Chairman and Chief Executive Officer




Date:November 3, 2017

 

By:

Date:          May 12, 2023

 /s/

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)


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