PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under "Risk Factors" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") was formed in September 2003 to invest primarily in residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS ("PT MBS") and (ii) structured Agency MBS, such as collateralized mortgage obligations ("CMOs"), interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS.
As described more fully below under "Outlook/Tax Matters", the Company no longer operates as a Real Estate Investment Trust ("REIT") and possesses significant net operating loss carryforwards ("NOL"), as does its wholly-owned subsidiary, MortCo TRS, LLC ("MortCo"). In order to more effectively utilize the NOLs the Company began the process of transferring MBS assets from the Company to MortCo in late 2015 and continued to do so during the six months ended June 30, 2016. The Company plans to ultimately transfer all or substantially all of the existing MBS assets to MortCo and to grow the MBS portfolio at MortCo over time in order to utilize NOLs at MortCo before their expiration. After such transfer is complete the MBS portfolio management operations will be conducted at MortCo and not at the Company.
In 2013, the Company also began to serve 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, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. In addition, the Company receives dividends from its investment in Orchid common shares.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:
|
the difference between Agency MBS yields and our funding and hedging costs;
|
|
competition for investments in Agency MBS;
|
|
actions taken by the Federal Reserve and the U.S. Treasury;
|
|
prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; and
|
|
other market developments.
|
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:
|
our degree of leverage;
|
|
our access to funding and borrowing capacity;
|
|
our hedging activities;
|
|
the market value of our investments; and
|
|
the requirements to qualify for a registration exemption under the Investment Company Act; and
|
our ability to utilize net operating loss carryforwards and capital loss carryforwards to reduce our taxable income.
Results of Operations
Described below are the Company's results of operations for the six and three months ended June 30, 2016, as compared to the six and three months ended June 30, 2015.
Net Income (Loss) Summary
Consolidated net income for the six months ended June 30, 2016 was $1.0 million, or $0.08 basic and diluted income per share of Class A Common Stock, as compared to consolidated net loss of $2.9 million, or $0.23 basic and diluted loss per share of Class A Common Stock, for the six months ended June 30, 2015.
Consolidated net income for the three months ended June 30, 2016 was $0.6 million, or $0.05 basic and diluted income per share of Class A Common Stock, as compared to consolidated net loss of $1.5 million, or $0.12 basic and diluted loss per share of Class A Common Stock, for the three months ended June 30, 2015.
The components of net income (loss) for the six and three months ended June 30, 2016 and 2015, along with the changes in those components are presented in the table below:
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net portfolio interest
|
|
$
|
1,541
|
|
|
$
|
2,083
|
|
|
$
|
(542
|
)
|
|
$
|
851
|
|
|
$
|
976
|
|
|
$
|
(125
|
)
|
Interest expense on junior subordinated notes
|
|
|
(540
|
)
|
|
|
(491
|
)
|
|
|
(49
|
)
|
|
|
(276
|
)
|
|
|
(248
|
)
|
|
|
(28
|
)
|
Losses on MBS and derivative instruments
|
|
|
(1,846
|
)
|
|
|
(1,207
|
)
|
|
|
(639
|
)
|
|
|
(490
|
)
|
|
|
(1,021
|
)
|
|
|
531
|
|
Net portfolio (loss) income
|
|
|
(845
|
)
|
|
|
385
|
|
|
|
(1,230
|
)
|
|
|
85
|
|
|
|
(293
|
)
|
|
|
378
|
|
Other income
|
|
|
5,297
|
|
|
|
4,175
|
|
|
|
1,122
|
|
|
|
2,282
|
|
|
|
878
|
|
|
|
1,404
|
|
Expenses, including income taxes
|
|
|
(3,404
|
)
|
|
|
(7,453
|
)
|
|
|
4,049
|
|
|
|
(1,765
|
)
|
|
|
(2,089
|
)
|
|
|
324
|
|
Net income (loss)
|
|
$
|
1,048
|
|
|
$
|
(2,893
|
)
|
|
$
|
3,941
|
|
|
$
|
602
|
|
|
$
|
(1,504
|
)
|
|
$
|
2,106
|
|
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
To date, the Company has used derivatives, specifically interest rate futures contracts, such as Eurodollar and Treasury Note ("T-Note") futures contracts, to hedge a portion of the interest rate risk on its repurchase agreements and junior subordinate notes in a rising rate environment. Each interest rate futures contract covers a specific three month period, but the Company typically has many contracts in place at any point in time — usually covering several years in the aggregate.
The Company has not elected to designate its derivative holdings for hedge accounting treatment under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815,
Derivatives and Hedging
. Changes in fair value of these instruments are presented in a separate line item in the Company's consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments. In the future, the Company may use other derivative instruments to hedge its interest expense and/or elect to designate its derivative holdings for hedge accounting treatment.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized gains or losses on specific derivative instruments that pertain to each period presented. As of June 30, 2016, the Company has Eurodollar futures contracts in place through 2021. Adjusting our interest expense for the periods presented by the gains or losses on all derivative instruments would not accurately reflect our economic interest expense for these periods.
For each period presented, the Company has combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on repurchase agreements and junior subordinated notes to reflect total expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income.
However, because the Company has not elected hedging treatment
under ASC Topic 815, the gains or losses on all of the Company's derivative instruments held during the period are reflected in our consolidated statements of operations. This presentation includes gains or losses on all contracts in effect during the reporting period, including those covering both the current period as well as future periods.
The Company believes that economic interest expense and economic net interest income provides meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help the Company to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of its current investment portfolio or operations. The realized and unrealized gains or losses presented in the Company's consolidated statements of operations are not necessarily representative of the total interest rate expense that the Company will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses the Company ultimately realizes, and which will affect the Company's total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.
The Company's presentation of the economic value of its hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the Company calculates them. Second, while the Company believes that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of the Company's investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, losses on derivative instruments, calculated in accordance with GAAP for the six months ended June 30, 2016 and for each quarter in 2016 and 2015.
Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
Three Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(353
|
)
|
|
$
|
(404
|
)
|
|
$
|
(757
|
)
|
March 31, 2016
|
|
|
(787
|
)
|
|
|
(513
|
)
|
|
|
(1,300
|
)
|
December 31, 2015
|
|
|
426
|
|
|
|
197
|
|
|
|
623
|
|
September 30, 2015
|
|
|
(676
|
)
|
|
|
(315
|
)
|
|
|
(991
|
)
|
June 30, 2015
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
6
|
|
March 31, 2015
|
|
|
(687
|
)
|
|
|
(328
|
)
|
|
|
(1,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
|
Six Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(1,140
|
)
|
|
$
|
(917
|
)
|
|
$
|
(2,057
|
)
|
June 30, 2015
|
|
|
(680
|
)
|
|
|
(329
|
)
|
|
|
(1,009
|
)
|
Losses on Derivative Instruments - Attributed to Current Period (Non-GAAP)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
Three Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(60
|
)
|
|
$
|
(77
|
)
|
|
$
|
(137
|
)
|
March 31, 2016
|
|
|
(45
|
)
|
|
|
(80
|
)
|
|
|
(125
|
)
|
December 31, 2015
|
|
|
(31
|
)
|
|
|
(80
|
)
|
|
|
(111
|
)
|
September 30, 2015
|
|
|
(20
|
)
|
|
|
(74
|
)
|
|
|
(94
|
)
|
June 30, 2015
|
|
|
(9
|
)
|
|
|
(64
|
)
|
|
|
(73
|
)
|
March 31, 2015
|
|
|
(1
|
)
|
|
|
(54
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
|
Six Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(105
|
)
|
|
$
|
(157
|
)
|
|
$
|
(262
|
)
|
June 30, 2015
|
|
|
(10
|
)
|
|
|
(118
|
)
|
|
|
(128
|
)
|
Gains (Losses) on Derivative Instruments - Attributed to Future Periods (Non-GAAP)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
Three Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(293
|
)
|
|
$
|
(327
|
)
|
|
$
|
(620
|
)
|
March 31, 2016
|
|
|
(742
|
)
|
|
|
(433
|
)
|
|
|
(1,175
|
)
|
December 31, 2015
|
|
|
457
|
|
|
|
277
|
|
|
|
734
|
|
September 30, 2015
|
|
|
(656
|
)
|
|
|
(241
|
)
|
|
|
(897
|
)
|
June 30, 2015
|
|
|
16
|
|
|
|
63
|
|
|
|
79
|
|
March 31, 2015
|
|
|
(686
|
)
|
|
|
(274
|
)
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior
|
|
|
|
|
|
|
|
Repurchase
|
|
|
Subordinated
|
|
|
|
|
|
Six Months Ended
|
|
Agreements
|
|
|
Debt
|
|
|
Total
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
(1,035
|
)
|
|
$
|
(760
|
)
|
|
$
|
(1,795
|
)
|
June 30, 2015
|
|
|
(670
|
)
|
|
|
(211
|
)
|
|
|
(881
|
)
|
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)
|
|
Consolidated
|
|
June 30, 2016
|
|
$
|
1,025
|
|
|
$
|
174
|
|
|
$
|
(60
|
)
|
|
$
|
234
|
|
|
$
|
851
|
|
|
$
|
791
|
|
March 31, 2016
|
|
|
817
|
|
|
|
127
|
|
|
|
(45
|
)
|
|
|
172
|
|
|
|
690
|
|
|
|
645
|
|
December 31, 2015
|
|
|
1,035
|
|
|
|
120
|
|
|
|
(31
|
)
|
|
|
151
|
|
|
|
915
|
|
|
|
884
|
|
September 30, 2015
|
|
|
996
|
|
|
|
107
|
|
|
|
(20
|
)
|
|
|
127
|
|
|
|
889
|
|
|
|
869
|
|
June 30, 2015
|
|
|
1,074
|
|
|
|
98
|
|
|
|
(9
|
)
|
|
|
107
|
|
|
|
976
|
|
|
|
967
|
|
March 31, 2015
|
|
|
1,207
|
|
|
|
100
|
|
|
|
(1
|
)
|
|
|
101
|
|
|
|
1,107
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Interest Expense on Repurchase Agreements
|
|
|
Net Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
|
|
|
|
|
|
|
Interest Income
|
|
|
|
Interest
|
|
|
GAAP
|
|
|
Non-GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Six Months Ended
|
|
Income
|
|
|
Basis
|
|
|
Hedges
(1)
|
|
|
Basis
(2)
|
|
|
Basis
|
|
|
Basis
(3)
|
|
Consolidated
|
|
June 30, 2016
|
|
$
|
1,842
|
|
|
$
|
301
|
|
|
$
|
(105
|
)
|
|
$
|
406
|
|
|
$
|
1,541
|
|
|
$
|
1,436
|
|
June 30, 2015
|
|
|
2,281
|
|
|
|
198
|
|
|
|
(10
|
)
|
|
|
208
|
|
|
|
2,083
|
|
|
|
2,073
|
|
(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)
|
|
Consolidated
|
|
June 30, 2016
|
|
$
|
851
|
|
|
$
|
791
|
|
|
$
|
276
|
|
|
$
|
(77
|
)
|
|
$
|
353
|
|
|
$
|
575
|
|
|
$
|
438
|
|
March 31, 2016
|
|
|
690
|
|
|
|
645
|
|
|
|
264
|
|
|
|
(80
|
)
|
|
|
344
|
|
|
|
426
|
|
|
|
301
|
|
December 31, 2015
|
|
|
915
|
|
|
|
884
|
|
|
|
255
|
|
|
|
(80
|
)
|
|
|
335
|
|
|
|
660
|
|
|
|
549
|
|
September 30, 2015
|
|
|
889
|
|
|
|
869
|
|
|
|
252
|
|
|
|
(74
|
)
|
|
|
326
|
|
|
|
637
|
|
|
|
543
|
|
June 30, 2015
|
|
|
976
|
|
|
|
967
|
|
|
|
248
|
|
|
|
(64
|
)
|
|
|
312
|
|
|
|
728
|
|
|
|
655
|
|
March 31, 2015
|
|
|
1,107
|
|
|
|
1,106
|
|
|
|
243
|
|
|
|
(54
|
)
|
|
|
297
|
|
|
|
864
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
Six Months Ended
|
|
Basis
|
|
|
Basis
(1)
|
|
|
Basis
|
|
|
Hedges
(2)
|
|
|
Basis
(3)
|
|
|
Basis
|
|
|
Basis
(4)
|
|
Consolidated
|
|
June 30, 2016
|
|
$
|
1,541
|
|
|
$
|
1,436
|
|
|
$
|
540
|
|
|
$
|
(157
|
)
|
|
$
|
697
|
|
|
$
|
1,001
|
|
|
$
|
739
|
|
June 30, 2015
|
|
|
2,083
|
|
|
|
2,073
|
|
|
|
491
|
|
|
|
(118
|
)
|
|
|
609
|
|
|
|
1,592
|
|
|
|
1,464
|
|
(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 subtracting the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income.
|
Net Portfolio Income
During the six months ended June 30, 2016, the Company generated $1.5 million of net portfolio interest income, consisting of $1.8 million of interest income from MBS assets offset by $0.3 million of interest expense on repurchase liabilities. For the comparable period ended June 30, 2015, the Company generated $2.1 million of net portfolio interest income, consisting of $2.3 million of interest income from MBS assets offset by $0.2 million of interest expense on repurchase liabilities. The $0.5 million decrease in interest income for the six months ended June 30, 2016 was due to a combination of a 43 basis point decrease in yields earned on the portfolio and the $10.9 million decrease in average MBS balances.
The Company's economic interest expense on repurchase liabilities for the six months ended June 30, 2016 and 2015 was $0.4 million and $0.2 million, respectively, resulting in $1.4 million and $2.1 million of economic net portfolio interest income, respectively.
During the three months ended June 30, 2016, the Company generated $0.8 million of net portfolio interest income, consisting of $1.0 million of interest income from MBS assets offset by $0.2 million of interest expense on repurchase liabilities. For the three months ended June 30, 2015, the Company generated $1.0 million of net portfolio interest income, consisting of $1.1 million of interest income from MBS assets offset by $0.1 million of interest expense on repurchase liabilities. The $0.1 million decrease in interest income for the six months ended June 30, 2016 was due to a combination of a 12 basis point decrease in yields earned on the portfolio and the $1.7 million decrease in average MBS balances.
The Company's economic interest expense on repurchase liabilities for the three months ended June 30, 2016 and 2015 was $0.2 million and $0.1 million, respectively, resulting in $0.8 million and $1.0 million of economic net portfolio interest income, respectively.
The tables below provide consolidated information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for the six months ended June 30, 2016 and 2015 and each quarter in 2016 and 2015 on both a GAAP and economic basis.
($ 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)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
December 31, 2015
|
|
|
103,551
|
|
|
|
1,035
|
|
|
|
4.00
|
%
|
|
|
95,456
|
|
|
|
120
|
|
|
|
151
|
|
|
|
0.50
|
%
|
|
|
0.63
|
%
|
September 30, 2015
|
|
|
115,437
|
|
|
|
996
|
|
|
|
3.45
|
%
|
|
|
107,442
|
|
|
|
107
|
|
|
|
127
|
|
|
|
0.40
|
%
|
|
|
0.47
|
%
|
June 30, 2015
|
|
|
111,674
|
|
|
|
1,074
|
|
|
|
3.85
|
%
|
|
|
103,750
|
|
|
|
98
|
|
|
|
107
|
|
|
|
0.38
|
%
|
|
|
0.41
|
%
|
March 31, 2015
|
|
|
116,709
|
|
|
|
1,207
|
|
|
|
4.14
|
%
|
|
|
108,129
|
|
|
|
100
|
|
|
|
101
|
|
|
|
0.37
|
%
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Yield on
|
|
|
Average
|
|
|
Interest Expense
|
|
|
Average Cost of Funds
|
|
|
|
MBS
|
|
|
Interest
|
|
|
Average
|
|
|
Repurchase
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Six Months Ended
|
|
Held
(1)
|
|
|
Income
(2)
|
|
|
MBS
|
|
|
Agreements
(1)
|
|
|
Basis
|
|
|
Basis
(2)
|
|
|
Basis
|
|
|
Basis
(3)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
103,305
|
|
|
$
|
1,842
|
|
|
|
3.57
|
%
|
|
$
|
96,637
|
|
|
$
|
301
|
|
|
$
|
406
|
|
|
|
0.62
|
%
|
|
|
0.84
|
%
|
June 30, 2015
|
|
|
114,192
|
|
|
|
2,281
|
|
|
|
4.00
|
%
|
|
|
105,939
|
|
|
|
198
|
|
|
|
208
|
|
|
|
0.37
|
%
|
|
|
0.39
|
%
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Portfolio
|
|
|
Net Portfolio
|
|
|
|
Interest Income
|
|
|
Interest Spread
|
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Three Months Ended
|
|
Basis
|
|
|
Basis
(2)
|
|
|
Basis
|
|
|
Basis
(4)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
851
|
|
|
$
|
791
|
|
|
|
3.06
|
%
|
|
|
2.82
|
%
|
March 31, 2016
|
|
|
690
|
|
|
|
645
|
|
|
|
2.82
|
%
|
|
|
2.62
|
%
|
December 31, 2015
|
|
|
915
|
|
|
|
884
|
|
|
|
3.50
|
%
|
|
|
3.37
|
%
|
September 30, 2015
|
|
|
889
|
|
|
|
869
|
|
|
|
3.05
|
%
|
|
|
2.98
|
%
|
June 30, 2015
|
|
|
976
|
|
|
|
967
|
|
|
|
3.47
|
%
|
|
|
3.44
|
%
|
March 31, 2015
|
|
|
1,107
|
|
|
|
1,106
|
|
|
|
3.77
|
%
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Portfolio
|
|
|
Net Portfolio
|
|
|
|
Interest Income
|
|
|
Interest Spread
|
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Six Months Ended
|
|
Basis
|
|
|
Basis
(2)
|
|
|
Basis
|
|
|
Basis
(4)
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
1,541
|
|
|
$
|
1,436
|
|
|
|
2.95
|
%
|
|
|
2.73
|
%
|
June 30, 2015
|
|
|
2,083
|
|
|
|
2,073
|
|
|
|
3.63
|
%
|
|
|
3.61
|
%
|
(1)
|
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 31-33 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 32 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 Held.
|
(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 income for the Company was $1.8 million for the six months ended June 30, 2016 and $2.3 million for the six months ended June 30, 2015. Average MBS holdings were $103.3 million and $114.2 million for the six months ended June 30, 2016 and 2015, respectively. The $0.5 million decrease in interest income was due to combination of a 43 basis point decrease in yields and a $10.9 million decrease in average MBS holdings.
Interest income for the Company was $1.0 million for the three months ended June 30, 2016 and $1.1 million for the three months ended June 30, 2015. Average MBS holdings were $110.0 million and $111.7 million for the three months ended June 30, 2016 and 2015, respectively. The $0.1 million decrease in interest income was due to combination of a 12 basis point decrease in yields and a $1.7 million decrease in average MBS holdings.
The tables below present the consolidated average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and pass-through MBS ("PT MBS") for the six months ended June 30, 2016 and 2015 and for each quarter during 2016 and 2015.
($ 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
|
|
Consolidated
|
|
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
|
%
|
December 31, 2015
|
|
|
98,585
|
|
|
|
4,966
|
|
|
|
103,551
|
|
|
|
1,057
|
|
|
|
(22
|
)
|
|
|
1,035
|
|
|
|
4.29
|
%
|
|
|
(1.82
|
)%
|
|
|
4.00
|
%
|
September 30, 2015
|
|
|
109,582
|
|
|
|
5,855
|
|
|
|
115,437
|
|
|
|
1,038
|
|
|
|
(42
|
)
|
|
|
996
|
|
|
|
3.79
|
%
|
|
|
(2.90
|
)%
|
|
|
3.45
|
%
|
June 30, 2015
|
|
|
105,368
|
|
|
|
6,306
|
|
|
|
111,674
|
|
|
|
1,031
|
|
|
|
43
|
|
|
|
1,074
|
|
|
|
3.91
|
%
|
|
|
2.75
|
%
|
|
|
3.85
|
%
|
March 31, 2015
|
|
|
111,035
|
|
|
|
5,674
|
|
|
|
116,709
|
|
|
|
1,090
|
|
|
|
117
|
|
|
|
1,207
|
|
|
|
3.93
|
%
|
|
|
8.25
|
%
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average MBS Held
|
|
|
Interest Income
|
|
|
Realized Yield on Average MBS
|
|
|
|
PT
|
|
|
Structured
|
|
|
|
|
|
|
PT
|
|
|
Structured
|
|
|
|
|
|
|
PT
|
|
|
Structured
|
|
|
|
|
|
Six Months Ended
|
|
MBS
|
|
|
MBS
|
|
|
Total
|
|
|
MBS
|
|
|
MBS
|
|
|
Total
|
|
|
MBS
|
|
|
MBS
|
|
|
Total
|
|
Consolidated
|
|
June 30, 2016
|
|
$
|
99,509
|
|
|
$
|
3,796
|
|
|
$
|
103,305
|
|
|
$
|
1,791
|
|
|
$
|
51
|
|
|
$
|
1,842
|
|
|
|
3.60
|
%
|
|
|
2.72
|
%
|
|
|
3.57
|
%
|
June 30, 2015
|
|
|
108,202
|
|
|
|
5,990
|
|
|
|
114,192
|
|
|
|
2,121
|
|
|
|
160
|
|
|
|
2,281
|
|
|
|
3.92
|
%
|
|
|
5.36
|
%
|
|
|
4.00
|
%
|
Interest Expense on Repurchase Agreements and the Cost of Funds
Average outstanding repurchase agreements for the Company were $96.6 million and $105.9 million, generating interest expense of $0.3 million and $0.2 million for the six months ended June 30, 2016 and 2015, respectively. Our average cost of funds was 0.62% and 0.37% for six months ended June 30, 2016 and 2015, respectively. There was a 25 basis point increase in the average cost of funds and a $9.3 million decrease in average outstanding repurchase agreements during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015.
The Company's economic interest expense was $0.4 million and $0.2 million for the six months ended June 30, 2016 and 2015, respectively. There was a 45 basis point increase in the average economic cost of funds to 0.84% for the six months ended June 30, 2016 from 0.39% for the six months ended June 30, 2015. The $0.2 million increase in economic interest expense was due to the increase in the economic cost of funds rate, partially offset by the $9.3 million decrease in average outstanding repurchase agreements during the six months ended June 30, 2016.
Average outstanding repurchase agreements for the Company were $103.3 million and $103.7 million, generating interest expense of $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively. Our average cost of funds was 0.67% and 0.38% for three months ended June 30, 2016 and 2015, respectively. There was a 29 basis point increase in the average cost of funds and a $0.5 million decrease in average outstanding repurchase agreements during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015.
The Company's economic interest expense was $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively. There was a 50 basis point increase in the average economic cost of funds to 0.91% for the three months ended June 30, 2016 from 0.41% for the three months ended June 30, 2015. The $0.1 million increase in economic interest expense was due to the increase in the economic cost of funds rate, partially offset by the $0.5 million decrease in average outstanding repurchase agreements during the three months ended June 30, 2016.
Because all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. The Company's average cost of funds calculated on a GAAP basis was 23 basis points above the average one-month LIBOR and 25 basis points below the average six-month LIBOR for the quarter ended June 30, 2016. The Company's average economic cost of funds was 47 basis points above the average one-month LIBOR and 1 basis points below the average six-month LIBOR for the quarter ended June 30, 2016. The average term to maturity of the outstanding repurchase agreements increased from 17 days at December 31, 2015 to 29 days at June 30, 2016.
The tables below present the consolidated average outstanding balances under our repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for the six months ended June 30, 2016 and 2015 and each quarter in 2016 and 2015 on both a GAAP and economic basis.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of
|
|
|
Interest Expense
|
|
|
Average Cost of Funds
|
|
|
|
Repurchase
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Three Months Ended
|
|
Agreements
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
103,259
|
|
|
$
|
174
|
|
|
$
|
234
|
|
|
|
0.67
|
%
|
|
|
0.91
|
%
|
March 31, 2016
|
|
|
90,014
|
|
|
|
127
|
|
|
|
172
|
|
|
|
0.57
|
%
|
|
|
0.77
|
%
|
December 31, 2015
|
|
|
95,456
|
|
|
|
120
|
|
|
|
151
|
|
|
|
0.50
|
%
|
|
|
0.63
|
%
|
September 30, 2015
|
|
|
107,442
|
|
|
|
107
|
|
|
|
127
|
|
|
|
0.40
|
%
|
|
|
0.47
|
%
|
June 30, 2015
|
|
|
103,750
|
|
|
|
98
|
|
|
|
107
|
|
|
|
0.38
|
%
|
|
|
0.41
|
%
|
March 31, 2015
|
|
|
108,129
|
|
|
|
100
|
|
|
|
101
|
|
|
|
0.37
|
%
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of
|
|
|
Interest Expense
|
|
|
Average Cost of Funds
|
|
|
|
Repurchase
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Six Months Ended
|
|
Agreements
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
$
|
96,637
|
|
|
$
|
301
|
|
|
$
|
406
|
|
|
|
0.62
|
%
|
|
|
0.84
|
%
|
June 30, 2015
|
|
|
105,939
|
|
|
|
198
|
|
|
|
208
|
|
|
|
0.37
|
%
|
|
|
0.39
|
%
|
|
|
|
|
|
|
|
|
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
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
December 31, 2015
|
|
|
0.28
|
%
|
|
|
0.65
|
%
|
|
|
0.22
|
%
|
|
|
(0.15
|
)%
|
|
|
0.35
|
%
|
|
|
(0.02
|
)%
|
September 30, 2015
|
|
|
0.19
|
%
|
|
|
0.49
|
%
|
|
|
0.21
|
%
|
|
|
(0.09
|
)%
|
|
|
0.28
|
%
|
|
|
(0.02
|
)%
|
June 30, 2015
|
|
|
0.18
|
%
|
|
|
0.40
|
%
|
|
|
0.20
|
%
|
|
|
(0.02
|
)%
|
|
|
0.23
|
%
|
|
|
0.01
|
%
|
March 31, 2015
|
|
|
0.17
|
%
|
|
|
0.35
|
%
|
|
|
0.20
|
%
|
|
|
0.02
|
%
|
|
|
0.20
|
%
|
|
|
0.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Six Months Ended
|
|
One-Month
|
|
|
Six-Month
|
|
|
LIBOR
|
|
|
LIBOR
|
|
|
LIBOR
|
|
|
LIBOR
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
0.42
|
%
|
|
|
0.88
|
%
|
|
|
0.20
|
%
|
|
|
(0.26
|
)%
|
|
|
0.42
|
%
|
|
|
(0.04
|
)%
|
June 30, 2015
|
|
|
0.18
|
%
|
|
|
0.38
|
%
|
|
|
0.19
|
%
|
|
|
(0.01
|
)%
|
|
|
0.21
|
%
|
|
|
0.01
|
%
|
Junior Subordinated Notes
Interest expense on the Company's junior subordinated debt securities was $0.5 million for each of the six months ended June 30, 2016 and 2015. The average rate of interest paid for the six months ended June 30, 2016 was 4.11% compared to 3.76% for the comparable period in 2015.
Interest expense on the Company's junior subordinated debt securities was $0.3 million and $0.2 million for the three month periods ended June 30, 2016 and 2015, respectively. The average rate of interest paid for the three months ended June 30, 2016 was 4.20% compared to 3.77% for the comparable period in 2015.
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 June 30, 2016, the interest rate was 4.15%.
Gains or Losses and Other Income
The table below presents the Company's gains or losses and other income for the six and three months ended June 30, 2016 and 2015.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
|
|
|
2015
|
|
|
Change
|
|
Realized gains on sales of MBS
|
|
$
|
251
|
|
|
$
|
-
|
|
|
$
|
251
|
|
|
$
|
19
|
|
|
|
|
|
$
|
-
|
|
|
$
|
19
|
|
Unrealized (losses) gains on MBS
|
|
|
(39
|
)
|
|
|
(197
|
)
|
|
|
158
|
|
|
|
249
|
|
|
|
|
|
|
(1,027
|
)
|
|
|
1,276
|
|
Total gains (losses) on MBS
|
|
|
212
|
|
|
|
(197
|
)
|
|
|
409
|
|
|
|
268
|
|
|
|
-
|
|
|
|
(1,027
|
)
|
|
|
1,295
|
|
(Losses) gains on derivative instruments
|
|
|
(2,057
|
)
|
|
|
(1,009
|
)
|
|
|
(1,048
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
6
|
|
|
|
(764
|
)
|
Advisory services
|
|
|
2,543
|
|
|
|
2,382
|
|
|
|
161
|
|
|
|
1,274
|
|
|
|
|
|
|
|
1,287
|
|
|
|
(13
|
)
|
Gains on retained interests
|
|
|
1,080
|
|
|
|
2,539
|
|
|
|
(1,459
|
)
|
|
|
534
|
|
|
|
|
|
|
|
1,053
|
|
|
|
(519
|
)
|
Unrealized gains (losses) on Orchid Island Capital, Inc.
|
|
|
502
|
|
|
|
(1,806
|
)
|
|
|
2,308
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(1,993
|
)
|
|
|
1,881
|
|
Orchid Island Capital, Inc. dividends
|
|
|
1,172
|
|
|
|
1,060
|
|
|
|
112
|
|
|
|
586
|
|
|
|
|
|
|
|
530
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We invest in MBS with the intent to earn net income from the realized yield on those assets over the related funding and hedging costs, and not for purposes 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 six and three months ended June 30, 2016, the Company received proceeds of $41.8 million and $16.0 million from the sales of MBS, respectively. During the six months ended June 30, 2015, the Company did not dispose of any MBS.
The fair value of the Company's MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are sensitive to changes in interest rates. The table below presents historical interest rate data for each quarter end during 2016 and 2015.
|
|
|
|
|
|
|
|
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)
|
|
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
|
%
|
December 31, 2015
|
|
|
1.76
|
%
|
|
|
2.27
|
%
|
|
|
3.21
|
%
|
|
|
3.96
|
%
|
|
|
0.54
|
%
|
September 30, 2015
|
|
|
1.38
|
%
|
|
|
2.06
|
%
|
|
|
3.10
|
%
|
|
|
3.89
|
%
|
|
|
0.33
|
%
|
June 30, 2015
|
|
|
1.63
|
%
|
|
|
2.34
|
%
|
|
|
3.19
|
%
|
|
|
3.98
|
%
|
|
|
0.28
|
%
|
March 31, 2015
|
|
|
1.38
|
%
|
|
|
1.93
|
%
|
|
|
3.04
|
%
|
|
|
3.77
|
%
|
|
|
0.27
|
%
|
(1)
|
Historical 10 Year Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.
|
(2)
|
Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac's Primary Mortgage Market Survey.
|
3)
|
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration Ltd.
|
The retained interests in securitizations represent the residual net interest spread remaining after payments on the notes issued through the securitization. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve), the discount rate used to determine the present value of the residual cash flows and prepayment and loss estimates on the underlying mortgage loans. During the six and three months ended June 30, 2016, the Company recorded gains on retained interests of $1.1 million and $0.5 million, respectively, compared to gains of $2.5 million and $1.1 million, respectively, for the six and three months ended June 30, 2015.
Advisory Services
Advisory services revenue consist of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement.
For the six and three months ended June 30, 2016, the Company's total operating expenses were approximately $2.7 million and $1.4 million, respectively, compared to approximately $6.8 million and $1.8 million for the six and three months ended June 30, 2015, respectively. The table below presents a breakdown of operating expenses for the six and three months ended June 30, 2016 and 2015.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Compensation and benefits
|
|
$
|
1,551
|
|
|
$
|
1,522
|
|
|
$
|
29
|
|
|
$
|
755
|
|
|
$
|
738
|
|
|
$
|
17
|
|
Legal fees
|
|
|
104
|
|
|
|
712
|
|
|
|
(608
|
)
|
|
|
40
|
|
|
|
536
|
|
|
|
(496
|
)
|
Accounting, auditing and other professional fees
|
|
|
191
|
|
|
|
335
|
|
|
|
(144
|
)
|
|
|
98
|
|
|
|
177
|
|
|
|
(79
|
)
|
Directors' fees and liability insurance
|
|
|
311
|
|
|
|
343
|
|
|
|
(32
|
)
|
|
|
156
|
|
|
|
175
|
|
|
|
(19
|
)
|
Settlement of litigation
|
|
|
-
|
|
|
|
3,500
|
|
|
|
(3,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other G&A expenses
|
|
|
567
|
|
|
|
433
|
|
|
|
134
|
|
|
|
305
|
|
|
|
192
|
|
|
|
113
|
|
|
|
$
|
2,724
|
|
|
$
|
6,845
|
|
|
$
|
(4,121
|
)
|
|
$
|
1,354
|
|
|
$
|
1,818
|
|
|
$
|
(464
|
)
|
In May 2015, Bimini Capital agreed to settle a legal action. In connection with the settlement, a loss of $3.5 million was charged to operations for the six months ended June 30, 2015.
Mortgage-Backed Securities
As of June 30, 2016, the Company's MBS portfolio consisted of $110.8 million of agency or government MBS at fair value and had a weighted average coupon of 4.31%. During the six months ended June 30, 2016, the Company received principal repayments of $6.1 million compared to $10.9 million for the comparable period ended June 30, 2015. The average prepayment speeds for the quarters ended June 30, 2016 and 2015 were 12.6% and 15.9%, respectively.
The following table presents the constant prepayment rate ("CPR") experienced on the Company's structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented (including the impact of Orchid for all periods presented prior to Orchid's deconsolidation on December 31, 2014). CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
The increase in prepayments during the three months ended June 30, 2015 was primarily due to the effects of lower residential mortgage rates in the previous quarter.
|
|
|
|
|
Structured
|
|
|
|
|
|
|
PT MBS
|
|
|
MBS
|
|
|
Total
|
|
Three Months Ended
|
|
Portfolio (%)
|
|
|
Portfolio (%)
|
|
|
Portfolio (%)
|
|
June 30, 2016
|
|
|
7.8
|
|
|
|
20.4
|
|
|
|
12.6
|
|
March 31, 2016
|
|
|
11.8
|
|
|
|
16.6
|
|
|
|
14.3
|
|
December 31, 2015
|
|
|
7.9
|
|
|
|
13.7
|
|
|
|
10.4
|
|
September 30, 2015
|
|
|
13.4
|
|
|
|
12.4
|
|
|
|
13.0
|
|
June 30, 2015
|
|
|
16.2
|
|
|
|
15.3
|
|
|
|
15.9
|
|
March 31, 2015
|
|
|
9.6
|
|
|
|
12.3
|
|
|
|
10.5
|
|
The following tables summarize certain characteristics of the Company's PT MBS and structured MBS as of June 30, 2016 and December 31, 2015:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
of
|
|
|
Weighted
|
|
|
Maturity
|
|
|
|
Coupon
|
|
|
Average
|
|
|
Average
|
|
|
|
Fair
|
|
|
Entire
|
|
|
Average
|
|
|
in
|
|
Longest
|
|
Reset in
|
|
|
Lifetime
|
|
|
Periodic
|
|
Asset Category
|
|
Value
|
|
|
Portfolio
|
|
|
Coupon
|
|
|
Months
|
|
Maturity
|
|
Months
|
|
|
Cap
|
|
|
Cap
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate MBS
|
|
$
|
107,751
|
|
|
|
97.2
|
%
|
|
|
4.30
|
%
|
|
|
333
|
|
1-Jul-46
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Hybrid Adjustable Rate MBS
|
|
|
115
|
|
|
|
0.1
|
%
|
|
|
4.00
|
%
|
|
|
307
|
|
20-Jan-42
|
|
|
9.03
|
|
|
|
9.00
|
%
|
|
|
1.00
|
%
|
Total PT MBS
|
|
|
107,866
|
|
|
|
97.3
|
%
|
|
|
4.30
|
%
|
|
|
333
|
|
1-Jul-46
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Interest-Only Securities
|
|
|
1,299
|
|
|
|
1.2
|
%
|
|
|
2.98
|
%
|
|
|
233
|
|
25-Dec-39
|
|
NA
|
|
|
|
n/
|
a
|
|
|
n/
|
a
|
Inverse Interest-Only Securities
|
|
|
1,673
|
|
|
|
1.5
|
%
|
|
|
6.05
|
%
|
|
|
295
|
|
25-Apr-41
|
|
NA
|
|
|
|
6.50
|
%
|
|
|
n/
|
a
|
Total Structured MBS
|
|
|
2,972
|
|
|
|
2.7
|
%
|
|
|
4.71
|
%
|
|
|
268
|
|
25-Apr-41
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total Mortgage Assets
|
|
$
|
110,838
|
|
|
|
100.0
|
%
|
|
|
4.31
|
%
|
|
|
331
|
|
1-Jul-46
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate MBS
|
|
$
|
79,170
|
|
|
|
94.3
|
%
|
|
|
4.26
|
%
|
|
|
313
|
|
1-Sep-45
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Hybrid Adjustable Rate MBS
|
|
|
118
|
|
|
|
0.1
|
%
|
|
|
4.00
|
%
|
|
|
313
|
|
20-Jan-42
|
|
|
15.03
|
|
|
|
9.00
|
%
|
|
|
1.00
|
%
|
Total PT MBS
|
|
|
79,288
|
|
|
|
94.4
|
%
|
|
|
4.26
|
%
|
|
|
313
|
|
1-Sep-45
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Interest-Only Securities
|
|
|
2,554
|
|
|
|
3.0
|
%
|
|
|
3.10
|
%
|
|
|
242
|
|
25-Dec-39
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Inverse Interest-Only Securities
|
|
|
2,146
|
|
|
|
2.6
|
%
|
|
|
6.12
|
%
|
|
|
301
|
|
25-Apr-41
|
|
NA
|
|
|
|
6.53
|
%
|
|
NA
|
|
Total Structured MBS
|
|
|
4,700
|
|
|
|
5.6
|
%
|
|
|
4.48
|
%
|
|
|
269
|
|
25-Apr-41
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total Mortgage Assets
|
|
$
|
83,988
|
|
|
|
100.0
|
%
|
|
|
4.27
|
%
|
|
|
310
|
|
1-Sep-45
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
Agency
|
|
Fair Value
|
|
|
Entire Portfolio
|
|
|
Fair Value
|
|
|
Entire Portfolio
|
|
Fannie Mae
|
|
$
|
81,156
|
|
|
|
73.2
|
%
|
|
$
|
42,065
|
|
|
|
50.1
|
%
|
Freddie Mac
|
|
|
29,184
|
|
|
|
26.3
|
%
|
|
|
40,928
|
|
|
|
48.7
|
%
|
Ginnie Mae
|
|
|
498
|
|
|
|
0.5
|
%
|
|
|
995
|
|
|
|
1.2
|
%
|
Total Portfolio
|
|
$
|
110,838
|
|
|
|
100.0
|
%
|
|
$
|
83,988
|
|
|
|
100.0
|
%
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Weighted Average Pass-through Purchase Price
|
|
$
|
109.42
|
|
|
$
|
107.96
|
|
Weighted Average Structured Purchase Price
|
|
$
|
6.11
|
|
|
$
|
6.11
|
|
Weighted Average Pass-through Current Price
|
|
$
|
110.99
|
|
|
$
|
107.86
|
|
Weighted Average Structured Current Price
|
|
$
|
6.19
|
|
|
$
|
8.45
|
|
Effective Duration
(1)
|
|
|
2.503
|
|
|
|
2.326
|
|
(1)
|
Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 2.503 indicates that an interest rate increase of 1.0% would be expected to cause a 2.503% decrease in the value of the MBS in the Company's investment portfolio at June 30, 2016. An effective duration of 2.326 indicates that an interest rate increase of 1.0% would be expected to cause a 2.326% decrease in the value of the MBS in the Company's investment portfolio at December 31, 2015. These figures include the structured securities in the portfolio but do include the effect of the Company's funding cost hedges.
Effective duration quotes for individual investments are obtained from The Yield Book, Inc.
|
The following table presents a summary of the Company's portfolio assets acquired during the six months ended June 30, 2016 and 2015.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
|
|
Total Cost
|
|
|
Average Price
|
|
|
Weighted Average Yield
|
|
|
Total Cost
|
|
|
Average Price
|
|
|
Weighted Average Yield
|
|
PT MBS
|
|
$
|
74,460
|
|
|
$
|
110.75
|
|
|
|
2.50
|
%
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Structured MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
986
|
|
|
|
8.18
|
|
|
|
10.23
|
%
|
The Company's portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. The Company generally seeks to acquire low duration assets that offer high levels of protection from mortgage prepayments provided they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, 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's 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's investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales.
The duration of the Company's 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's may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIO's similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) cause their price movements - and model duration - to be affected by changes in both prepayments and one month LIBOR - both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying the Company's MBS can alter the timing of the cash flows from the underlying loans to the Company. As a result, the Company gauges 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 the risk that the market value of its PT MBS assets will increase or decrease at different rates than that of its structured MBS or liabilities, including its hedging instruments. Accordingly, the Company assesses its interest rate risk by estimating the duration of its assets and the duration of its liabilities. The Company generally calculates duration and effective duration using various third-party models or obtains 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 June 30, 2016, assuming rates instantaneously fall 100 basis points ("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' 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
|
|
Hybrid Adjustable Rate MBS
|
|
$
|
115
|
|
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
|
|
1.37
|
%
|
|
|
(1.58
|
)%
|
|
|
(2.58
|
)%
|
Fixed Rate MBS
|
|
|
107,751
|
|
|
|
2,097
|
|
|
|
(4,712
|
)
|
|
|
(10,697
|
)
|
|
|
1.95
|
%
|
|
|
(4.37
|
)%
|
|
|
(9.93
|
)%
|
Interest-Only MBS
|
|
|
1,299
|
|
|
|
(545
|
)
|
|
|
590
|
|
|
|
930
|
|
|
|
(41.94
|
)%
|
|
|
45.43
|
%
|
|
|
71.61
|
%
|
Inverse Interest-Only MBS
|
|
|
1,673
|
|
|
|
(237
|
)
|
|
|
22
|
|
|
|
(152
|
)
|
|
|
(14.18
|
)%
|
|
|
1.29
|
%
|
|
|
(9.07
|
)%
|
Total MBS Portfolio
|
|
$
|
110,838
|
|
|
$
|
1,317
|
|
|
$
|
(4,102
|
)
|
|
$
|
(9,922
|
)
|
|
|
1.19
|
%
|
|
|
(3.70
|
)%
|
|
|
(8.95
|
)%
|
($ 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
|
|
$
|
628,000
|
|
|
$
|
(322
|
)
|
|
$
|
1,570
|
|
|
$
|
3,140
|
|
|
|
(0.21
|
)%
|
|
|
1.01
|
%
|
|
|
2.02
|
%
|
Junior Subordinated Debt Hedges
|
|
|
572,000
|
|
|
|
(667
|
)
|
|
|
1,430
|
|
|
|
2,860
|
|
|
|
(0.47
|
)%
|
|
|
1.01
|
%
|
|
|
2.02
|
%
|
|
|
$
|
1,200,000
|
|
|
$
|
(989
|
)
|
|
$
|
3,000
|
|
|
$
|
6,000
|
|
|
|
(0.33
|
)%
|
|
|
1.01
|
%
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Totals
|
|
|
|
|
|
$
|
328
|
|
|
$
|
(1,102
|
)
|
|
$
|
(3,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total cumulative contract/notional amount of Eurodollar futures contracts.
|
In addition to changes in interest rates, other factors impact the fair value of the Company's 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's assets would likely differ from that shown above and such difference might be material and adverse to the Company's stockholders.
Repurchase Agreements
As of June 30, 2016, the Company 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 three of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company. These borrowings are secured by the Company's MBS and cash and bear interest rates that are based on a spread to LIBOR.
As of June 30, 2016, the Company had obligations outstanding under the repurchase agreements of approximately $103.7 million with a net weighted average borrowing cost of 0.69%. The remaining maturity of the Company's outstanding repurchase agreement obligations ranged from 11 to 77 days, with a weighted average maturity of 29 days. Securing the repurchase agreement obligation as of June 30, 2016 are MBS with an estimated fair value, including accrued interest and receivable for securities sold, of $109.7 million and a weighted average maturity of 334 months. Through August 10, 2016, the Company has been able to maintain its repurchase facilities with comparable terms to those that existed at June 30, 2016 with maturities through October 25, 2016.
The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 2016 and 2015.
($ in thousands)
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Difference Between Ending
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Ending Balance
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|
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Average Balance
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|
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Repurchase Agreements and
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of Repurchase
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|
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of Repurchase
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|
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Average Repurchase Agreements
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Three Months Ended
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Agreements
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Agreements
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Amount
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Percent
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|
June 30, 2016
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$
|
103,725
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|
|
$
|
103,259
|
|
|
$
|
466
|
|
|
|
0.45
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%
|
March 31, 2016
|
|
|
102,794
|
|
|
|
90,014
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|
|
|
12,780
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|
|
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14.20
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%
(1)
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December 31, 2015
|
|
|
77,234
|
|
|
|
95,456
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|
|
|
(18,222
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)
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|
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(19.09
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)%
(2)
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September 30, 2015
|
|
|
113,677
|
|
|
|
107,442
|
|
|
|
6,235
|
|
|
|
5.80
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%
|
June 30, 2015
|
|
|
101,206
|
|
|
|
103,750
|
|
|
|
(2,544
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)
|
|
|
(2.45
|
)%
|
March 31, 2015
|
|
|
106,294
|
|
|
|
108,129
|
|
|
|
(1,835
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)
|
|
|
(1.70
|
)%
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(1)
|
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.
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(2)
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The lower ending balance relative to the average balance during the quarter ended December 31, 2015 reflects the repositioning of the portfolio. During the quarter ended December 31, 2015, the Company's investment in PT MBS decreased $38.6 million.
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Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. Our principal immediate sources of liquidity include cash balances, unencumbered assets, the availability to borrow under repurchase agreements, and fees and dividends received from Orchid. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio, and from cash flows received from the retained interests and the collection of servicing advances. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing MBS portfolio, (b) the repayments on borrowings, (c) the payment of overhead and operating expenses, and (d) the payment of other accrued obligations.
Our strategy for hedging our funding costs typically involves taking short positions in Eurodollar futures, T-Note futures, swaptions or other instruments. Since inception we have primarily used short positions in Eurodollar futures. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis.
As discussed above, the Company invests a portion of its capital in structured MBS. We do not apply leverage to this portion of our portfolio. The leverage inherent in the structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured MBS strategy has been a core element of the Company's overall investment strategy since 2008. However, we have and may continue to pledge a portion of our structured MBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.
In future periods we expect to continue to finance our activities through repurchase agreements. As of June 30, 2016, the Company had cash and cash equivalents of $3.9 million. We generated cash flows of $7.8 million from principal and interest payments on our MBS portfolio and $0.8 million from retained interests and had average repurchase agreements outstanding of $96.6 million during the six months ended June 30, 2016. In addition, during the six months ended June 30, 2016, the Company received approximately $2.6 million in management fees and expense reimbursements as manager of Orchid and approximately $1.2 million in dividends from its investment in Orchid common shares.
In May 2015, Bimini Capital agreed to settle a legal action. A loss of $3.5 million has been charged to operations for the six months ended June 30, 2015 related to this settlement. Although payments under the settlement agreement will reduce the Company's liquidity, management believes that the Company will be able to generate sufficient cash from its operations to meet the remaining payment obligations as they come due.
The table below summarizes the effect that certain future contractual obligations existing as of June 30, 2016 will have on our liquidity and cash flows.
(in thousands)
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|
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|
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Obligations Maturing
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|
|
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Within One Year
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One to Three Years
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|
Three to Five Years
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More than Five Years
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|
Total
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|
Repurchase agreements
|
|
$
|
103,725
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|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103,725
|
|
Interest expense on repurchase agreements
(1)
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|
|
125
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
Junior subordinated notes
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,000
|
|
|
|
26,000
|
|
Interest expense on junior subordinated notes
(1)
|
|
|
1,143
|
|
|
|
2,189
|
|
|
|
2,192
|
|
|
|
15,838
|
|
|
|
21,362
|
|
Litigation settlement
|
|
|
250
|
|
|
|
500
|
|
|
|
250
|
|
|
|
-
|
|
|
|
1,000
|
|
Totals
|
|
$
|
105,243
|
|
|
$
|
2,689
|
|
|
$
|
2,442
|
|
|
$
|
41,838
|
|
|
$
|
152,212
|
|
(1)
|
Interest expense on repurchase agreements and junior subordinated notes are based on current interest rates as of June 30, 2016 and the remaining term of liabilities existing at that date.
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(2)
|
The Company holds a common equity interest in Bimini Capital Trust II. The amount presented represents the net cash outlay of the Company.
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Outlook
Orchid Island Capital Inc.
To the extent Orchid is able to increase its capital base over time, we will benefit via increased management fees. In addition, Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid'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 of Directors of Orchid has the ability to terminate the management agreement and thus end our ability to collect management fees and share overhead costs. Should Orchid terminate the management agreement without cause, it will pay us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the initial term or automatic renewal term.
Tax Matters
Bimini Capital was taxed as a REIT under the Code until December 31, 2014. Certain trends and events experienced during 2015 caused Bimini Capital to no longer meet the Code's rules and regulations to be taxed as a REIT, effective January 1, 2015. In particular, additional offerings of common stock by Orchid in 2015 increased revenue attributable to management fees received from Orchid by Bimini Advisors. In addition, payments that have been and will be made by Bimini Capital pursuant to a litigation settlement agreement entered into in 2015 reduced and may continue to reduce the value of Bimini Capital's assets and revenues generated by our MBS portfolio. Consequently, the aggregate value of our two TRSs (MortCo and Bimini Advisors) increased in relation to the value of Bimini Capital's assets to a level that exceeds the limits permitted under the Code.
The termination of our REIT status subjects Bimini Capital's taxable income to federal and state corporate income taxes at regular corporate rates. However, Bimini Capital and its subsidiaries have NOL carryforwards that, subject to various expiration dates, are available to offset taxable income. Under our current ownership structure, the NOL carryforwards of each entity may generally be applied only to offset the taxable income of that entity. However, management is implementing certain internal restructuring transactions that would maximize our ability to utilize the existing federal NOL carryforwards.
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. We currently provide a valuation allowance for a portion of the deferred tax assets. The valuation allowance relates primarily to the ability to utilize the NOL carryforwards of MortCo in future periods and is based on management's estimated projections of future taxable income.
In addition, the termination of our REIT status eliminated the income, asset, distribution, and stock ownership requirements applicable to REITs, which provides us with more flexibility in executing our business strategy. Specifically, because we are no longer required to derive a significant portion of our income from mortgage or other real estate related investments, we have greater flexibility to invest in other types of assets as part of our principal investing activity, subject to maintaining compliance with our exclusion from regulation as an investment company under the Investment Company Act. In addition, because we no longer are subject to the REIT distribution requirement, we have greater flexibility to retain our earnings to fund future growth.
Interest Rates
The second quarter of 2016 was in many respects a continuation of market developments seen in the first quarter. At the conclusion of the Federal Reserve Open Market Committee meeting in late April, the committee released a statement that was perceived to be dovish by the market. The committee was seen to be backing away from earlier calls for two to three rate increases in 2016 and more concerned with market turmoil and events abroad. However, the market reaction was apparently stronger than the committee expected. The committee once again reversed their tone in May, and several governors and committee members returned to their data dependent focus in their public comments – appearing to try to talk the market back into expecting further policy normalization. This seemed to make sense as the incoming economic data improved and events overseas moderated. Just as the market was starting to price in a meaningful probability of a rate hike in June, the May non-farm payroll data was released in early June. The lone stalwart of the expansion, job growth, appeared to slow dramatically. The market was taken by surprise by the magnitude of the slowdown in job creation. Once again the market reversed course, and the futures market priced out most policy adjustments for the balance of the year. Later in the month the Federal Reserve conducted their scheduled meeting, and at the press conference Chair Yellen stressed the committee would be even more patient in normalizing rates and needed to see more data on the employment front to determine if the June report was the start of a new trend or an aberration. The chair also cited the pending referendum in the United Kingdom ("UK") the following week regarding the potential exit of the UK from the European Union ("EU"), referred to as "Brexit", as another reason for patience. The following week the market was stunned when voters in the UK voted in favor of the referendum and opted to leave the EU, albeit the process could take up to two years. The initial market reaction was violent, and the futures market priced in a small probability of an easing of monetary policy by the Fed in the months ahead. The second quarter ended with rates, particularly longer term rates, at or near all-time lows. In early July Germany issued 10 year bunds with a negative yield for the first time.
This made for a volatile market as expectations for the path of the economy, Federal Reserve monetary policy and the status of the EU changed violently and often over the course of the quarter. This has abated substantially in the third quarter. The impact on the mortgage market was to push spreads wider and heighten prepayment fears. As we move further into the third quarter the market has improved. The economic data, starting with the June non-farm payroll report on July 8th, and again on August 5, 2016 when the July report was issued, strengthened and the June report appears to have been an aberration. The balance of the economic data since – at least data pertaining to the consumer and consumer spending - has been strong and the economy appears to be well on its way to recovering from a slowdown in the first quarter. Gross domestic product growth was less than 1% in the first quarter of 2016, and growth in the second quarter appears to have been slightly over 1%, based on the advanced reading released on July 29th, 2016. Secondly, the fall-out from the "Brexit" as it was dubbed appears to have been minimal. Since the event in late June, the European Central Bank has held a meeting and opted to maintain their current monetary policy as they wait to further assess the impact, if any, from the referendum. The Bank of England announced significant steps recently, involving both a reduction in rates as well as a substantial increase in asset purchases by the central bank. The markets have reacted accordingly as equities, both domestically and in Europe, have returned to levels seen before the vote, and in some cases higher. Interest rates have moved off the extreme lows seen immediately after the vote but have yet to reach pre-Brexit levels, as is the case with the British Pound. Mortgages have tightened, although still trade at slightly wider levels than those seen before the vote. Importantly for most mortgage investors, primary mortgage rates did not react meaningfully to the sharp rally in rates as originators appear to be unable or unwilling to lower rates available to borrowers as much as the move in benchmark rates would suggest. Given the turn in economic data the front end of the curve, and funding levels, have stabilized and are in fact higher than before the UK referendum. This has likely kept originators from lowering primary rates as their margins would just be squeezed further if they lowered rates to borrowers.
When and if the Fed does resume its tightening cycle and raises short term interest rates, a higher cost of capital for the Company could, in the longer-term, lead to narrowing net interest margins and lower yields on existing Agency MBS. Home sales and new single-family home construction remain relatively slow due, in part, to mortgage lending rules implemented under the Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and bank conservatism in efforts to, among other things, prevent future MBS repurchase requests. These factors have created a shortage of mortgage origination, resulting in low Agency MBS issuance. The Fed's purchases of Agency MBS through reinvesting principal and interest payments it receives on its existing Agency MBS portfolio have continued to dominate the Agency MBS markets, where many participants perceive a lack of liquidity. The Fed's purchases have contributed to strong Agency MBS demand and limited new investment opportunities. While the Fed has not indicated when it will cease or reduce its Agency MBS purchases by reinvesting principal and interest payments, private banks have less incentive to purchase Freddie Mac and Fannie Mae MBS, as the Basel III liquidity coverage ratio rules provide lower quality liquid asset credit for such securities on their balance sheets than for cash, U.S. Treasuries and MBS issued by Ginnie Mae.
Our portfolio positioning is therefore unlikely to change materially over the course of the year. We will continue to closely monitor the developments in the market and may seek to re-align our strategy as we evaluate the opportunities across the spectrum in the mortgage industry and other types of assets in a continuing effort to seek the highest risk-adjusted returns for our capital.
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, 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, prepayment proceeds may not be able to be 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 yields earned on those assets, which would increase our net income.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency MBS with shorter durations, such as short-term fixed and floating rate CMOs. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than pass-through Agency MBS, particularly pass-through Agency MBS backed by fixed-rate mortgages.
We do not believe our investment portfolio will be materially affected by loan modification programs because Agency MBS backed by loans that would qualify for such programs (e.g., seriously delinquent loans) will be purchased by Fannie Mae and Freddie Mac at their par value prior to the implementation of such programs. However, if Fannie Mae and Freddie Mac were to modify or end their repurchase programs or if the U.S. Government modified its loan modification programs to modify non-delinquent mortgage loans, our investment portfolio could be negatively impacted.
Effects on our borrowing costs
We leverage our pass-through Agency 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 Federal Funds Rate and LIBOR. An increase in the U.S. Federal Funds Rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency 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.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which effectively convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar and T-Note futures contracts or interest rate swaptions.
Summary
Over the past quarter the spread between short and long-term interest rates remained volatile as the market reacted to economic data and changing views on future rate hikes by the Federal Reserve. This has marginally affected our net interest margin as spreads between Agency MBS and benchmark interest rates widened during the early stages of the first quarter before tightening during the second quarter. Prepayment rates have increased as longer term rates declined during the second quarter and, to the extent prepayment rates remain elevated, this could put pressure on our net interest margin. The markets' perception of the timing of Federal Reserve increases in interest rates and the growth prospects for the global economy have changed more than once during 2016. Accordingly, economic data, as it is released, continues to have a significant impact in shaping market expectations. These developments are very important to our results as increases in the Federal Funds Rate and LIBOR could significantly increase our financing costs, which could lower our net interest margin.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our consolidated financial statements. These 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 consolidated financial statements.
GAAP requires the Company's management to make complex and subjective decisions and assessments. The Company's most critical accounting policies involve decisions and assessments which could significantly affect reported assets and liabilities, as well as reported revenues and expenses. The Company believes that all of the decisions and assessments upon which its financial statements are based were reasonable at the time made based upon information available to it at that time. There have been no changes to our critical accounting policies as discussed in our annual report on Form 10-K for the year ended December 31, 2015.
Capital Expenditures
At June 30, 2016, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At June 30, 2016, we did not have any off-balance sheet arrangements.
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.