UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10‑Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number:  001-32171

Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 
       
Maryland
 
72-1571637
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 

3305 Flamingo Drive, Vero Beach, Florida 32963
(Address of principal executive offices) (Zip Code)

(772) 231-1400
(Registrant's telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
       
Large accelerated filer
Accelerated filer
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No ý


Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
November 3, 2017
12,631,627
Class B Common Stock, $0.001 par value
November 3, 2017
31,938
Class C Common Stock, $0.001 par value
November 3, 2017
31,938

BIMINI CAPITAL MANAGEMENT, INC.

TABLE OF CONTENTS


   
Page
 
       
PART I. FINANCIAL INFORMATION
 
       
ITEM 1. Condensed Financial Statements
   
1
 
Condensed Consolidated Balance Sheets (unaudited)
   
1
 
Condensed Consolidated Statements of Operations (unaudited)
   
2
 
Condensed Consolidated Statement of Stockholders' Equity (unaudited)
   
3
 
Condensed Consolidated Statements of Cash Flows (unaudited)
   
4
 
Notes to Condensed Consolidated Financial Statements
   
5
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
   
24
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
43
 
ITEM 4. Controls and Procedures
   
44
 
         
PART II. OTHER INFORMATION
 
         
ITEM 1. Legal Proceedings
   
45
 
ITEM 1A. Risk Factors
   
45
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
45
 
ITEM 3. Defaults Upon Senior Securities
   
45
 
ITEM 4. Mine Safety Disclosures
   
45
 
ITEM 5. Other Information
   
45
 
ITEM 6. Exhibits
   
46
 
SIGNATURES
   
47
 

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

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

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

 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Nine Months Ended September 30, 2017 and 2016
 
             
   
2017
   
2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
1,936,380
   
$
2,226,926
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Stock based compensation
   
21,515
     
217,206
 
Depreciation
   
57,903
     
64,780
 
Deferred income tax provision
   
1,200,403
     
1,891,268
 
Losses on mortgage-backed securities, net
   
296,691
     
133,320
 
Gains on retained interests in securitizations
   
(389,568
)
   
(2,100,367
)
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
   
823,308
     
(683,568
)
Changes in operating assets and liabilities:
               
Accrued interest receivable
   
(198,270
)
   
(136,360
)
Other assets
   
20,445
     
(226,813
)
Accrued interest payable
   
133,397
     
12,000
 
Other liabilities
   
(678,809
)
   
(879,328
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
3,223,395
     
519,064
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
   
(77,294,851
)
   
(133,099,987
)
Sales
   
1,654,834
     
73,061,443
 
Principal repayments
   
7,654,912
     
10,291,945
 
Payments received on retained interests in securitizations
   
945,645
     
1,758,303
 
Purchases of property and equipment
   
(29,379
)
   
-
 
Purchases of Orchid Island Capital, Inc. common stock
   
(1,204,235
)
   
(1,859,277
)
NET CASH USED IN INVESTING ACTIVITIES
   
(68,273,074
)
   
(49,847,573
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
   
762,398,624
     
712,324,734
 
Principal repayments on repurchase agreements
   
(696,852,430
)
   
(663,567,951
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
65,546,194
     
48,756,783
 
                 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
496,515
     
(571,726
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
   
5,651,437
     
6,712,483
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
 
$
6,147,952
   
$
6,140,757
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
 
$
1,891,045
   
$
1,302,681
 
Income taxes
 
$
261,492
   
$
515,689
 
                 
See Notes to Condensed Consolidated Financial Statements
 

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2017

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Bimini Capital Management, Inc., a Maryland corporation ("Bimini Capital" or the "Company"), was formed in September 2003 for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage-backed securities ("MBS").  In addition, the Company manages an MBS portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services.

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital, its wholly-owned subsidiaries, Bimini Advisors Holdings, LLC (formerly known as Bimini Advisors, Inc.) and Royal Palm Capital, LLC (formerly known as MortCo TRS, LLC).   Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC are collectively referred to as "Bimini Advisors."  Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."  All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 810, Consolidation, requires the consolidation of a variable interest entity ("VIE") by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 8 for a description of the accounting used for this VIE.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the nine and three month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.



Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates affecting the accompanying consolidated financial statements include the fair values of MBS, investment in Orchid common shares, derivatives, retained interests, asset valuation allowances and deferred tax asset allowances recorded for each accounting period.

Statement of Comprehensive Income

In accordance with ASC Topic 220, Comprehensive Income, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income (loss).  Comprehensive income is the same as net income for all periods presented.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments.

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

The Company maintains cash balances at several banks, and at times, these balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. At September 30, 2017, the Company's cash deposits exceeded federally insured limits by approximately $3.3 million. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty.  The Company limits uninsured balances to only large, well-known banks and derivative counterparties and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through ("PT") certificates, collateralized mortgage obligations, and interest-only ("IO") securities and inverse interest-only ("IIO") securities representing interest in or obligations backed by pools of mortgage-backed loans. The Company has elected to account for its investment in MBS under the fair value option.  Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management's view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.

The Company records MBS transactions on the trade date.  Security purchases that have not settled as of the balance sheet date are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the MBS balance with an offsetting receivable recorded.


The fair value of the Company's investment in MBS is governed by ASC Topic 820, Fair Value Measurement.  The definition of fair value in ASC Topic 820 focuses on the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.  The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third-party broker quotes, when available.

Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized.  Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains on MBS in the consolidated statements of operations.  For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset's carrying value. At each reporting date, the effective yield is adjusted prospectively from the reporting period based on the new estimate of prepayments and the contractual terms of the security.  For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.  Changes in fair value of MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. The amount reported as unrealized gains or losses on mortgage backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period.

Orchid Island Capital, Inc. Common Stock

The Company has elected the fair value option for its investment in Orchid common shares.  The change in the fair value of this investment and dividends received on this investment are reflected in other income in the consolidated statements of operations.  We estimate the fair value of our investment in Orchid on a market approach using "Level 1" inputs based on the quoted market price of Orchid's common stock on a national stock exchange. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management's view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.

Advisory Services

Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement.  Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf.

Retained Interests in Securitizations

Retained interests in the subordinated tranches of securities created in securitization transactions were initially recorded at their fair value when issued by Royal Palm. Subsequent adjustments to fair value are reflected in earnings. Quoted market prices for these assets are generally not available, so the Company estimates fair value based on the present value of expected future cash flows using management's best estimates of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.

Derivative Financial Instruments

The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Treasury Note ("T-Note") and Eurodollar futures contracts, but the Company may enter into other transactions in the future.


The Company has elected not to treat any of its derivative financial instruments as hedges in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option.  FASB ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be carried at fair value.  Changes in fair value are recorded in earnings for each period.

Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties to honor their commitments.  In addition, the Company may be required to post collateral based on any declines in the market value of the derivatives.  In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement.  To mitigate this risk, the Company uses only well-established commercial banks as counterparties.

Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value, either in the body of the financial statements or in the accompanying notes. MBS, Orchid common stock, Eurodollar futures contracts, interest rate swaptions and retained interests in securitization transactions are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 14 of the consolidated financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of September 30, 2017 and December 31, 2016, due to the short-term nature of these financial instruments.

It is impractical to estimate the fair value of the Company's junior subordinated notes.  Currently, there is a limited market for these types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. Information regarding carrying amount and effective interest rate for these instruments is presented in Note 8 to the consolidated financial statements.

Property and Equipment, net

Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30 years.  Property and equipment is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets.

Repurchase Agreements

The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accounts for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.



Share-Based Compensation

The Company follows the provisions of ASC Topic 718, Compensation – Stock Compensation, to account for stock and stock-based awards.  For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings over the vesting period based on the fair value of the award.  The Company applies a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal.  A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate. For transactions with non-employees in which services are performed in exchange for the Company's common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance.

Earnings Per Share

The Company follows the provisions of ASC Topic 260, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents or two (or more) classes of securities that participate in dividend distributions to present both basic and diluted earnings per share ("EPS") on the face of the consolidated statement of operations. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors. Accordingly, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.

The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class B and Class C Common Stock are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.

Income Taxes

For the calendar year ended December 31, 2015, Bimini Capital, Bimini Advisors, Inc. and Royal Palm were separate taxpaying entities for income tax purposes and filed separate Federal income tax returns. Bimini Advisors, Inc. remained a separate tax paying entity through January 31, 2016; on that date, Bimini Advisors, Inc. was reorganized (as Bimini Advisors Holdings, LLC) to be an LLC wholly-owned by Bimini Capital. Beginning with the tax period starting on February 1, 2016, Bimini Capital and Bimini Advisors are combined as a single tax paying entity. Royal Palm continues to be treated as a separate tax paying entity.

   Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company's evaluation, it is more likely than not that they will not be realized.

The Company's U.S. federal income tax returns for years ended on or after December 31, 2014 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company.



The Company measures, recognizes and presents its uncertain tax positions in accordance with ASC Topic 740, Income Taxes.  Under that guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period.  The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.

Recent Accounting Pronouncements

In November 2016, the FASB issued Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows – (Topic 230): Restricted Cash. ASU 2016-18 requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017.  Early application is permitted.  The Company adopted the ASU beginning with the first quarter of 2017. The prior period consolidated statement of cash flows has been retrospectively adjusted to conform to this presentation.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017.  Early application is permitted.  The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). ASU 2016-13 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019.  Early application is permitted for fiscal periods beginning after December 15, 2018.  The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01 provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities.  ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach.  Early application is permitted for certain provisions.  The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.



NOTE 2.   MORTGAGE-BACKED SECURITIES

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

(in thousands)
           
    
September 30, 2017
   
December 31, 2016
 
Pass-Through MBS:
           
Fixed-rate Mortgages
 
$
195,151
   
$
124,299
 
Total Pass-Through MBS
   
195,151
     
124,299
 
Structured MBS:
               
Interest-Only Securities
   
1,643
     
2,654
 
Inverse Interest-Only Securities
   
1,196
     
3,349
 
Total Structured MBS
   
2,839
     
6,003
 
Total
 
$
197,990
   
$
130,302
 

The following table summarizes the Company's MBS portfolio as of September 30, 2017 and December 31, 2016, according to the contractual maturities of the securities in the portfolio. Actual maturities of MBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

(in thousands)
           
 
September 30, 2017
 
December 31, 2016
 
Greater than or equal to ten years
 
$
197,990
   
$
130,302
 
Total
 
$
197,990
   
$
130,302
 

NOTE 3.  RETAINED INTERESTS IN SECURITIZATIONS

The following table summarizes the estimated fair value of the Company's retained interests in asset backed securities as of September 30, 2017 and December 31, 2016:

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

NOTE 4.   REPURCHASE AGREEMENTS

As of September 30, 2017, the Company had outstanding repurchase agreement obligations of approximately $187.4 million with a net weighted average borrowing rate of 1.35%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $198.2 million.  As of December 31, 2016, the Company had outstanding repurchase agreement obligations of approximately $121.8 million with a net weighted average borrowing rate of 0.99%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $130.1 million.



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

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

If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any.  At September 30, 2017 and December 31, 2016, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $11.0 million and $8.4 million, respectively.  The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company's equity at September 30, 2017 or December 31, 2016.

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding and junior subordinated notes by entering into derivatives and other hedging contracts.  To date the Company has entered into Eurodollar  and T-Note futures contracts, but may enter into other contracts in the future.  The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

As of September 30, 2017 and December 31, 2016, such instruments were comprised entirely of Eurodollar futures contracts.  Eurodollar futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company's account on a daily basis and reflected in earnings as they occur. A minimum balance, or "margin", is required to be maintained in the account on a daily basis. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker.  This margin represents the collateral the Company has posted for its open positions and is recorded on the consolidated balance sheets as part of restricted cash.



The tables below present information related to the Company's Eurodollar futures positions at September 30, 2017 and December 31, 2016.

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

($ in thousands)
                       
As of September 30, 2017
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2017
 
$
26,000
     
2.15
%
   
1.48
%
 
$
(43
)
2018
   
26,000
     
1.84
%
   
1.73
%
 
$
(28
)
2019
   
26,000
     
1.63
%
   
1.98
%
 
$
90
 
2020
   
26,000
     
1.95
%
   
2.14
%
 
$
50
 
2021
   
26,000
     
2.22
%
   
2.29
%
 
$
18
 
Total / Weighted Average
 
$
26,000
     
1.92
%
   
2.00
%
 
$
87
 

($ in thousands)
                       
As of December 31, 2016
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2017
 
$
60,000
     
1.32
%
   
1.28
%
 
$
(26
)
2018
   
60,000
     
1.90
%
   
1.82
%
 
$
(49
)
2019
   
60,000
     
2.32
%
   
2.21
%
 
$
(69
)
2020
   
60,000
     
2.60
%
   
2.45
%
 
$
(88
)
2021
   
60,000
     
2.80
%
   
2.64
%
 
$
(93
)
Total / Weighted Average
 
$
60,000
     
2.19
%
   
2.08
%
 
$
(325
)



($ in thousands)
                       
As of December 31, 2016
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2017
 
$
26,000
     
1.93
%
   
1.28
%
 
$
(169
)
2018
   
26,000
     
1.84
%
   
1.82
%
 
$
(6
)
2019
   
26,000
     
1.63
%
   
2.21
%
 
$
150
 
2020
   
26,000
     
1.95
%
   
2.45
%
 
$
132
 
2021
   
26,000
     
2.22
%
   
2.64
%
 
$
110
 
Total / Weighted Average
 
$
26,000
     
1.91
%
   
2.08
%
 
$
217
 

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

(Losses) Gains On Derivative Instruments, Net

The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations for the nine and three months ended September 30, 2017 and 2016.

(in thousands)
                       
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Eurodollar futures contracts (short positions)
 
$
(829
)
 
$
(1,550
)
 
$
(19
)
 
$
508
 
(Losses) gains on derivative instruments
 
$
(829
)
 
$
(1,550
)
 
$
(19
)
 
$
508
 

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk in several ways.  For instruments which are not centrally cleared on a registered exchange, the Company limits its counterparties to major financial institutions with acceptable credit ratings, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty obtaining its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company's derivative instruments are included in restricted cash on the consolidated balance sheets.



NOTE 6. PLEDGED ASSETS

Assets Pledged to Counterparties

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

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

($ in thousands)
                 
As of December 31, 2016
                 
   
Repurchase
   
Derivative
       
Assets Pledged to Counterparties
 
Agreements
   
Agreements
   
Total
 
PT MBS - at fair value
 
$
124,298
   
$
-
   
$
124,298
 
Structured MBS - at fair value
   
5,284
     
-
     
5,284
 
Accrued interest on pledged securities
   
489
     
-
     
489
 
Cash
   
456
     
766
     
1,222
 
Total
 
$
130,527
   
$
766
   
$
131,293
 

Assets Pledged from Counterparties

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

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



NOTE 7. OFFSETTING ASSETS AND LIABILITIES

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

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

The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.  The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented.  See Note 6 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.

NOTE 8.  TRUST PREFERRED SECURITIES

During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II ("BCTII") of which 100% of the common equity is owned by Bimini Capital.  It was formed for the purpose of issuing trust preferred capital securities to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital. The debt securities held by BCTII are the sole assets of BCTII.

As of September 30, 2017 and December 31, 2016, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million.  The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate.  As of September 30, 2017, the interest rate was 4.82%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions and are redeemable at Bimini Capital's option, in whole or in part and without penalty. Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in right of payment to all present and future senior indebtedness.

BCTII is a VIE because the holders of the equity investment at risk do not have adequate decision making ability over BCTII's activities. Since Bimini Capital's investment in BCTII's common equity securities was financed directly by BCTII as a result of its loan of the proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not consolidated the financial statements of BCTII into its consolidated financial statements, and this investment is accounted for on the equity method.

The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to BCTII as a liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets).  For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.


NOTE 9.  COMMON STOCK

The table below presents information related to Bimini Capital's Class A Common Stock issued during the nine and three months ended September 30, 2017 and 2016.

   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
Shares Issued Related To:
 
2017
   
2016
   
2017
   
2016
 
Vested incentive plan shares
   
-
     
258,333
     
-
     
-
 
Total shares of Class A Common Stock issued
   
-
     
258,333
     
-
     
-
 

There were no issuances of Bimini Capital's Class B Common Stock and Class C Common Stock during the nine months ended September 30, 2017 and 2016.

NOTE 10.    STOCK INCENTIVE PLANS

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

Share Awards

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

Performance Units

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



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

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

NOTE 11.  COMMITMENTS AND CONTINGENCIES

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

NOTE 12.  INCOME TAXES

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

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

NOTE 13.   EARNINGS PER SHARE

Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. Following the provisions of FASB ASC 260, the Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at September 30, 2017 and 2016.


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

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

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

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

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



NOTE 14.   FAIR VALUE

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

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

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

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



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

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

The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017 and 2016:

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

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

Our retained interests are valued based on a discounted cash flow approach.  These values are sensitive to changes in unobservable inputs, including: estimated prepayment speeds, default rates and loss severity, weighted-average life, and discount rates.  Significant increases or decreases in any of these inputs may result in significantly different fair value measurements.



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

Retained interests in securitzations, at fair value (in thousands)
             
$
558
 
         
CPR Range
         
Prepayment Assumption
       
(Weighted Average)
         
Constant Prepayment Rate
         
10% (10
%)
       
         
Severity
         
Default Assumptions
 
Probability of Default
   
(Weighted Average)
   
Range Of Loss Timing
 
Real Estate Owned
   
100
%
   
25.5
%
 
Next 10 Months
 
Loans in Foreclosure
   
100
%
   
25.5
%
 
Month 4 - 13
 
Loans 90 Day Delinquent
   
100
%
   
45
%
 
Month 11-28
 
Loans 60 Day Delinquent
   
85
%
   
45
%
 
Month 11-28
 
Loans 30 Day Delinquent
   
75
%
   
45
%
 
Month 11-28
 
Current Loans
   
3.1
%
   
45
%
 
Month 29 and Beyond
 
           
Remaining Life Range
   
Discount Rate Range
 
Cash Flow Recognition
 
Valuation Technique
   
(Weighted Average)
   
(Weighted Average)
 
Nominal Cash Flows
 
Discounted Cash Flow
     
12.2 - 15.3
(13.2)
   
27.50% (27.50
%)
Discounted Cash Flows
 
Discounted Cash Flow
     
1.3 - 14.2
(3.8)
   
27.50% (27.50
%)

NOTE 15. RELATED PARTY TRANSACTIONS

Management Agreement

Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement.  As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:

·
One-twelfth of 1.5% of the first $250 million of the Orchid's equity, as defined in the management agreement,
·
One-twelfth of 1.25% of the Orchid's equity that is greater than $250 million and less than or equal to $500 million, and
·
One-twelfth of 1.00% of the Orchid's equity that is greater than $500 million.

Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 20, 2018 and provides for automatic one-year extension options thereafter.  Should Orchid terminate the management agreement without cause, it will pay to Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the current automatic renewal term.

The following table summarizes the advisory services revenue from Orchid for the nine and three months ended September 30, 2017 and 2016.

(in thousands)
                       
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Management fee
 
$
4,230
   
$
2,968
   
$
1,528
   
$
1,052
 
Allocated overhead
   
1,168
     
963
     
412
     
336
 
Total
 
$
5,398
   
$
3,931
   
$
1,940
   
$
1,388
 
 
 

 

At September 30, 2017 and December 31, 2016, the net amount due from Orchid was approximately $0.8 million and $0.6 million, respectively, and such amounts are included in "other assets" in the consolidated balance sheets.  Orchid accrued cash and equity compensation payable to officers and employees of Bimini of $0.4 million and $0.2 million during the nine and three months ended September 30, 2017, respectively and $0.6 million and $0.2 million during the nine and three months ended September 30, 2016, respectively.  This compensation is not included in the consolidated statements of operations.

Other Relationships with Orchid

At September 30, 2017 and December 31, 2016, the Company owned 1,520,036  and 1,395,036 shares of Orchid common stock, respectively, representing approximately 3.4% and 4.2% of the outstanding shares, respectively.  The Company received dividends on this common stock investment of approximately $1.9 million and $0.6 million during the nine and three months ended September 30, 2017, respectively, and approximately $1.8 million and $0.6 million during the nine and three months ended September 30, 2016, respectively.

Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation from Orchid, and owns shares of common stock of Orchid.  In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid's Board of Directors, receives compensation from Orchid, and owns shares of common stock of Orchid.


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.

The Company also serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"), through its wholly owned subsidiary, Bimini Advisors Holdings, LLC ("Bimini Advisors").  From this arrangement, the Company receives management fees and expense reimbursements.  As Manager, 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:

 interest rate trends;
 the difference between Agency MBS yields and our funding and hedging costs;
 competition for investments in Agency MBS;
 actions taken by the new presidential administration, the Federal Reserve (the "Fed") and the U.S. Treasury;
prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; and
 the equity markets and the ability of Orchid to raise additional capital; and
 other market developments.

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

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

 

Results of Operations

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

Net Income Summary

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

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

The components of net income for the nine and three months ended September 30, 2017 and 2016, along with the changes in those components are presented in the table below:

(in thousands)
                                   
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2017
   
2016
   
Change
   
2017
   
2016
   
Change
 
Net portfolio interest
 
$
2,965
   
$
2,454
   
$
511
   
$
1,010
   
$
913
   
$
97
 
Interest expense on junior subordinated notes
   
(914
)
   
(818
)
   
(96
)
   
(316
)
   
(278
)
   
(38
)
(Losses) gains on MBS and derivative instruments
   
(1,126
)
   
(1,683
)
   
557
     
149
     
163
     
(14
)
Net portfolio income (loss)
   
925
     
(47
)
   
972
     
843
     
798
     
45
 
Other income
   
6,846
     
8,473
     
(1,627
)
   
3,166
     
3,176
     
(10
)
Expenses, including income taxes
   
(5,835
)
   
(6,199
)
   
364
     
(2,508
)
   
(2,795
)
   
287
 
Net income
 
$
1,936
   
$
2,227
   
$
(291
)
 
$
1,501
   
$
1,179
   
$
322
 

GAAP and Non-GAAP Reconciliation

Economic Interest Expense and Economic Net Interest Income

We use derivative instruments, specifically Eurodollar and Treasury Note ("T-Note") futures contracts, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment. We have not elected to designate our 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 our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.

For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized gains or losses on specific derivative instruments that pertain to each period presented. We believe that 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, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.


We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.

Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.

The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter in 2017 and 2016.

Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
 
(in thousands)
                 
         
Junior
       
   
Repurchase
   
Subordinated
       
Three Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
(13
)
 
$
(6
)
 
$
(19
)
June 30, 2017
   
(581
)
   
(251
)
   
(832
)
March 31, 2017
   
15
     
7
     
22
 
December 31, 2016
   
496
     
1,037
     
1,533
 
September 30, 2016
   
326
     
182
     
508
 
June 30, 2016
   
(353
)
   
(404
)
   
(757
)
March 31, 2016
   
(787
)
   
(513
)
   
(1,300
)
                         
(in thousands)
                       
           
Junior
         
   
Repurchase
   
Subordinated
         
Nine Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
(579
)
 
$
(250
)
 
$
(829
)
September 30, 2016
   
(814
)
   
(735
)
   
(1,549
)

Losses on Derivative Instruments - Attributed to Current Period (Non-GAAP)
 
(in thousands)
                 
         
Junior
       
   
Repurchase
   
Subordinated
       
Three Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
(162
)
 
$
(40
)
 
$
(202
)
June 30, 2017
   
(152
)
   
(37
)
   
(189
)
March 31, 2017
   
(116
)
   
(60
)
   
(176
)
December 31, 2016
   
(122
)
   
(57
)
   
(179
)
September 30, 2016
   
(92
)
   
(55
)
   
(147
)
June 30, 2016
   
(60
)
   
(77
)
   
(137
)
March 31, 2016
   
(45
)
   
(80
)
   
(125
)
                         


(in thousands)
                 
         
Junior
       
   
Repurchase
   
Subordinated
       
Nine Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
(430
)
 
$
(137
)
 
$
(567
)
September 30, 2016
   
(197
)
   
(212
)
   
(409
)

Gains (Losses) on Derivative Instruments - Attributed to Future Periods (Non-GAAP)
 
(in thousands)
                 
         
Junior
       
   
Repurchase
   
Subordinated
       
Three Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
149
   
$
34
   
$
183
 
June 30, 2017
   
(429
)
   
(214
)
   
(643
)
March 31, 2017
   
131
     
67
     
198
 
December 31, 2016
   
618
     
1,094
     
1,712
 
September 30, 2016
   
418
     
237
     
655
 
June 30, 2016
   
(293
)
   
(327
)
   
(620
)
March 31, 2016
   
(742
)
   
(433
)
   
(1,175
)
                         
(in thousands)
                       
           
Junior
         
   
Repurchase
   
Subordinated
         
Nine Months Ended
 
Agreements
   
Debt
   
Total
 
September 30, 2017
 
$
(149
)
 
$
(113
)
 
$
(262
)
September 30, 2016
   
(617
)
   
(523
)
   
(1,140
)

Economic Net Portfolio Interest Income
 
(in thousands)
 
         
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
               
Effect of
         
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
September 30, 2017
 
$
1,514
   
$
504
   
$
(162
)
 
$
666
   
$
1,010
   
$
848
 
June 30, 2017
   
1,269
     
324
     
(152
)
   
476
     
945
     
793
 
March 31, 2017
   
1,293
     
283
     
(116
)
   
399
     
1,010
     
894
 
December 31, 2016
   
1,285
     
251
     
(122
)
   
373
     
1,034
     
912
 
September 30, 2016
   
1,108
     
195
     
(92
)
   
287
     
913
     
821
 
June 30, 2016
   
1,025
     
174
     
(60
)
   
234
     
851
     
791
 
March 31, 2016
   
817
     
127
     
(45
)
   
172
     
690
     
645
 
                                                 
(in thousands)
 
           
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
                   
Effect of
           
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Nine Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
September 30, 2017
 
$
4,076
   
$
1,111
   
$
(430
)
 
$
1,541
   
$
2,965
   
$
2,535
 
September 30, 2016
   
2,950
     
496
     
(197
)
   
693
     
2,454
     
2,257
 

(1)
Reflects the effect of derivative instrument hedges for only the period presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income.



Economic Net Interest Income
 
(in thousands)
 
   
Net Portfolio
   
Interest Expense on Junior Subordinated Notes
             
   
Interest Income
         
Effect of
         
Net Interest Income
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
September 30, 2017
 
$
1,010
   
$
847
   
$
316
   
$
(40
)
 
$
356
   
$
694
   
$
491
 
June 30, 2017
   
945
     
793
     
306
     
(37
)
   
343
     
639
     
450
 
March 31, 2017
   
1,010
     
894
     
292
     
(60
)
   
352
     
718
     
542
 
December 31, 2016
   
1,034
     
912
     
291
     
(57
)
   
348
     
743
     
564
 
September 30, 2016
   
913
     
821
     
278
     
(55
)
   
333
     
635
     
488
 
June 30, 2016
   
851
     
791
     
276
     
(77
)
   
353
     
575
     
438
 
March 31, 2016
   
690
     
645
     
264
     
(80
)
   
344
     
426
     
301
 
                                                         
(in thousands)
 
   
Net Portfolio
   
Interest Expense on Junior Subordinated Notes
                 
   
Interest Income
           
Effect of
           
Net Interest Income
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Nine Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
September 30, 2017
 
$
2,965
   
$
2,534
   
$
914
   
$
(137
)
 
$
1,051
   
$
2,051
   
$
1,483
 
September 30, 2016
   
2,454
     
2,257
     
818
     
(212
)
   
1,030
     
1,636
     
1,227
 

(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 from GAAP net interest income.

Net Portfolio Income

During the nine months ended September 30, 2017, the Company generated $3.0 million of net portfolio interest income, consisting of $4.1 million of interest income from MBS assets offset by $1.1 million of interest expense on repurchase liabilities.  For the comparable period ended September 30, 2016, the Company generated $2.5 million of net portfolio interest income, consisting of $3.0 million of interest income from MBS assets offset by $0.5 million of interest expense on repurchase liabilities.

The Company's economic interest expense on repurchase liabilities for the nine months ended September 30, 2017 and 2016 was $1.5 million and $0.7 million, respectively, resulting in $2.5 million and $2.3 million of economic net portfolio interest income, respectively.

During the three months ended September 30, 2017, the Company generated $1.0 million of net portfolio interest income, consisting of $1.5 million of interest income from MBS assets offset by $0.5 million of interest expense on repurchase liabilities.  For the three months ended September 30, 2016, the Company generated $0.9 million of net portfolio interest income, consisting of $1.1 million of interest income from MBS assets offset by $0.2 million of interest expense on repurchase liabilities.

The Company's economic interest expense on repurchase liabilities for the three months ended September 30, 2017 and 2016 was $0.7 million and $0.3 million, respectively, resulting in $0.8 million and $0.8 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 nine months ended September 30, 2017 and 2016 and each quarter in 2017 and 2016 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)
 
September 30, 2017
 
$
170,237
   
$
1,514
     
3.56
%
 
$
161,003
   
$
504
   
$
666
     
1.25
%
   
1.66
%
June 30, 2017
   
134,188
     
1,269
     
3.78
%
   
126,341
     
324
     
476
     
1.02
%
   
1.51
%
March 31, 2017
   
128,098
     
1,293
     
4.04
%
   
119,938
     
283
     
399
     
0.94
%
   
1.33
%
December 31, 2016
   
131,952
     
1,285
     
3.89
%
   
123,909
     
251
     
373
     
0.81
%
   
1.20
%
September 30, 2016
   
122,220
     
1,108
     
3.63
%
   
114,858
     
195
     
287
     
0.68
%
   
1.00
%
June 30, 2016
   
110,017
     
1,025
     
3.73
%
   
103,259
     
174
     
234
     
0.67
%
   
0.91
%
March 31, 2016
   
96,592
     
817
     
3.39
%
   
90,014
     
127
     
172
     
0.57
%
   
0.77
%
                                                                 
($ in thousands)
                                                               
   
Average
           
Yield on
   
Average
   
Interest Expense
   
Average Cost of Funds
 
   
MBS
   
Interest
   
Average
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Nine Months Ended
 
Held(1)
   
Income(2)
   
MBS
   
Agreements(1)
   
Basis
   
Basis(2)
   
Basis
   
Basis(3)
 
September 30, 2017
 
$
144,174
   
$
4,076
     
3.77
%
 
$
135,761
   
$
1,111
   
$
1,541
     
1.09
%
   
1.51
%
September 30, 2016
   
109,610
     
2,950
     
3.59
%
   
102,710
     
496
     
693
     
0.64
%
   
0.90
%

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

(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 30 and 31 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 31 include the effect of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS.
(4)
Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS.



Interest Income and Average Earning Asset Yield

Interest income for the Company was $4.1 million for the nine months ended September 30, 2017 and $3.0 million for the nine months ended September 30, 2016.  Average MBS holdings were $144.2 million and $109.6 million for the nine months ended September 30, 2017 and 2016, respectively. The $1.1 million increase in interest income was due to combination of a 18 basis point increase in yields and a $34.6 million increase in average MBS holdings.

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

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

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

Interest Expense on Repurchase Agreements and the Cost of Funds

Average outstanding balances under repurchase agreements for the Company were $135.8 million and $102.7 million, generating interest expense of $1.1 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.  Our average cost of funds was 1.09% and 0.64% for nine months ended September 30, 2017 and 2016, respectively.  There was a 45 basis point increase in the average cost of funds and a $33.1 million increase in average outstanding repurchase agreements during the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. 

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



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

The Company's economic interest expense was $0.7 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively. There was a 66 basis point increase in the average economic cost of funds to 1.66% for the three months ended September 30, 2017 from 1.00% for the three months ended September 30, 2016.  The $0.4 million increase in economic interest expense was due to the $46.1 million increase in average outstanding repurchase agreements during the three months ended September 30, 2017, combined with the negative performance of our derivative agreements attributed to the current period.

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 5 basis points above the average one-month LIBOR and 20 basis points below the average six-month LIBOR for the quarter ended September 30, 2017.  The Company's average economic cost of funds was 46 basis points above the average one-month LIBOR and 21 basis points above the average six-month LIBOR for the quarter ended September 30, 2017. The average term to maturity of the outstanding repurchase agreements increased from 40 days at December 31, 2016 to 48 days at September 30, 2017.

The tables below present the consolidated average outstanding balances under our repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for the nine months ended September 30, 2017 and 2016, and for each quarter in 2017 and 2016, on both a GAAP and economic basis.

($ in thousands)
                             
   
Average
                         
   
Balance of
   
Interest Expense
   
Average Cost of Funds
 
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Agreements
   
Basis
   
Basis
   
Basis
   
Basis
 
September 30, 2017
 
$
161,003
   
$
504
   
$
666
     
1.25
%
   
1.66
%
June 30, 2017
   
126,341
     
324
     
476
     
1.02
%
   
1.51
%
March 31, 2017
   
119,938
     
283
     
399
     
0.94
%
   
1.33
%
December 31, 2016
   
123,909
     
251
     
373
     
0.81
%
   
1.20
%
September 30, 2016
   
114,858
     
195
     
287
     
0.68
%
   
1.00
%
June 30, 2016
   
103,259
     
174
     
234
     
0.67
%
   
0.91
%
March 31, 2016
   
90,014
     
127
     
172
     
0.57
%
   
0.77
%
                                         
($ in thousands)
                                       
   
Average
                                 
   
Balance of
   
Interest Expense
   
Average Cost of Funds
 
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Nine Months Ended
 
Agreements
   
Basis
   
Basis
   
Basis
   
Basis
 
September 30, 2017
 
$
135,761
   
$
1,111
   
$
1,541
     
1.09
%
   
1.51
%
September 30, 2016
   
102,710
     
496
     
693
     
0.64
%
   
0.90
%




               
Average GAAP Cost of Funds
   
Average Economic Cost of Funds
 
               
Relative to Average
   
Relative to Average
 
   
Average LIBOR
   
One-Month
   
Six-Month
   
One-Month
   
Six-Month
 
Three Months Ended
 
One-Month
   
Six-Month
   
LIBOR
   
LIBOR
   
LIBOR
   
LIBOR
 
September 30, 2017
   
1.20
%
   
1.45
%
   
0.05
%
   
(0.20
)%
   
0.46
%
   
0.21
%
June 30, 2017
   
1.05
%
   
1.43
%
   
(0.03
)%
   
(0.41
)%
   
0.46
%
   
0.08
%
March 31, 2017
   
0.82
%
   
1.37
%
   
0.12
%
   
(0.43
)%
   
0.51
%
   
(0.04
)%
December 31, 2016
   
0.62
%
   
1.28
%
   
0.19
%
   
(0.47
)%
   
0.58
%
   
(0.08
)%
September 30, 2016
   
0.49
%
   
1.09
%
   
0.19
%
   
(0.41
)%
   
0.51
%
   
(0.09
)%
June 30, 2016
   
0.44
%
   
0.92
%
   
0.23
%
   
(0.25
)%
   
0.47
%
   
(0.01
)%
March 31, 2016
   
0.40
%
   
0.84
%
   
0.17
%
   
(0.27
)%
   
0.37
%
   
(0.07
)%
                                                 
                                                 
                   
Average GAAP Cost of Funds
   
Average Economic Cost of Funds
 
                   
Relative to Average
   
Relative to Average
 
   
Average LIBOR
   
One-Month
   
Six-Month
   
One-Month
   
Six-Month
 
Nine Months Ended
 
One-Month
   
Six-Month
   
LIBOR
   
LIBOR
   
LIBOR
   
LIBOR
 
September 30, 2017
   
1.03
%
   
1.42
%
   
0.06
%
   
(0.33
)%
   
0.48
%
   
0.09
%
September 30, 2016
   
0.44
%
   
0.95
%
   
0.20
%
   
(0.31
)%
   
0.46
%
   
(0.05
)%

Junior Subordinated Notes

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

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

The junior subordinated debt securities pay interest at a floating rate.  The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date.  As of September 30, 2017, the interest rate was 4.82%.

Gains or Losses and Other Income

The table below presents the Company's gains or losses and other income for the nine and three months ended September 30, 2017 and 2016.
(in thousands)
                                   
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2017
   
2016
   
Change
   
2017
   
2016
   
Change
 
Realized (losses) gains on sales of MBS
 
$
(1
)
 
$
180
   
$
(181
)
 
$
-
   
$
(71
)
 
$
71
 
Unrealized (losses) gains on MBS
   
(296
)
   
(313
)
   
17
     
168
     
(274
)
   
442
 
Total (losses) gains on MBS
   
(297
)
   
(133
)
   
(164
)
   
168
     
(345
)
   
513
 
(Losses) gains on derivative instruments
   
(829
)
   
(1,550
)
   
721
     
(19
)
   
508
     
(527
)
Advisory services
   
5,398
     
3,931
     
1,467
     
1,940
     
1,388
     
552
 
Gains on retained interests in securitizations
   
390
     
2,100
     
(1,710
)
   
85
     
1,021
     
(936
)
Unrealized (losses) gains on
                                               
Orchid Island Capital, Inc. common stock
   
(823
)
   
684
     
(1,507
)
   
502
     
181
     
321
 
Orchid Island Capital, Inc. dividends
   
1,880
     
1,758
     
122
     
638
     
586
     
52
 
                                                 
 

 

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 months ended September 30, 2017, the Company received proceeds of $1.7 million from the sales of MBS.  There were no sales of MBS during the three months ended September 30, 2017. During the nine and three months ended September 30, 2016, the Company received proceeds of $73.1 million and $31.3 million from the sales of MBS, respectively.

The fair value of the Company'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 2017 and 2016.

               
15 Year
   
30 Year
   
Three
 
   
5 Year
   
10 Year
   
Fixed-Rate
   
Fixed-Rate
   
Month
 
   
Treasury Rate(1)
   
Treasury Rate(1)
   
Mortgage Rate(2)
   
Mortgage Rate(2)
   
Libor(3)
 
September 30, 2017
   
1.93
%
   
2.33
%
   
3.11
%
   
3.81
%
   
1.32
%
June 30, 2017
   
1.88
%
   
2.30
%
   
3.17
%
   
3.90
%
   
1.26
%
March 31, 2017
   
1.93
%
   
2.40
%
   
3.41
%
   
4.20
%
   
1.13
%
December 31, 2016
   
1.93
%
   
2.45
%
   
3.43
%
   
4.20
%
   
0.98
%
September 30, 2016
   
1.16
%
   
1.61
%
   
2.76
%
   
3.46
%
   
0.85
%
June 30, 2016
   
1.01
%
   
1.49
%
   
2.84
%
   
3.57
%
   
0.65
%
March 31, 2016
   
1.22
%
   
1.79
%
   
2.97
%
   
3.69
%
   
0.63
%

(1)
Historical 5 and 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, 2017, the Company recorded gains on retained interests of $0.4 million and $0.1 million, respectively, compared to gains of $2.1 million and $1.0 million, respectively, for the nine and three months ended September 30, 2016.

Advisory Services

Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement.



Operating Expenses

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

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

Financial Condition:

Mortgage-Backed Securities

As of September 30, 2017, the Company's MBS portfolio consisted of $198.0 million of agency or government MBS at fair value and had a weighted average coupon of 4.23%.  During the nine months ended September 30, 2017, the Company received principal repayments of $7.7 million compared to $10.3 million for the comparable period ended September 30, 2016.  The average prepayment speeds for the quarters ended September 30, 2017 and 2016 were 8.3% and 13.6%, 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.

         
Structured
       
   
PT MBS
   
MBS
   
Total
 
Three Months Ended
 
Portfolio (%)
   
Portfolio (%)
   
Portfolio (%)
 
September 30, 2017
   
5.2
     
18.8
     
8.3
 
June 30, 2017
   
5.9
     
20.4
     
9.9
 
March 31, 2017
   
4.8
     
18.8
     
8.8
 
December 31, 2016
   
5.5
     
27.3
     
11.1
 
September 30, 2016
   
9.4
     
19.7
     
13.6
 
June 30, 2016
   
7.8
     
20.4
     
12.6
 
March 31, 2016
   
11.8
     
16.6
     
14.3
 



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

($ in thousands)
           
         
Weighted
 
     
Percentage
 
Average
 
     
of
Weighted
Maturity
 
   
Fair
Entire
Average
in
Longest
Asset Category
 
Value
Portfolio
Coupon
Months
Maturity
September 30, 2017
           
Fixed Rate MBS
$
195,151
98.6%
4.23%
326
1-Sep-47
Total PT MBS
 
195,151
98.6%
4.23%
326
1-Sep-47
Interest-Only Securities
 
1,643
0.8%
3.44%
232
25-Dec-39
Inverse Interest-Only Securities
 
1,196
0.6%
5.32%
281
25-Apr-41
Total Structured MBS
 
2,839
1.4%
4.23%
253
25-Apr-41
Total MBS
$
197,990
100.0%
4.23%
325
1-Sep-47
December 31, 2016
           
Fixed Rate MBS
$
124,299
95.4%
4.24%
347
1-Oct-46
Total PT MBS
 
124,299
95.4%
4.24%
347
1-Oct-46
Interest-Only Securities
 
2,654
2.0%
3.48%
245
25-Dec-39
Inverse Interest-Only Securities
 
3,349
2.6%
5.52%
325
25-Dec-46
Total Structured MBS
 
6,003
4.6%
4.62%
290
25-Dec-46
Total MBS
$
130,302
100.0%
4.26%
344
25-Dec-46

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

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

(1)
Effective duration is the approximate percentage change in price for a 100 basis point change in rates.  An effective duration of 3.867 indicates that an interest rate increase of 1.0% would be expected to cause a 3.867% decrease in the value of the MBS in the Company's investment portfolio at September 30, 2017.  An effective duration of 4.769 indicates that an interest rate increase of 1.0% would be expected to cause a 4.769% decrease in the value of the MBS in the Company's investment portfolio at December 31, 2016. 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, 2017 and 2016.

($ in thousands)
                                   
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
   
Total Cost
   
Average Price
   
Weighted Average Yield
   
Total Cost
   
Average Price
   
Weighted Average Yield
 
PT MBS
 
$
77,295
   
$
107.68
     
2.70
%
 
$
133,100
   
$
110.31
     
2.42
%

The Company's 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, 2017, 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
 
$
195,151
   
$
6,177
   
$
(10,066
)
 
$
(22,189
)
   
3.17
%
   
(5.16
)%
   
(11.37
)%
Interest-Only MBS
   
1,643
     
(621
)
   
465
     
735
     
(37.77
)%
   
28.31
%
   
44.75
%
Inverse Interest-Only MBS
   
1,196
     
(134
)
   
(51
)
   
(256
)
   
(11.17
)%
   
(4.27
)%
   
(21.37
)%
Total MBS Portfolio
 
$
197,990
   
$
5,422
   
$
(9,652
)
 
$
(21,710
)
   
2.74
%
   
(4.88
)%
   
(10.96
)%

($ in thousands)
                                         
   
Notional
   
$ Change in Fair Value
   
% Change in Fair Value
 
   
Amount(1)
   
-100BPS
   
+100BPS
   
+200BPS
   
-100BPS
   
+100BPS
   
+200BPS
 
Eurodollar Futures Contracts
                                         
Repurchase Agreement Hedges
 
$
1,020,000
   
$
(1,701
)
 
$
2,550
   
$
5,100
     
(0.68
)%
   
1.02
%
   
2.04
%
Junior Subordinated Debt Hedges
   
442,000
     
(737
)
   
1,105
     
2,210
     
(0.68
)%
   
1.02
%
   
2.04
%
   
$
1,462,000
   
$
(2,438
)
 
$
3,655
   
$
7,310
     
(0.68
)%
   
1.02
%
   
2.04
%
                                                         
Gross Totals
         
$
2,984
   
$
(5,997
)
 
$
(14,400
)
                       

(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, 2017, 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 five of these counterparties.  We believe these facilities provide borrowing capacity in excess of our needs.  None of these lenders are affiliated with the Company. These borrowings are secured by the Company's MBS.

As of September 30, 2017, the Company had obligations outstanding under the repurchase agreements of approximately $187.4 million with a net weighted average borrowing cost of 1.35%. The remaining maturity of the Company's outstanding repurchase agreement obligations ranged from 11 to 89 days, with a weighted average maturity of 48 days.  Securing the repurchase agreement obligation as of September 30, 2017 are MBS with an estimated fair value, including accrued interest, of $198.2 million and a weighted average maturity of 326 months.  Through November 3, 2017, the Company has been able to maintain its repurchase facilities with comparable terms to those that existed at September 30, 2017 with maturities through January 29, 2018.



The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 2017 and 2016.

($ in thousands)
 
               
Difference Between Ending
 
   
Ending Balance
   
Average Balance
   
Repurchase Agreements and
 
   
of Repurchase
   
of Repurchase
   
Average Repurchase Agreements
 
Three Months Ended
 
Agreements
   
Agreements
   
Amount
   
Percent
 
September 30, 2017
 
$
187,374
   
$
161,003
   
$
26,371
     
16.38
%(1)
June 30, 2017
   
134,633
     
126,341
     
8,292
     
6.56
%
March 31, 2017
   
118,049
     
119,938
     
(1,889
)
   
(1.57
)%
December 31, 2016
   
121,828
     
123,909
     
(2,081
)
   
(1.68
)%
September 30, 2016
   
125,991
     
114,858
     
11,133
     
9.69
%
June 30, 2016
   
103,725
     
103,259
     
466
     
0.45
%
March 31, 2016
   
102,794
     
90,014
     
12,780
     
14.20
%(2)

(1)
The higher ending balance relative to the average balance during the quarter ended September 30, 2017 reflects the growth of the portfolio, on a leveraged basis. During the quarter ended September 30, 2017, the Company's investment in PT MBS increased $56.1 million.
(2)
The higher ending balance relative to the average balance during the quarter ended March 31, 2016 reflects the repositioning of the portfolio. During the quarter ended March 31, 2016, the Company's investment in PT MBS increased $26.2 million.


Liquidity and Capital Resources

Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead and fulfill margin calls.  Our principal immediate sources of liquidity include cash balances, unencumbered assets, the availability to borrow under repurchase agreements, and fees and dividends received from Orchid.  Our borrowing capacity will vary over time as the market value of our interest earning assets varies.  Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio, and from cash flows received from the retained interests and the collection of servicing advances.  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, we invest a portion of our 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, 2017, the Company had cash and cash equivalents of $5.2 million.  We generated cash flows of $11.5 million from principal and interest payments on our MBS portfolio and $0.9 million from retained interests and had average repurchase agreements outstanding of $135.8 million during the nine months ended September 30, 2017.  In addition, during the nine months ended September 30, 2017, the Company received approximately $5.3 million in management fees and expense reimbursements as manager of Orchid and approximately $1.9 million in dividends from its investment in Orchid common stock.

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

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

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

Outlook

Orchid Island Capital Inc.

To 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.

Interest Rates and the MBS Market

In many respects the third quarter was a repeat of the first and second. Economic and market developments continued the trend in place since March.  Inflation data continued to come in below market expectations.  Optimism stemming from the surprise outcome of the U.S. Presidential election last November and the markets' expectations for progress on health care, regulatory and tax reform, infrastructure spending, etc. were not realized.  In contrast, events in Washington were chaotic at times as the Trump Administration struggled with a Republican party rife with internal struggles and political infighting inside the White House itself.  Efforts to repeal and replace the Affordable Care Act seemed to come to an end and the continued in-fighting among Republicans called into question the ability of the Trump Administration to accomplish anything meaningful. The Federal Reserve (the "Fed") raised their target for the Federal Funds rate in March and June, and announced a tapering of their asset purchases in September. However, the market remained skeptical the Fed would be able to follow through with as many additional hikes as the Fed was expecting as core inflation readings continued to show year over year declines, with many of the elements of the index exhibiting persistent weakness.  Geopolitical events – particularly with respect to North Korea – keep the world and markets on edge.  The yield on the 10-year US Treasury rate hit its year to date low on September 7, 2017, closing at 2.04%, and nearly broke below the psychologically important 2% level intra-day. Mother nature had a hand in shaping developments in the markets as well, as three major hurricanes made landfall – one each in Texas, Florida and Puerto Rico. In the case of Texas, Hurricane Harvey caused unprecedented flooding and disrupted the Nation's oil refining capacity for several days.

However, there was a perceptible change in market sentiment in early September, and the market reversed course into the end of the third quarter and early fourth quarter. Geo-political events calmed down, removing the flight-to-quality induced demand for safe-haven assets, and economic news strengthened.  Events in Washington turned mildly positive as the Trump Administration pivoted away from health care reform to tax reform, with what the market perceived to be slightly better prospects for success. Inflation data finally met expectations and showed signs of reversing its decline when the August data was released on September 14th.    Finally, on September 20th, Fed Chairwomen Yellen sounded quite hawkish and reiterated her belief that recent inflation data represented temporary or transitory effects and would reverse soon enough back towards their 2% target.  It was quite clear the Fed intended to raise the Federal Funds rate again in December. The market responded as Fed Funds futures pricing implied a 70-80% probability of a 25 basis point increase in the Federal Funds rate in December.  The September economic data released in early October has also been very strong, and the anticipated short-term effects of the hurricanes appear to have been less than feared. Further, the repair work associated with the hurricanes should put even more upward pressure on economic activity.

As we move into the fourth quarter, market pricing of additional policy accommodation removal is far less than the Fed anticipates. The latest reads on inflation returned to its aforementioned string of below expectations readings.  The perceived lack of meaningful inflation, coupled with a hawkish Fed, has caused the U.S. Treasury curve to flatten, as the spread between 5-year Treasury Notes and 30-year Treasury Bonds is at multi-year lows.  The market is also faced with uncertainty surrounding President Trump's appointment of the next Fed chair, with many of the leading candidates perceived to be more hawkish by the markets than the current chairwoman, even though she remains a candidate herself.  Regardless of the uncertainty in the bond market, the equity markets, and risk markets generally, continue to hit all-time high closes almost daily, and the combination of robust economic data, low inflation and the prospects for tax reform make for an ideal environment for risk assets.



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

Recent Regulatory Developments

The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve.  Although the Trump administration has made statements of its intentions to reform housing finance and tax policy, many of these potential policy changes will require congressional action.  In addition, the Fed has made statements regarding additional increases to the Federal Funds Rate over the balance of 2017 and beyond.  The Fed also announced that it will begin to reduce its holdings of Agency MBS and U.S. treasuries.

Effect on Us

Regulatory developments, movements in interest rates and prepayment rates as well as loan modification programs affect us in many ways, including the following:

Effects on our Assets

A change in or elimination of the guarantee structure of Agency MBS may increase our costs or require us to change our investment strategy altogether. For example, an increase in guarantee fees would increase our costs.  In addition, the elimination of the guarantee structure of Agency MBS may cause us to change our investment strategy to focus on non-Agency MBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.

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, it may not be possible to reinvest prepayment proceeds in similar-yielding assets. Agency MBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency MBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the discount accretion on those assets and increase the yields earned, 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 PT MBS, particularly PT MBS backed by fixed-rate mortgages.


If Fannie Mae and Freddie Mac were to modify or end their repurchase programs, our investment portfolio could be negatively impacted.

Effects on our borrowing costs

We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by market levels of both the Fed Funds Rate and LIBOR. An 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. We believe that we have sufficient borrowing capacity to support our MBS portfolio.

In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which 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

As we entered the first quarter of 2017, risk assets were performing very well as the Trump administration took office and appeared to be very pro-business.  The markets looked forward to a roll back of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbish the nation's aging roads, highways, bridges and airports.  While the Administration made bold promises, there has been very little delivered.  Market optimism was quickly replaced with pessimism.  Political infighting among the Administration and congressional republicans has generally been the cause, as has turmoil within the White House itself.   Geopolitical events surfaced in early April, specifically the Korean peninsula.  These events kept the market on edge and induced sporadic flight to quality rallies as headlines hit the market from time to time. Incoming inflation  data since March  was below expectations.  In the case of the core Consumer Price Index, ("CPI") measure, the year over year figure moved from 2.3% in January 2017 to 1.7% by May and has stayed there through September.  Despite these readings, the Federal Reserve remains convinced these readings are being driven by temporary or transitory phenomenon and that inflation will reverse and head back towards their two percent target over the medium term.  To wit, the Fed appears as if they will hike their target rate again at the December meeting baring surprise outcomes to the downside.  The market accepts this outcome as highly likely – as reflected in Fed Funds futures pricing.  However, using the same measure, the market does not expect the Fed to raise rates in 2018 and beyond to the extent the Fed expects to.  As a result, the combination of benign inflation readings currently coupled with hawkish Fed expectation has caused the yield curve to flatten significantly – to multi-year lows.  A second order effect of these developments has occurred in the equity and risk markets as they continue to perform exceedingly well.  The major equity indices in the US make record new highs almost daily.

The MBS market has performed well in this environment as the resulting low volatility, tight trading spreads across most comparable asset classes and with demand from asset managers and REIT's easily replacing the lost demand expected from the Fed's tapering of their asset purchases. Current coupon, 30-year fixed rate mortgage are trading at their tightest spread to comparable duration treasuries since early 2014.   If these conditions persist we do not believe that the market will be likely to suffer a material widening of spreads to comparable duration U.S. treasuries, even as the Fed has started to trim their asset purchases.  The risk to this outcome appears to be inflation exceeding market expectations which should allow the Fed to carry out their professed intentions to raise rates three times in 2018 and more so in the years after. This would also put upward pressure on volatility and longer-term rates, both negatively impacting MBS performance.



Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our condensed consolidated financial statements.  These condensed consolidated financial statements are prepared in accordance with GAAP. The Company's significant accounting policies are described in Note 1 to the Company's accompanying condensed consolidated financial statements.

GAAP requires the Company'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, 2016.

Capital Expenditures

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

Off-Balance Sheet Arrangements

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

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.



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.


ITEM 1A.  RISK FACTORS.

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 8, 2017.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.  OTHER INFORMATION

None.



ITEM 6. EXHIBITS

Exhibit No

3.1
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
 
3.2
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
 
3.3
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
 
3.4
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
 
3.5
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
 
31.1
Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002*
 
31.2
Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002*
 
32.1
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002**
 
32.2
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002**
 
 
101.INS
Instance Document***
101.SCH
Taxonomy Extension Schema Document***
101.CAL
Taxonomy Extension Calculation Linkbase Document***
101.DEF
Additional Taxonomy Extension Definition Linkbase Document***
101.LAB
Taxonomy Extension Label Linkbase Document***
101.PRE
Taxonomy Extension Presentation Linkbase Document***

*
Filed herewith.
**
Furnished herewith
***
Submitted electronically herewith.

Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BIMINI CAPITAL MANAGEMENT, INC.


Date: November 3, 2017
 
By:
 /s/ Robert E. Cauley  
     
Robert E. Cauley
Chairman and Chief Executive Officer



Date: November 3, 2017
 
By:
 /s/ G. Hunter Hass, IV  
     
G. Hunter Haas, IV
President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)