(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Realized gains (losses) on sales of MBS
|
|
$
|
180
|
|
|
$
|
(2
|
)
|
|
$
|
182
|
|
|
$
|
(71
|
)
|
|
$
|
(2
|
)
|
|
$
|
(69
|
)
|
Unrealized losses on MBS
|
|
|
(313
|
)
|
|
|
(911
|
)
|
|
|
598
|
|
|
|
(274
|
)
|
|
|
(713
|
)
|
|
|
439
|
|
Total losses on MBS
|
|
|
(133
|
)
|
|
|
(913
|
)
|
|
|
780
|
|
|
|
(345
|
)
|
|
|
(715
|
)
|
|
|
370
|
|
(Losses) gains on derivative instruments
|
|
|
(1,550
|
)
|
|
|
(2,000
|
)
|
|
|
450
|
|
|
|
508
|
|
|
|
(991
|
)
|
|
|
1,499
|
|
Advisory services
|
|
|
3,931
|
|
|
|
3,703
|
|
|
|
228
|
|
|
|
1,388
|
|
|
|
1,320
|
|
|
|
68
|
|
Gains on retained interests
|
|
|
2,100
|
|
|
|
2,739
|
|
|
|
(639
|
)
|
|
|
1,021
|
|
|
|
201
|
|
|
|
820
|
|
Unrealized gains (losses) on Orchid Island Capital, Inc.
|
|
|
684
|
|
|
|
(3,730
|
)
|
|
|
4,414
|
|
|
|
181
|
|
|
|
(1,924
|
)
|
|
|
2,105
|
|
Orchid Island Capital, Inc. dividends
|
|
|
1,758
|
|
|
|
1,472
|
|
|
|
286
|
|
|
|
586
|
|
|
|
412
|
|
|
|
174
|
|
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 nine and three months ended September 30, 2016, the Company received proceeds of $73.1 million and $31.3 million from the sales of MBS, respectively. During the nine and three months ended September 30, 2015, the Company received proceeds of $4.3 million from the sales of 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)
|
|
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
|
%
|
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 nine and three months ended September 30, 2016, the Company recorded gains on retained interests of $2.1 million and $1.0 million, respectively, compared to gains of $2.7 million and $0.2 million, respectively, for the nine and three months ended September 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 nine and three months ended September 30, 2016, the Company's total operating expenses were approximately $4.1 million and $1.4 million, respectively, compared to approximately $8.2 million and $1.3 million for the nine and three months ended September 30, 2015, respectively. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2016 and 2015.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Compensation and benefits
|
|
$
|
2,274
|
|
|
$
|
2,237
|
|
|
$
|
37
|
|
|
$
|
723
|
|
|
$
|
715
|
|
|
$
|
8
|
|
Legal fees
|
|
|
144
|
|
|
|
845
|
|
|
|
(701
|
)
|
|
|
40
|
|
|
|
133
|
|
|
|
(93
|
)
|
Accounting, auditing and other professional fees
|
|
|
308
|
|
|
|
437
|
|
|
|
(129
|
)
|
|
|
118
|
|
|
|
102
|
|
|
|
16
|
|
Directors' fees and liability insurance
|
|
|
467
|
|
|
|
514
|
|
|
|
(47
|
)
|
|
|
155
|
|
|
|
172
|
|
|
|
(17
|
)
|
Settlement of litigation
|
|
|
-
|
|
|
|
3,500
|
|
|
|
(3,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other G&A expenses
|
|
|
888
|
|
|
|
657
|
|
|
|
231
|
|
|
|
321
|
|
|
|
222
|
|
|
|
99
|
|
|
|
$
|
4,081
|
|
|
$
|
8,190
|
|
|
$
|
(4,109
|
)
|
|
$
|
1,357
|
|
|
$
|
1,344
|
|
|
$
|
13
|
|
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 nine months ended September 30, 2015.
Mortgage-Backed Securities
As of September 30, 2016, the Company's MBS portfolio consisted of $133.6 million of agency or government MBS at fair value and had a weighted average coupon of 4.25%. During the nine months ended September 30, 2016, the Company received principal repayments of $10.3 million compared to $15.9 million for the comparable period ended September 30, 2015. The average prepayment speeds for the quarters ended September 30, 2016 and 2015 were 13.6% and 13.0%, respectively.
The following table presents the constant prepayment rate ("CPR") experienced on the Company's structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
The increase in prepayments during the three months ended June 30, 2015 was primarily due to the effects of lower residential mortgage rates in the previous quarter.
|
|
|
|
|
Structured
|
|
|
|
|
|
|
PT MBS
|
|
|
MBS
|
|
|
Total
|
|
Three Months Ended
|
|
Portfolio (%)
|
|
|
Portfolio (%)
|
|
|
Portfolio (%)
|
|
September 30, 2016
|
|
|
9.4
|
|
|
|
19.7
|
|
|
|
13.6
|
|
June 30, 2016
|
|
|
7.8
|
|
|
|
20.4
|
|
|
|
12.6
|
|
March 31, 2016
|
|
|
11.8
|
|
|
|
16.6
|
|
|
|
14.3
|
|
December 31, 2015
|
|
|
7.9
|
|
|
|
13.7
|
|
|
|
10.4
|
|
September 30, 2015
|
|
|
13.4
|
|
|
|
12.4
|
|
|
|
13.0
|
|
June 30, 2015
|
|
|
16.2
|
|
|
|
15.3
|
|
|
|
15.9
|
|
March 31, 2015
|
|
|
9.6
|
|
|
|
12.3
|
|
|
|
10.5
|
|
The following tables summarize certain characteristics of the Company's PT MBS and structured MBS as of September 30, 2016 and December 31, 2015:
($ 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
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate MBS
|
|
$
|
130,955
|
|
|
|
98.0
|
%
|
|
|
4.24
|
%
|
|
|
350
|
|
1-Oct-46
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total PT MBS
|
|
|
130,955
|
|
|
|
98.0
|
%
|
|
|
4.24
|
%
|
|
|
350
|
|
1-Oct-46
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Interest-Only Securities
|
|
|
1,120
|
|
|
|
0.9
|
%
|
|
|
2.98
|
%
|
|
|
226
|
|
25-Dec-39
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Inverse Interest-Only Securities
|
|
|
1,527
|
|
|
|
1.1
|
%
|
|
|
6.02
|
%
|
|
|
293
|
|
25-Apr-41
|
|
NA
|
|
|
|
6.54
|
%
|
|
NA
|
|
Total Structured MBS
|
|
|
2,647
|
|
|
|
2.0
|
%
|
|
|
4.73
|
%
|
|
|
264
|
|
25-Apr-41
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
Total Mortgage Assets
|
|
$
|
133,602
|
|
|
|
100.0
|
%
|
|
|
4.25
|
%
|
|
|
348
|
|
1-Oct-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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
Agency
|
|
Fair Value
|
|
|
Entire Portfolio
|
|
|
Fair Value
|
|
|
Entire Portfolio
|
|
Fannie Mae
|
|
$
|
123,322
|
|
|
|
92.3
|
%
|
|
$
|
42,065
|
|
|
|
50.1
|
%
|
Freddie Mac
|
|
|
9,990
|
|
|
|
7.5
|
%
|
|
|
40,928
|
|
|
|
48.7
|
%
|
Ginnie Mae
|
|
|
290
|
|
|
|
0.2
|
%
|
|
|
995
|
|
|
|
1.2
|
%
|
Total Portfolio
|
|
$
|
133,602
|
|
|
|
100.0
|
%
|
|
$
|
83,988
|
|
|
|
100.0
|
%
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Weighted Average Pass-through Purchase Price
|
|
$
|
110.31
|
|
|
$
|
107.96
|
|
Weighted Average Structured Purchase Price
|
|
$
|
5.91
|
|
|
$
|
6.11
|
|
Weighted Average Pass-through Current Price
|
|
$
|
110.92
|
|
|
$
|
107.86
|
|
Weighted Average Structured Current Price
|
|
$
|
6.00
|
|
|
$
|
8.45
|
|
Effective Duration
(1)
|
|
|
2.927
|
|
|
|
2.326
|
|
(1)
|
Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 2.927 indicates that an interest rate increase of 1.0% would be expected to cause a 2.927% decrease in the value of the MBS in the Company's investment portfolio at September 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 nine months ended September 30, 2016 and 2015.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
|
Total Cost
|
|
|
Average Price
|
|
|
Weighted Average Yield
|
|
|
Total Cost
|
|
|
Average Price
|
|
|
Weighted Average Yield
|
|
PT MBS
|
|
$
|
133,100
|
|
|
$
|
110.31
|
|
|
|
2.42
|
%
|
|
$
|
25,410
|
|
|
$
|
109.45
|
|
|
|
2.49
|
%
|
Structured MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
987
|
|
|
|
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 September 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
|
|
Fixed Rate MBS
|
|
|
130,955
|
|
|
|
2,973
|
|
|
|
(6,118
|
)
|
|
|
(13,903
|
)
|
|
|
2.27
|
%
|
|
|
(4.67
|
)%
|
|
|
(10.62
|
)%
|
Interest-Only MBS
|
|
|
1,120
|
|
|
|
(455
|
)
|
|
|
434
|
|
|
|
690
|
|
|
|
(40.68
|
)%
|
|
|
38.80
|
%
|
|
|
61.64
|
%
|
Inverse Interest-Only MBS
|
|
|
1,527
|
|
|
|
(227
|
)
|
|
|
28
|
|
|
|
(142
|
)
|
|
|
(14.85
|
)%
|
|
|
1.82
|
%
|
|
|
(9.31
|
)%
|
Total MBS Portfolio
|
|
$
|
133,602
|
|
|
$
|
2,291
|
|
|
$
|
(5,656
|
)
|
|
$
|
(13,355
|
)
|
|
|
1.71
|
%
|
|
|
(4.23
|
)%
|
|
|
(10.00
|
)%
|
($ 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
|
|
$
|
572,000
|
|
|
$
|
(335
|
)
|
|
$
|
1,430
|
|
|
$
|
2,860
|
|
|
|
(0.24
|
)%
|
|
|
1.01
|
%
|
|
|
2.02
|
%
|
Junior Subordinated Debt Hedges
|
|
|
546,000
|
|
|
|
(567
|
)
|
|
|
1,365
|
|
|
|
2,730
|
|
|
|
(0.42
|
)%
|
|
|
1.01
|
%
|
|
|
2.03
|
%
|
|
|
$
|
1,118,000
|
|
|
$
|
(902
|
)
|
|
$
|
2,795
|
|
|
$
|
5,590
|
|
|
|
(0.33
|
)%
|
|
|
1.01
|
%
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Totals
|
|
|
|
|
|
$
|
1,389
|
|
|
$
|
(2,861
|
)
|
|
$
|
(7,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 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.
As of September 30, 2016, the Company had obligations outstanding under the repurchase agreements of approximately $126.0 million with a net weighted average borrowing cost of 0.74%. The remaining maturity of the Company's outstanding repurchase agreement obligations ranged from 11 to 59 days, with a weighted average maturity of 23 days. Securing the repurchase agreement obligation as of September 30, 2016 are MBS with an estimated fair value, including accrued interest and receivable for securities sold, of $133.5 million and a weighted average maturity of 349 months. Through November 9, 2016, the Company has been able to maintain its repurchase facilities with comparable terms to those that existed at September 30, 2016 with maturities through January 23, 2017.
The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 2016 and 2015.
($ 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, 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
|
%
(1)
|
December 31, 2015
|
|
|
77,234
|
|
|
|
95,456
|
|
|
|
(18,222
|
)
|
|
|
(19.09
|
)%
(2)
|
September 30, 2015
|
|
|
113,677
|
|
|
|
107,442
|
|
|
|
6,235
|
|
|
|
5.80
|
%
|
June 30, 2015
|
|
|
101,206
|
|
|
|
103,750
|
|
|
|
(2,544
|
)
|
|
|
(2.45
|
)%
|
March 31, 2015
|
|
|
106,294
|
|
|
|
108,129
|
|
|
|
(1,835
|
)
|
|
|
(1.70
|
)%
|
(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.
|
(2)
|
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.
|
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 September 30, 2016, the Company had cash and cash equivalents of $5.6 million. We generated cash flows of $13.1 million from principal and interest payments on our MBS portfolio and $1.8 million from retained interests and had average repurchase agreements outstanding of $102.7 million during the nine months ended September 30, 2016. In addition, during the nine months ended September 30, 2016, the Company received approximately $3.9 million in management fees and expense reimbursements as manager of Orchid and approximately $1.8 million in dividends from its investment in Orchid common shares.
In May 2015, Bimini Capital settled a legal action. A loss of $3.5 million was charged to operations for the nine months ended September 30, 2015. Although the remaining payments $750,000 due 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 September 30, 2016 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
|
|
$
|
125,991
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
125,991
|
|
Interest expense on repurchase agreements
(1)
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
Junior subordinated notes
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,000
|
|
|
|
26,000
|
|
Interest expense on junior subordinated notes
(1)
|
|
|
1,197
|
|
|
|
2,294
|
|
|
|
2,297
|
|
|
|
16,303
|
|
|
|
22,091
|
|
Litigation settlement
|
|
|
250
|
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
750
|
|
Totals
|
|
$
|
127,541
|
|
|
$
|
2,794
|
|
|
$
|
2,297
|
|
|
$
|
42,303
|
|
|
$
|
174,935
|
|
(1)
|
Interest expense on repurchase agreements and junior subordinated notes are based on current interest rates as of September 30, 2016 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 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 current 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 (Royal Palm 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 Royal Palm 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 economic trends in place over the course of the first and second quarters of 2016 reversed in the third quarter and into the fourth. The broadest measure of economic growth in the United States, gross domestic product, or "GDP", appears to have rebounded back to around 2%, the level widely considered to be at or slightly above trend growth in the United States since the Great Recession. Interest rates, after falling precipitously early in the year and again after passage of the referendum in the United Kingdom known as "Brexit", have since stabilized and, earlier this month, moved back above levels seen just before the Brexit vote on June 23, 2016. In fact, the yield on the 10 year US Treasury reached an all-time low yield shortly after the Brexit vote. However, while the slow growth witnessed in the US over the first half of the year has ended, economic growth is by no means robust. Many of the drags on growth, predominantly in the manufacturing and energy sectors, have stabilized but have not recovered meaningfully. The strongest sectors of the economy, the housing, consumer and labor markets, continue to perform relatively well and drive economic growth. However, the net of all this activity appears to be modest growth accompanied by increasing, but not excessive inflation. These conditions should allow the Federal Reserve (the "Fed") to remove accommodation at a very gradual pace. To wit, the market now expects the Fed to raise rates before year-end, probably at its December meeting. Public comments by various Fed governors and committee members have been consistent in supporting this expectation. Assuming incoming economic data remains supportive and financial conditions do not deteriorate, we expect the Fed to move rates higher by 25 basis points ("bps") at its December meeting. Nonetheless, it is equally likely, in the eyes of the most market participants, that the Fed will not raise rates aggressively in 2017 and beyond. Public comments by the Fed officials described above are also consistent with this expectation. Accordingly, we expect the level of the U.S. Federal Funds rate ("Fed Funds"), and funding levels generally, only to move modestly higher over the next few years.
With this backdrop in the economy and rates market, the mortgage market has performed well over the course of the third quarter of 2016. From a price perspective, the slight increase in rates over the course of the third quarter – the US treasury curve flattened modestly as two year yields increased by approximately 17.5 bps while the ten year treasury yields increased by approximately 12.5 bps – coupled with expectations that prepayment speeds would moderate, enabled 30 year fixed rate mortgages to tighten in spread to comparable duration treasuries. In fact, with rates up, prices of 30 year fixed rate 3% through 4.5% securities increased. The same is true of higher coupon 15 year, fixed rate securities, although to a lesser extent. From a prepayment perspective, speeds accelerated into the late summer post-Brexit and appear to have peaked in August, based on the report issued in early September. However, speeds moderated only modestly in September – based on the report issued in early October. Going forward the combination of higher rates – the MBA survey rate issued on October 20, 2016 was the highest since just before the Brexit vote – coupled with the seasonal slowdown in prepayments should cause prepayment rates to decrease further. This in turn should be supportive of mortgage valuations. In addition, the Fed appears intent on continuing the reinvestment of pay-downs on its MBS holdings, and banks, particularly large banks, continue to add to their MBS holdings, both in securitized and whole-loan form. Both of these trends are supportive of mortgage valuations as well. A potential pitfall would be if the Fed, in an effort to steepen the curve, terminated, or significantly reduced, its reinvestment of pay-downs. Governor Eric Rosengren of the Boston Fed recently hinted at this possibility, although Fed leadership, Chair Yellen, Vice Chair Fischer and NY Fed governor Dudley, have not.
A second consideration for mortgage valuations is pay-up premiums on call-protected securities. Orchid has a significant allocation of its portfolio in these securities. In spite of the increase in rates during the third quarter, and continuing into the fourth quarter, such pay-up premiums remain elevated, consistent with prepayment speeds. Going forward, if prepayment speeds moderate further, call-protected security pay-up premiums could diminish. The Company has reduced exposure to such securities gradually over the course of the third quarter and to date in the fourth quarter, while weighing the potential risks of continued pay-up premium erosion versus the need for prepayment protection as speeds have moderated only modestly so far.
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 Fed Funds Rate and LIBOR. An increase in the Fed 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, volatility in the rates market moderated and financial conditions stabilized, particularly as fears over the UK Brexit Referendum appear to have been over-done, at least for the short to medium term. As interest rates stopped decreasing and eventually increased slightly during the third quarter, mortgage securities performed well, especially higher coupon, fixed rate securities. These developments have positively affected our book value as the spread between Agency MBS and benchmark interest rates narrowed during the third quarter. Prepayment rates increased during the third quarter as longer term rates declined during the second quarter and early third quarter, but have since begun to moderate. The markets' expectations of the timing of Fed increases in interest rates have coalesced around a 25 bps hike at the December Federal Open Market Committee meeting. Nonetheless, economic data, as it is released, will continue to have a significant impact in shaping market expectations. These developments are very important to our results as increases in the Fed Funds Rate and LIBOR could 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 September 30, 2016, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At September 30, 2016, 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.
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"), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company and its 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 its periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC's rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.
There have been no material changes from the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K filed with the SEC on March 22, 2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No
3.1
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Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company's Form S-11/A, filed with the SEC on April 29, 2004
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3.2
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Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
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3.3
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Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
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3.4
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Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
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3.5
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Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
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31.1
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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*
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31.2
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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*
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32.1
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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**
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32.2
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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**
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101.INS
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Instance Document***
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101.SCH
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Taxonomy Extension Schema Document***
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101.CAL
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Taxonomy Extension Calculation Linkbase Document***
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101.DEF
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Additional Taxonomy Extension Definition Linkbase Document***
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101.LAB
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Taxonomy Extension Label Linkbase Document***
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101.PRE
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Taxonomy Extension Presentation Linkbase Document***
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***
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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 9, 2016
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By:
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/s/ Robert E. Cauley
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Robert E. Cauley
Chairman and Chief Executive Officer
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Date:
November 9, 2016
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By:
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/s/ G. Hunter Haas, IV
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G. Hunter Haas, IV
President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
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