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 March 31, 2019

  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 every Interactive Data File required to be submitted 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 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

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

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
May 10, 2019
   
12,708,555
 
Class B Common Stock, $0.001 par value
May 10, 2019
   
31,938
 
Class C Common Stock, $0.001 par value
May 10, 2019
   
31,938
 



BIMINI CAPITAL MANAGEMENT, INC.

TABLE OF CONTENTS


   
Page
 
       
PART I. FINANCIAL INFORMATION
 
       
ITEM 1. 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
   
44
 
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
   
56
 
SIGNATURES
   
47
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
(Unaudited)
       
    
March 31, 2019
   
December 31, 2018
 
ASSETS:
           
Mortgage-backed securities, at fair value
           
Pledged to counterparties
 
$
211,581,999
   
$
212,349,874
 
Unpledged
   
59,359
     
74,318
 
Total mortgage-backed securities
   
211,641,358
     
212,424,192
 
Cash and cash equivalents
   
5,003,253
     
4,947,801
 
Restricted cash
   
1,783,440
     
1,292,687
 
Orchid Island Capital, Inc. common stock, at fair value
   
10,001,837
     
9,713,030
 
Accrued interest receivable
   
764,511
     
780,535
 
Property and equipment, net
   
3,279,616
     
3,298,067
 
Deferred tax assets, at fair value
   
22,445,722
     
23,202,821
 
Other assets
   
3,873,179
     
3,740,543
 
Total Assets
 
$
258,792,916
   
$
259,399,676
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Repurchase agreements
 
$
199,146,000
   
$
200,396,000
 
Junior subordinated notes due to Bimini Capital Trust II
   
26,804,440
     
26,804,440
 
Accrued interest payable
   
434,865
     
678,262
 
Other liabilities
   
1,835,929
     
2,566,353
 
Total Liabilities
   
228,221,234
     
230,445,055
 
                 
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 March 31, 2019 and December 31, 2018
   
-
     
-
 
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 12,708,555
               
shares issued and outstanding as of March 31, 2019 and 12,709,269 shares issued
               
and outstanding as of December 31, 2018
   
12,709
     
12,709
 
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of March 31, 2019 and December 31, 2018
   
32
     
32
 
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of March 31, 2019 and December 31, 2018
   
32
     
32
 
Additional paid-in capital
   
334,917,723
     
334,919,265
 
Accumulated deficit
   
(304,358,814
)
   
(305,977,417
)
Stockholders’ Equity
   
30,571,682
     
28,954,621
 
Total Liabilities and Stockholders' Equity
 
$
258,792,916
   
$
259,399,676
 
See Notes to Condensed Consolidated Financial Statements
 

-1-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
For the Three Months Ended March 31, 2019 and 2018
 
             
   
2019
   
2018
 
Revenues:
           
Advisory services
 
$
1,607,320
   
$
2,093,465
 
Interest income
   
2,190,416
     
2,080,266
 
Dividend income from Orchid Island Capital, Inc. common stock
   
364,809
     
471,211
 
Total revenues
   
4,162,545
     
4,644,942
 
Interest expense
               
Repurchase agreements
   
(1,312,865
)
   
(809,266
)
Junior subordinated notes
   
(406,555
)
   
(337,333
)
Net revenues
   
2,443,125
     
3,498,343
 
                 
Other income (expense):
               
Unrealized gains (losses) on mortgage-backed securities
   
3,052,235
     
(4,879,806
)
Unrealized gains (losses) on Orchid Island Capital, Inc. common stock
   
288,807
     
(2,903,269
)
(Losses) gains on derivative instruments
   
(2,257,411
)
   
1,740,712
 
Gains (losses) on retained interests in securitizations
   
275,115
     
(82,664
)
Other income
   
246
     
606
 
Total other income (expense)
   
1,358,992
     
(6,124,421
)
                 
Expenses:
               
Compensation and related benefits
   
1,070,781
     
1,066,455
 
Directors' fees and liability insurance
   
160,641
     
160,613
 
Audit, legal and other professional fees
   
138,632
     
175,752
 
Administrative and other expenses
   
250,972
     
336,158
 
Total expenses
   
1,621,026
     
1,738,978
 
                 
Net income (loss) before income tax provision (benefit)
   
2,181,091
     
(4,365,056
)
Income tax provision (benefit)
   
562,488
     
(1,091,290
)
                 
Net income (loss)
 
$
1,618,603
   
$
(3,273,766
)
                 
Basic and Diluted Net income (loss) Per Share of:
               
CLASS A COMMON STOCK
               
Basic and Diluted
 
$
0.13
   
$
(0.26
)
CLASS B COMMON STOCK
               
Basic and Diluted
 
$
0.13
   
$
(0.26
)
Weighted Average Shares Outstanding:
               
CLASS A COMMON STOCK
               
Basic and Diluted
   
12,708,618
     
12,730,070
 
CLASS B COMMON STOCK
               
Basic and Diluted
   
31,938
     
31,938
 
See Notes to Condensed Consolidated Financial Statements
 

-2-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
(Unaudited)
 
For the Three Months Ended March 31, 2019 and 2018
 
                         
   
Stockholders' Equity
     
   
Common
 
Additional
 
Accumulated
     
   
Stock
 
Paid-in Capital
 
Deficit
 
Total
 
Balances, January 1, 2018
 
$
12,725
   
$
334,878,779
   
$
(279,199,256
)
 
$
55,692,248
 
Net loss
   
-
     
-
     
(3,273,766
)
   
(3,273,766
)
Class A common shares sold directly to employees
   
83
     
199,914
     
-
     
199,997
 
Amortization of stock based compensation
   
-
     
2,869
     
-
     
2,869
 
                                 
Balances, March 31, 2018
 
$
12,808
   
$
335,081,562
   
$
(282,473,022
)
 
$
52,621,348
 
                                 
Balances, January 1, 2019
 
$
12,773
   
$
334,919,265
   
$
(305,977,417
)
 
$
28,954,621
 
Net income
   
-
     
-
     
1,618,603
     
1,618,603
 
Class A common shares repurchased and retired
   
-
     
(1,542
)
   
-
     
(1,542
)
                                 
Balances, March 31, 2019
 
$
12,773
   
$
334,917,723
   
$
(304,358,814
)
 
$
30,571,682
 
See Notes to Condensed Consolidated Financial Statements
 

-3-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Three Months Ended March 31, 2019 and 2018
 
             
   
2019
   
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
1,618,603
   
$
(3,273,766
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Stock based compensation
   
-
     
2,869
 
Depreciation
   
18,451
     
19,449
 
Deferred income tax provision (benefit)
   
757,099
     
(896,482
)
(Gains) losses on mortgage-backed securities, net
   
(3,052,235
)
   
4,879,806
 
(Gains) losses on retained interests in securitizations
   
(275,115
)
   
82,664
 
Unrealized (gains) losses on Orchid Island Capital, Inc. common stock
   
(288,807
)
   
2,903,269
 
Realized and unrealized losses on forward settling TBA securities
   
1,067,686
     
523,438
 
Changes in operating assets and liabilities:
               
Accrued interest receivable
   
16,024
     
6,900
 
Other assets
   
(132,636
)
   
(510,719
)
Accrued interest payable
   
(243,397
)
   
(167,468
)
Other liabilities
   
(856,704
)
   
(541,710
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
   
(1,371,031
)
   
3,028,250
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
   
-
     
(5,080,712
)
Principal repayments
   
3,835,069
     
5,064,092
 
Payments received on retained interests in securitizations
   
-
     
298,978
 
Proceeds from termination of retained interests
   
275,115
     
-
 
Purchases of property and equipment
   
-
     
(15,393
)
Net settlement of forward settling TBA contracts
   
(941,406
)
   
-
 
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
3,168,778
     
266,965
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
   
348,756,000
     
439,403,535
 
Principal repayments on repurchase agreements
   
(350,006,000
)
   
(445,766,637
)
Class A common shares repurchased and retired
   
(1,542
)
   
-
 
Class A common shares sold directly to employees
   
-
     
199,997
 
NET CASH USED IN FINANCING ACTIVITIES
   
(1,251,542
)
   
(6,163,105
)
                 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
546,205
     
(2,867,890
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
   
6,240,488
     
8,752,860
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
 
$
6,786,693
   
$
5,884,970
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
Interest expense
 
$
1,962,817
   
$
1,314,067
 
Income taxes
 
$
(46,700
)
 
$
281,808
 
See Notes to Condensed Consolidated Financial Statements
 
-4-

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2019

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Business Description

Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”) formed in September 2003, is a holding company.  The Company operates in two business segments through its principal wholly-owned operating subsidiaries, Bimini Advisors Holdings, LLC and Royal Palm Capital, LLC.

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (a registered investment advisor), are collectively referred to as "Bimini Advisors."  Bimini Advisors manages a residential mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services. Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.

Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm.   All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

Variable Interest Entities (“VIEs”)

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

The Company obtains interests in VIEs through its investments in mortgage-backed securities.  The interests in these VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future.  As a result, the Company does not consolidate these VIEs and accounts for the interest in these VIEs as mortgage-backed securities.  See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities.  The maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.

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 may not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

-5-

The consolidated balance sheet at December 31, 2018 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, 2018.

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 determining the fair values of MBS, investment in Orchid common shares, derivatives and retained interests, determining the amounts of asset valuation allowances, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period.

Statement of Comprehensive 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 (loss) is the same as net income (loss) for all periods presented.

Segment Reporting

The Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance.  The accounting policies of the operating segments are the same as the Company’s accounting policies with the exception that inter-segment revenues and expenses are included in the presentation of segment results.  For further information see Note 15.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments.  The following table presents the Company’s cash, cash equivalents and restricted cash as of March 31, 2019 and December 31, 2018.

(in thousands)
           
 
March 31, 2019
 
December 31, 2018
 
Cash and cash equivalents
 
$
5,003,253
   
$
4,947,801
 
Restricted cash
   
1,783,440
     
1,292,687
 
Total cash, cash equivalents and restricted cash
 
$
6,786,693
   
$
6,240,488
 

The Company maintains cash balances at several banks and excess margin with an exchange clearing member. At times, 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 March 31, 2019, the Company’s cash deposits exceeded federally insured limits by approximately $3.7 million. The Company also maintains excess margin in accounts with derivative exchanges.  Restricted cash balances are uninsured, but are held in separate accounts that are segregated from the general funds of the counterparty.  The Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.

-6-

Advisory Services

Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement.  Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are recognized over the period of time in which the service is performed.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through (“PT”) certificates, collateralized mortgage obligations (“CMOs”), 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 for future reporting periods 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 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.

-7-

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. Any cash received from the retained interests are reflected in the consolidated statement of cash flows. Realized gains and subsequent adjustments to fair value are reflected in the consolidated statements of operations.

Derivative Financial Instruments

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

The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception of the TBA transaction, or throughout its term, that it will take physical delivery of the MBS for a long position, or make delivery of the MBS for a short position, upon settlement of the trade. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

FASB ASC Topic 815, Derivatives and Hedging , requires that all derivative instruments be carried at fair value.  Changes in fair value are recorded in the consolidated operations for each period.   The Company does not designate 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 election.

Holding derivatives creates exposure to credit risk related to the potential for failure by 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 and derivative assets and liabilities are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 14 of the consolidated financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of March 31, 2019 and December 31, 2018, 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. Further Information regarding these instruments is presented in Note 8 to the consolidated financial statements.

-8-


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 the issuance of the common stock.

Earnings Per Share

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

Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock. 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.

-9-


Income Taxes

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, 2015 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and Bimini Advisors are consolidated as a single tax paying entity.  Royal Palm files as a separate tax paying entity.

The Company measures, recognizes and presents its uncertain tax positions in accordance with ASC Topic 740, Income Taxes .  Under that guidance, the Company assesses the likelihood, based on their technical merit, that 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 early adopted the ASU beginning with the first quarter of 2017.

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.

NOTE 2. ADVISORY SERVICES

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

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

-10-

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, 2020 and provides for automatic one-year extension options thereafter.  Should Orchid terminate the management agreement without cause, it will be obligated to pay to Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the current automatic renewal term.

The following table summarizes the advisory services revenue from Orchid for the three months ended March 31, 2019 and 2018 .

(in thousands)
           
   
2019
   
2018
 
Management fee
 
$
1,285
   
$
1,712
 
Allocated overhead
   
322
     
381
 
Total
 
$
1,607
   
$
2,093
 

At March 31, 2019 and December 31, 2018, the net amount due from Orchid was approximately $0.5 million and $0.8 million, respectively. These amounts are included in “other assets” in the consolidated balance sheets.

NOTE 3.   MORTGAGE-BACKED SECURITIES

The following table presents the Company’s MBS portfolio as of March 31, 2019 and December 31, 2018:

(in thousands)
           
   
March 31, 2019
   
December 31, 2018
 
Fixed-rate MBS
 
$
209,262
   
$
209,675
 
Interest-Only MBS
   
1,703
     
2,021
 
Inverse Interest-Only MBS
   
676
     
728
 
Total
 
$
211,641
   
$
212,424
 

At March 31, 2019 and December 31, 2018, the portfolio consisted entirely of securities with contractual maturities in excess of ten years.  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.

NOTE 4.   REPURCHASE AGREEMENTS

As of March 31, 2019, the Company had outstanding repurchase agreement obligations of approximately $199.1 million with a net weighted average borrowing rate of 2.71%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $212.3 million.  As of December 31, 2018, the Company had outstanding repurchase agreement obligations of approximately $200.4 million with a net weighted average borrowing rate of 2.56%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $213.1 million, and cash pledged to counterparties of approximately $0.2 million.

-11-


As of March 31, 2019 and December 31, 2018, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)
                             
    
OVERNIGHT
   
BETWEEN 2
   
BETWEEN 31
   
GREATER
       
    
(1 DAY OR
   
AND
   
AND
   
THAN
       
   
LESS)
   
30 DAYS
   
90 DAYS
   
90 DAYS
   
TOTAL
 
March 31, 2019
                             
Fair value of securities pledged, including accrued
                             
interest receivable
 
$
1,844
   
$
97,966
   
$
112,534
   
$
-
   
$
212,344
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
1,374
   
$
91,861
   
$
105,911
   
$
-
   
$
199,146
 
Net weighted average borrowing rate
   
2.99
%
   
2.76
%
   
2.66
%
   
-
     
2.71
%
December 31, 2018
                                       
Fair value of securities pledged, including accrued
                                       
interest receivable
 
$
-
   
$
107,876
   
$
105,251
   
$
-
   
$
213,127
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
-
   
$
101,327
   
$
99,069
   
$
-
   
$
200,396
 
Net weighted average borrowing rate
   
-
     
2.56
%
   
2.56
%
   
-
     
2.56
%

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 March 31, 2019 and December 31, 2018, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $12.8 million and $12.4 million, respectively.  Summary information regarding amounts at risk with individual counterparties greater than 10% of equity at March 31, 2019 and December 31, 2018 is presented in the table below.

($ in thousands)
                 
         
% of
   
Weighted
 
         
Stockholders'
   
Average
 
   
Amount
   
Equity
   
Maturity
 
Repurchase Agreement Counterparties
 
at Risk
   
at Risk
   
(in Days)
 
March 31, 2019
                 
ED&F Man Capital Markets Inc.
 
$
4,564
     
14.9
%
   
25
 
Mirae Asset Securities (USA) Inc.
   
3,418
     
11.2
%
   
43
 
December 31, 2018
                       
ED&F Man Capital Markets Inc.
 
$
4,037
     
13.9
%
   
17
 
Mirae Asset Securities (USA) Inc.
   
3,506
     
12.1
%
   
40
 

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

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

In addition, the Company utilizes TBA securities as a means of investing in and financing MBS or as a means of reducing its exposure to MBS. The Company accounts for TBA securities as derivative instruments.

-12-

Derivative Liabilities, at Fair Value

The table below summarizes fair value information about our derivative liabilities as of March 31, 2019 and December 31, 2018.

(in thousands)
           
Derivative Instruments and Related Accounts
Balance Sheet Location
 
March 31, 2019
   
December 31, 2018
 
Liabilities
           
TBA Securities
Other liabilities
 
$
1,064
   
$
938
 
Total derivative liabilities, at fair value
   
$
1,064
   
$
938
 
                   
Margin Balances Posted to (from) Counterparties
                 
Futures contracts
Restricted cash
 
$
616
   
$
520
 
TBA securities
Restricted cash
   
1,167
     
543
 
Total margin balances on derivative contracts
   
$
1,783
   
$
1,063
 

Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar positions at March 31, 2019 and December 31, 2018.

($ in thousands)
                       
As of March 31, 2019
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity (1)
 
2019
 
$
133,333
     
2.63
%
   
2.47
%
 
$
(160
)
2020
   
150,000
     
2.84
%
   
2.21
%
   
(947
)
2021
   
100,000
     
2.80
%
   
2.13
%
   
(669
)
Total / Weighted Average
 
$
127,273
     
2.77
%
   
2.26
%
 
$
(1,776
)

($ in thousands)
                       
As of March 31, 2019
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity (1)
 
2019
 
$
26,000
     
1.68
%
   
2.48
%
 
$
157
 
2020
   
19,500
     
1.92
%
   
2.23
%
   
60
 
Total / Weighted Average
 
$
22,286
     
1.80
%
   
2.35
%
 
$
217
 

($ in thousands)
                       
As of December 31, 2018
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity (1)
 
2019
 
$
125,000
     
2.56
%
   
2.67
%
 
$
139
 
2020
   
150,000
     
2.84
%
   
2.49
%
   
(523
)
2021
   
100,000
     
2.80
%
   
2.46
%
   
(346
)
Total / Weighted Average
 
$
125,000
     
2.74
%
   
2.54
%
 
$
(730
)

-13-

($ in thousands)
                       
As of December 31, 2018
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity (1)
 
2019
 
$
26,000
     
1.63
%
   
2.68
%
 
$
271
 
2020
   
26,000
     
1.95
%
   
2.49
%
   
142
 
2021
   
26,000
     
2.22
%
   
2.46
%
   
61
 
Total / Weighted Average
 
$
26,000
     
1.93
%
   
2.54
%
 
$
474
 

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

The following table summarizes our contracts to purchase and sell TBA securities as of March 31, 2019 and December 31, 2018.

($ in thousands)
           
     
Notional
         
Net
     
Amount
 
Cost
 
Market
 
Carrying
     
Long (Short) (1)
 
Basis (2)
 
Value (3)
 
Value (4)
March 31, 2019
               
30-Year TBA Securities:
               
 
3.0%
$
(50,000)
$
(48,719)
$
(49,783)
$
(1,064)
December 31, 2018
               
30-Year TBA Securities:
               
 
3.0%
$
(50,000)
$
(47,844)
$
(48,782)
$
(938)

(1)
Notional amount represents the par value (or principal balance) of the underlying Agency MBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying Agency MBS.
(3)
Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) as of period-end.
(4)
Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our consolidated balance sheets.

(Losses) Gains On Derivative Instruments

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2019 and 2018.

(in thousands)
           
   
2019
   
2018
 
Eurodollar futures contracts (short positions)
           
Repurchase agreement funding hedges
 
$
(969
)
 
$
1,090
 
Junior subordinated debt funding hedges
   
(220
)
   
415
 
T-Note futures contracts (short positions)
               
Repurchase agreement funding hedges
   
-
     
759
 
Net TBA securities
   
(1,068
)
   
(523
)
(Losses) gains on derivative instruments
 
$
(2,257
)
 
$
1,741
 

-14-


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 recovering 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 table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of March 31, 2019 and December 31, 2018.

($ in thousands)
                                   
   
March 31, 2019
   
December 31, 2018
 
   
Repurchase
   
Derivative
         
Repurchase
   
Derivative
       
Assets Pledged to Counterparties
 
Agreements
   
Agreements
   
Total
   
Agreements
   
Agreements
   
Total
 
PT MBS - at fair value
 
$
209,262
   
$
-
   
$
209,262
   
$
209,675
   
$
-
   
$
209,675
 
Structured MBS - at fair value
   
2,320
     
-
     
2,320
     
2,675
     
-
     
2,675
 
Accrued interest on pledged securities
   
762
     
-
     
762
     
777
     
-
     
777
 
Restricted cash
   
-
     
1,783
     
1,783
     
230
     
1,063
     
1,293
 
Total
 
$
212,344
   
$
1,783
   
$
214,127
   
$
213,357
   
$
1,063
   
$
214,420
 

Assets Pledged from Counterparties

The table below summarizes assets pledged to Bimini from counterparties under repurchase agreements as of March 31, 2019 and December 31, 2018. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in other liabilities in the consolidated balance sheets.

($ in thousands)
           
Assets Pledged to Bimini
 
March 31, 2019
   
December 31, 2018
 
PT MBS - at fair value
 
$
698
   
$
-
 
Cash
   
305
     
371
 
Total
 
$
1,003
   
$
371
 

-15-


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 tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2019 and December 31, 2018.

(in thousands)
                                   
Offsetting of Liabilities
 
                   
Gross Amount Not Offset in the
       
             
Net Amount
 
Consolidated Balance Sheet
       
     
Gross Amount
 
of Liabilities
 
Financial
         
 
Gross Amount
 
Offset in the
 
Presented in the
 
Instruments
 
Cash
     
 
of Recognized
 
Consolidated
 
Consolidated
 
Posted as
 
Posted as
 
Net
 
 
Liabilities
 
Balance Sheet
 
Balance Sheet
 
Collateral
 
Collateral
 
Amount
 
March 31, 2019
                                   
Repurchase Agreements
 
$
199,146
   
$
-
   
$
199,146
   
$
(199,146
)
 
$
-
   
$
-
 
TBA securities
   
1,064
     
-
     
1,064
     
-
     
(1,167
)
   
(103
)
   
$
200,210
   
$
-
   
$
200,210
   
$
(199,146
)
 
$
(1,167
)
 
$
(103
)
December 31, 2018
                                               
Repurchase Agreements
 
$
200,396
   
$
-
   
$
200,396
   
$
(200,166
)
 
$
(230
)
 
$
-
 
TBA securities
   
938
     
-
     
938
     
-
     
(543
)
   
395
 
   
$
201,334
   
$
-
   
$
201,334
   
$
(200,166
)
 
$
(773
)
 
$
395
 

The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero in accordance with ASC 210-20-50.  The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented.  See Note 6 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.

NOTE 8.  TRUST PREFERRED SECURITIES

During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) 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 March 31, 2019 and December 31, 2018, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million.  The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate.  As of March 31, 2019, the interest rate was 6.11%. 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.

-16-

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 three months ended March 31, 2019 and 2018.

Shares Issued Related To:
 
2019
   
2018
 
Shares sold directly to employees
   
-
     
83,332
 
Total shares of Class A Common Stock issued
   
-
     
83,332
 

There were no issuances of Bimini Capital's Class B Common Stock and Class C Common Stock during the three months ended March 31, 2019 and 2018.

Stock Repurchase Plan

On March 26, 2018, the Board of Directors of Bimini Capital Management, Inc. (the “Company”) approved a Stock Repurchase Plan (“Repurchase Plan”).  Pursuant to Repurchase Plan, the Company may purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934.  Share repurchases may be executed through various means, including, without limitation, open market transactions.  The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it was extended by the Board of Directors until November 15, 2019.  The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.

From the inception of the Repurchase Plan through March 31, 2019, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,241, including commissions and fees, for a weighted average price of $2.37 per share.

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.

-17-


Performance Units

The Compensation Committee of the Board of Directors of Bimini Capital (the "Committee") has issued, and may in the future issue additional, 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 three months ended March 31, 2019 and 2018:

($ in thousands, except per share data)
                       
   
Three Months Ended March 31,
 
   
2019
   
2018
 
         
Weighted
         
Weighted
 
         
Average
         
Average
 
         
Grant Date
         
Grant Date
 
         
Fair Value
         
Fair Value
 
   
Shares
   
Per Share
 
Shares
   
Per Share
 
Unvested, beginning of period
   
-
   
$
-
     
41,000
   
$
0.84
 
Granted
   
-
     
-
     
-
     
-
 
Vested and issued
   
-
     
-
     
-
     
-
 
Unvested, end of period
   
-
   
$
-
     
41,000
   
$
0.84
 
                                 
Compensation expense during the period
         
$
-
           
$
3
 
Unrecognized compensation expense at period end
         
$
-
           
$
8
 
Weighted-average remaining vesting term (in years)
           
-
             
0.7
 
Intrinsic value of unvested shares at period end
         
$
-
           
$
96
 

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 March 31, 2019.

NOTE 12.  INCOME TAXES

The total income tax provision (benefit) recorded for the three months ended March 31, 2019 and 2018 was $0.6 million and $(1.1) million, respectively, on consolidated pre-tax book income (loss) of $2.2 million and $(4.4) million in the three months ended March 31, 2019 and 2018, respectively.

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

-18-


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 March 31, 2019 and 2018.

Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at March 31, 2019 and 2018.

The Company has dividend eligible stock incentive plan shares that were outstanding during the three months ended March 31, 2018. 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 three months ended March 31, 2019 and 2018.

(in thousands, except per-share information)
           
   
2019
   
2018
 
Basic and diluted EPS per Class A common share:
           
Income (loss) attributable to Class A common shares:
           
Basic and diluted
 
$
1,615
   
$
(3,266
)
Weighted average common shares:
               
Class A common shares outstanding at the balance sheet date
   
12,709
     
12,744
 
Effect of weighting
   
-
     
(14
)
Weighted average shares-basic and diluted
   
12,709
     
12,730
 
Income (loss) per Class A common share:
               
Basic and diluted
 
$
0.13
   
$
(0.26
)

(in thousands, except per-share information)
           
   
2019
   
2018
 
Basic and diluted EPS per Class B common share:
           
Income (loss) attributable to Class B common shares:
           
Basic and diluted
 
$
4
   
$
(8
)
Weighted average common shares:
               
Class B common shares outstanding at the balance sheet date
   
32
     
32
 
Effect of weighting
   
-
     
-
 
Weighted average shares-basic and diluted
   
32
     
32
 
Income (loss) per Class B common share:
               
Basic and diluted
 
$
0.13
   
$
(0.26
)

-19-


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.

MBS, Orchid common stock, retained interests and TBA securities were all recorded at fair value on a recurring basis during the three months ended March 31, 2019 and 2018. 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 Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes, 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. The Company and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets, spread pricing techniques (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.

-20-


The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

(in thousands)
                       
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
   
Fair Value
   
Assets
   
Inputs
   
Inputs
 
   
Measurements
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
March 31, 2019
                       
Mortgage-backed securities
 
$
211,641
   
$
-
   
$
211,641
   
$
-
 
Orchid Island Capital, Inc. common stock
   
10,002
     
10,002
     
-
     
-
 
TBA securities
   
(1,064
)
   
-
     
(1,064
)
   
-
 
December 31, 2018
                               
Mortgage-backed securities
 
$
212,424
   
$
-
   
$
212,424
   
$
-
 
Orchid Island Capital, Inc. common stock
   
9,713
     
9,713
     
-
     
-
 
TBA securities
   
(938
)
   
-
     
(938
)
   
-
 

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 three months ended March 31, 2019 and 2018:

(in thousands)
           
   
Retained Interests in Securitizations
 
   
Three Months Ended March 31,
 
   
2019
   
2018
 
Balances, January 1
 
$
-
   
$
653
 
Gain (loss) included in earnings
   
275
     
(83
)
Collections
   
(275
)
   
(298
)
Balances, March 31
 
$
-
   
$
272
 

During the three months ended March 31, 2019 and 2018, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.


NOTE 15.   SEGMENT INFORMATION

The Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment.

The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid.  Total revenues received under this management agreement for the three months ended March 31, 2019 and 2018, were approximately $1.6 million and $2.1 million, respectively, accounting for approximately 39% and 45% of consolidated revenues, respectively.

The investment portfolio segment includes the investment activities conducted by Royal Palm.  The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.

-21-


Segment information for the three months ended March 31, 2019 and 2018 is as follows:

(in thousands)
                             
   
Asset
   
Investment
                   
   
Management
   
Portfolio
   
Corporate
   
Eliminations
   
Total
 
2019
                             
Advisory services, external customers
 
$
1,607
   
$
-
   
$
-
   
$
-
   
$
1,607
 
Advisory services, other operating segments (1)
   
68
     
-
     
-
     
(68
)
   
-
 
Interest and dividend income
   
-
     
2,555
     
-
     
-
     
2,555
 
Interest expense
   
-
     
(1,313
)
   
(406
) (2)
   
-
     
(1,719
)
Net revenues
   
1,675
     
1,242
     
(406
)
   
(68
)
   
2,443
 
Other
   
-
     
1,304
     
55
(3)  
   
-
     
1,359
 
Operating expenses (4)
   
(630
)
   
(991
)
   
-
     
-
     
(1,621
)
Intercompany expenses (1)
   
-
     
(68
)
   
-
     
68
     
-
 
Income (loss) before income taxes
 
$
1,045
   
$
1,487
   
$
(351
)
 
$
-
   
$
2,181
 
                                         

   
Asset
   
Investment
                   
   
Management
   
Portfolio
   
Corporate
   
Eliminations
   
Total
 
2018
                             
Advisory services, external customers
 
$
2,093
   
$
-
   
$
-
   
$
-
   
$
2,093
 
Advisory services, other operating segments (1)
   
58
     
-
     
-
     
(58
)
   
-
 
Interest and dividend income
   
-
     
2,551
     
-
     
-
     
2,551
 
Interest expense
   
-
     
(809
)
   
(337
) (2)
   
-
     
(1,146
)
Net revenues
   
2,151
     
1,742
     
(337
)
   
(58
)
   
3,498
 
Other
   
-
     
(6,457
)
   
333
(3)  
   
-
     
(6,124
)
Operating expenses (4)
   
(761
)
   
(978
)
   
-
     
-
     
(1,739
)
Intercompany expenses (1)
   
-
     
(58
)
   
-
     
58
     
-
 
Income (loss) before income taxes
 
$
1,390
   
$
(5,751
)
 
$
(4
)
 
$
-
   
$
(4,365
)

(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services.
(2)
Includes interest on junior subordinated note.
(3)
Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations.
(4)
Corporate expenses are allocated based on each segment’s proportional share of total revenues.

Assets in each reportable segment were as follows:

(in thousands)
                       
 
Asset
 
Investment
         
 
Management
 
Portfolio
 
Corporate
 
Total
 
March 31, 2019
 
$
1,507
   
$
245,045
   
$
12,241
   
$
258,793
 
December 31, 2018
   
1,488
     
245,866
     
12,046
     
259,400
 

NOTE 16. RELATED PARTY TRANSACTIONS

Relationships with Orchid

At both March 31, 2019 and December 31, 2018, the Company owned 1,520,036 shares of Orchid common stock, representing approximately 3.0% and 3.1% of Orchid’s outstanding common stock on such dates.  The Company received dividends on this common stock investment of approximately $0.4 million and $0.5 million during the three months ended March 31, 2019 and 2018, respectively.

-22-

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. Robert J. Dwyer and Frank E. Jaumot, our independent directors, each own shares of common stock of Orchid.

-23-


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, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 2003.   The Company’s principal wholly-owned operating subsidiaries are Bimini Advisors Holdings, LLC and Royal Palm Capital, LLC.   We operate in two business segments: the asset management segment, which includes the investment advisory services provided by Bimini Advisors to Orchid, and the investment portfolio segment, which includes the investment activities conducted by Bimini Capital and Royal Palm.

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (a registered investment advisor), are collectively referred to as “Bimini Advisors.”  Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and expense reimbursements.  As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations.  Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. In addition, the Company receives dividends from its investment in Orchid common shares.

Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as “Royal Palm”) maintains an investment portfolio, consisting primarily of 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.

Stock Repurchase Plan

On March 26, 2018, the Board of Directors of Bimini Capital Management, Inc. (the “Company”) approved a Stock Repurchase Plan (“Repurchase Plan”).  Pursuant to Repurchase Plan, the Company may purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934.  Share repurchases may be executed through various means, including, without limitation, open market transactions.  The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it was extended by the Board of Directors until November 15, 2019.  The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.

Through March 31, 2019, the Company repurchased a total of 70,704 shares at an aggregate cost of approximately $166,241, including commissions and fees, for a weighted average price of $2.37 per share.

-24-


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 U.S. government, including the  presidential administration, the Federal Reserve (the “Fed”), the Federal Open Market Committee (the “FOMC”) 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 three months ended March 31, 2019, as compared to the three months ended March 31, 2018.

-25-


Net Income (Loss) Summary

Consolidated net income for the three months ended March 31, 2019 was $1.6 million, or $0.13 basic and diluted income per share of Class A Common Stock, as compared to a consolidated net loss of $3.3 million, or $0.26 basic and diluted loss per share of Class A Common Stock, for the three months ended March 31, 2018. The components of net income (loss) for the three months ended March 31, 2019 and 2018, along with the changes in those components are presented in the table below.

(in thousands)
                 
   
Three Months Ended March 31,
 
   
2019
   
2018
   
Change
 
Advisory services revenues
 
$
1,607
   
$
2,093
   
$
(486
)
Interest and dividend income
   
2,555
     
2,551
     
4
 
Interest expense
   
(1,719
)
   
(1,146
)
   
(573
)
Net revenues
   
2,443
     
3,498
     
(1,055
)
Other income (expense)
   
1,359
     
(6,124
)
   
7,483
 
Expenses
   
(1,621
)
   
(1,739
)
   
118
 
Net income (loss) before income tax provision (benefit)
   
2,181
     
(4,365
)
   
6,546
 
Income tax provision (benefit)
   
562
     
(1,091
)
   
1,653
 
Net income (loss)
 
$
1,619
   
$
(3,274
)
 
$
4,893
 

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 and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.

We have not elected to designate our derivative holdings for hedge accounting treatment under 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 and unrealized gains or losses on certain derivative instruments the Company uses that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period.  Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period.

For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.

-26-


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 2019 and 2018.

Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
 
(in thousands)
                 
   
Recognized in
             
   
Statement of
   
TBA
       
   
Operations
   
Securities
   
Futures
 
   
(GAAP)
   
Income (Loss)
   
Contracts
 
Three Months Ended
                 
March 31, 2019
 
$
(2,257
)
 
$
(1,068
)
 
$
(1,189
)
December 31, 2018
   
(3,835
)
   
(1,214
)
   
(2,621
)
September 30, 2018
   
948
     
349
     
599
 
June 30, 2018
   
870
     
194
     
676
 
March 31, 2018
   
1,741
     
(523
)
   
2,264
 

Gains (Losses) on Derivative Instruments
 
(in thousands)
                                   
   
Attributed to Current Period (Non-GAAP)
   
Attributed to Future Periods (Non-GAAP)
 
         
Junior
               
Junior
       
   
Repurchase
   
Subordinated
         
Repurchase
   
Subordinated
       
   
Agreements
   
Debt
   
Total
   
Agreements
   
Debt
   
Total
 
Three Months Ended
                                   
March 31, 2019
 
$
5
   
$
65
   
$
70
   
$
(974
)
 
$
(285
)
 
$
(1,259
)
December 31, 2018
   
134
     
68
     
202
     
(2,318
)
   
(505
)
   
(2,823
)
September 30, 2018
   
(35
)
   
11
     
(24
)
   
513
     
110
     
623
 
June 30, 2018
   
(108
)
   
(19
)
   
(127
)
   
642
     
161
     
803
 
March 31, 2018
   
(154
)
   
(33
)
   
(187
)
   
2,003
     
448
     
2,451
 

-27-


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
 
   
Income
   
Basis
   
Hedges (1)
   
Basis (2)
   
Basis
   
Basis (3)
 
Three Months Ended
 
March 31, 2019
 
$
2,190
   
$
1,313
   
$
5
   
$
1,308
   
$
877
   
$
882
 
December 31, 2018
   
2,227
     
1,235
     
134
     
1,101
     
992
     
1,126
 
September 30, 2018
   
2,054
     
1,049
     
(35
)
   
1,084
     
1,005
     
970
 
June 30, 2018
   
2,001
     
938
     
(108
)
   
1,046
     
1,063
     
955
 
March 31, 2018
   
2,080
     
808
     
(154
)
   
962
     
1,272
     
1,118
 

(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
 
   
Basis
   
Basis (1)
   
Basis
   
Hedges (2)
   
Basis (3)
   
Basis
   
Basis (4)
 
Three Months Ended
 
March 31, 2019
 
$
877
   
$
882
   
$
406
   
$
65
   
$
341
   
$
471
   
$
541
 
December 31, 2018
   
992
     
1,126
     
393
     
68
     
325
     
599
     
801
 
September 30, 2018
   
1,005
     
970
     
388
     
11
     
377
     
617
     
593
 
June 30, 2018
   
1,063
     
955
     
372
     
(19
)
   
391
     
691
     
564
 
March 31, 2018
   
1,272
     
1,118
     
337
     
(33
)
   
370
     
935
     
748
 

(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 adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income.

-28-


Segment Information

We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm.  Segment information for the three months ended March 31, 2019 and 2018 is as follows:

(in thousands)
                             
   
Asset
   
Investment
                   
   
Management
   
Portfolio
   
Corporate
   
Eliminations
   
Total
 
2019
                             
Advisory services, external customers
 
$
1,607
   
$
-
   
$
-
   
$
-
   
$
1,607
 
Advisory services, other operating segments (1)
   
68
     
-
     
-
     
(68
)
   
-
 
Interest and dividend income
   
-
     
2,555
     
-
     
-
     
2,555
 
Interest expense
   
-
     
(1,313
)
   
(406
) (2)
   
-
     
(1,719
)
Net revenues
   
1,675
     
1,242
     
(406
)
   
(68
)
   
2,443
 
Other
   
-
     
1,304
     
55
(3)  
   
-
     
1,359
 
Operating expenses (4)
   
(630
)
   
(991
)
   
-
     
-
     
(1,621
)
Intercompany expenses (1)
   
-
     
(68
)
   
-
     
68
     
-
 
Income (loss) before income taxes
 
$
1,045
   
$
1,487
   
$
(351
)
 
$
-
   
$
2,181
 
                                         

   
Asset
   
Investment
                   
   
Management
   
Portfolio
   
Corporate
   
Eliminations
   
Total
 
2018
                             
Advisory services, external customers
 
$
2,093
   
$
-
   
$
-
   
$
-
   
$
2,093
 
Advisory services, other operating segments (1)
   
58
     
-
     
-
     
(58
)
   
-
 
Interest and dividend income
   
-
     
2,551
     
-
     
-
     
2,551
 
Interest expense
   
-
     
(809
)
   
(337
) (2)
   
-
     
(1,146
)
Net revenues
   
2,151
     
1,742
     
(337
)
   
(58
)
   
3,498
 
Other
   
-
     
(6,457
)
   
333
(3)  
   
-
     
(6,124
)
Operating expenses (4)
   
(761
)
   
(978
)
   
-
     
-
     
(1,739
)
Intercompany expenses (1)
   
-
     
(58
)
   
-
     
58
     
-
 
Income (loss) before income taxes
 
$
1,390
   
$
(5,751
)
 
$
(4
)
 
$
-
   
$
(4,365
)

(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on junior subordinated note.
(3)
Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations.
(4)
Corporate expenses are allocated based on each segment’s proportional share of total revenues.

Assets in each reportable segment were as follows:

(in thousands)
                       
 
Asset
 
Investment
         
 
Management
 
Portfolio
 
Corporate
 
Total
 
March 31, 2019
 
$
1,507
   
$
245,045
   
$
12,241
   
$
258,793
 
December 31, 2018
   
1,488
     
245,866
     
12,046
     
259,400
 

-29-


Asset Management Segment

Advisory Services Revenue

Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement. We receive a monthly management fee in the amount of:

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

In addition, Orchid is obligated to reimburse us for any direct expenses incurred on its behalf and to pay to us an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 2020 and provides for automatic one-year extension options. Should Orchid terminate the management agreement without cause, it will be obligated to pay to us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.

The following table summarizes the advisory services revenue received from Orchid in each quarter during 2019 and 2018.

(in thousands)
                             
   
Average
   
Average
   
Advisory Services
 
   
Orchid
   
Orchid
   
Management
   
Overhead
       
Three Months Ended
 
MBS
   
Equity
   
Fee
   
Allocation
   
Total
 
March 31, 2019
 
$
3,051,509
   
$
363,204
   
$
1,285
   
$
322
   
$
1,607
 
December 31, 2018
   
3,264,230
     
395,911
     
1,404
     
434
     
1,838
 
September 30, 2018
   
3,601,776
     
431,962
     
1,482
     
391
     
1,873
 
June 30, 2018
   
3,717,690
     
469,974
     
1,606
     
361
     
1,967
 
March 31, 2018
   
3,745,298
     
488,906
     
1,712
     
381
     
2,093
 

Investment Portfolio Segment

Net Portfolio Interest Income

We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding.  During the three months ended March 31, 2019, we generated $0.9 million of net portfolio interest income, consisting of $2.2 million of interest income from MBS assets offset by $1.3 million of interest expense on repurchase liabilities.  For the comparable period ended March 31, 2018, we generated $1.3 million of net portfolio interest income, consisting of $2.1 million of interest income from MBS assets offset by $0.8 million of interest expense on repurchase liabilities. The $0.1 million increase in interest income for the three months ended March 31, 2019 was due to a $4.7 million increase in average MBS balances, combined with a 12 basis point ("bp") increase in yields earned on the portfolio.  The $0.5 million increase in interest expense for the three months ended March 31, 2019 was due to a combination of a $2.8 million increase in average repurchase liabilities and a 99 bp increase in cost of funds.

Our economic interest expense on repurchase liabilities for the three months ended March 31, 2019 and 2018 was $1.3 million and $1.0 million, respectively, resulting in $0.9 million and $1.1 million of economic net portfolio interest income, respectively.

-30-


The tables below provide 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 three months ended March 31, 2019 and for each quarter in 2018 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
 
   
Held (1)
   
Income (2)
   
MBS
   
Agreements (1)
   
Basis
   
Basis (2)
   
Basis
   
Basis (3)
 
Three Months Ended
                                               
March 31, 2019
 
$
212,033
   
$
2,190
     
4.13
%
   
199,771
   
$
1,313
   
$
1,308
     
2.63
%
   
2.62
%
December 31, 2018
   
212,317
     
2,227
     
4.20
%
   
202,069
     
1,235
     
1,101
     
2.44
%
   
2.18
%
September 30, 2018
   
198,367
     
2,054
     
4.14
%
   
189,582
     
1,049
     
1,084
     
2.21
%
   
2.29
%
June 30, 2018
   
194,677
     
2,001
     
4.11
%
   
184,621
     
938
     
1,046
     
2.03
%
   
2.27
%
March 31, 2018
   
207,261
     
2,080
     
4.01
%
   
197,001
     
808
     
962
     
1.64
%
   
1.96
%

($ in thousands)
                       
   
Net Portfolio
   
Net Portfolio
 
   
Interest Income
   
Interest Spread
 
   
GAAP
   
Economic
   
GAAP
   
Economic
 
   
Basis
   
Basis (2)
   
Basis
   
Basis (4)
 
Three Months Ended
                       
March 31, 2019
 
$
877
   
$
882
     
1.50
%
   
1.51
%
December 31, 2018
   
992
     
1,126
     
1.76
%
   
2.02
%
September 30, 2018
   
1,005
     
970
     
1.93
%
   
1.85
%
June 30, 2018
   
1,063
     
955
     
2.08
%
   
1.84
%
March 31, 2018
   
1,272
     
1,117
     
2.37
%
   
2.05
%

(1)
Portfolio yields and costs of borrowings presented in the table above and the tables on page 32 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the quarterly 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 table above and the tables on page 32 include the effect of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS held.
(4)
Economic Net Interest Spread is calculated by subtracting average economic cost of funds from yield on average MBS.

Interest Income and Average Earning Asset Yield

Our interest income was $2.2 million for the three months ended March 31, 2019 and $2.1 million for the three months ended March 31, 2018.  Average MBS holdings were $212.0 million and $207.3 million for the three months ended March 31, 2019 and 2018, respectively. The $0.1 million increase in interest income was due to a $4.7 million increase in average MBS holdings combined with a 12 basis point ("bp") increase in yields.

-31-


The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and pass-through MBS (“PT MBS”) for the three months ended March 31, 2019 and for each quarter in 2018.

($ in thousands)
                                                     
   
Average MBS Held
   
Interest Income
   
Realized Yield on Average MBS
 
   
PT
   
Structured
         
PT
   
Structured
         
PT
   
Structured
       
   
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
 
Three Months Ended
 
March 31, 2019
 
$
209,469
   
$
2,564
   
$
212,033
   
$
2,143
   
$
47
   
$
2,190
     
4.09
%
   
7.42
%
   
4.13
%
December 31, 2018
   
209,971
     
2,346
     
212,317
     
2,181
     
46
     
2,227
     
4.15
%
   
7.85
%
   
4.20
%
September 30, 2018
   
196,305
     
2,062
     
198,367
     
2,008
     
46
     
2,054
     
4.09
%
   
8.94
%
   
4.14
%
June 30, 2018
   
192,368
     
2,309
     
194,677
     
1,959
     
42
     
2,001
     
4.07
%
   
7.16
%
   
4.11
%
March 31, 2018
   
204,786
     
2,475
     
207,261
     
2,054
     
26
     
2,080
     
4.01
%
   
4.29
%
   
4.01
%

Interest Expense on Repurchase Agreements and the Cost of Funds

Our average outstanding balances under repurchase agreements were $199.8 million and $197.0 million, generating interest expense of $1.3 million and $0.8 million for the three months ended March 31, 2019 and 2018, respectively.  Our average cost of funds was 2.63% and 1.64% for three months ended March 31, 2019 and 2018, respectively.  There was a 99 bp increase in the average cost of funds and a $2.8 million increase in average outstanding balances under repurchase agreements during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. 

 Our economic interest expense was $1.3 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively. There was a 66 bp increase in the average economic cost of funds to 2.62% for the three months ended March 31, 2019 from 1.96% for the three months ended March 31, 2018.  The $0.3 million increase in economic interest expense was due to the $2.8 million increase in average outstanding repurchase agreements during the three months ended March 31, 2019, combined with the favorable performance of our derivative holdings attributed to the current period.

Because all of our repurchase agreements are short-term, changes in market rates have a more immediate impact on our interest expense.  The Company’s average cost of funds calculated on a GAAP basis was 13 bps above the average one-month LIBOR and 14 bps below the average six-month LIBOR for the quarter ended March 31, 2019.  The Company’s average economic cost of funds was 12 bps above the average one-month LIBOR and 15 bps below the average six-month LIBOR for the quarter ended March 31, 2019. The average term to maturity of the outstanding repurchase agreements increased from 31 days at December 31, 2018 to 37 days at March 31, 2019.

The tables below present the average outstanding balances under all repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for the three months ended March 31, 2019 and for each quarter in 2018 on both a GAAP and economic basis.

($ in thousands)
                             
   
Average
                         
   
Balance of
   
Interest Expense
   
Average Cost of Funds
 
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
   
Agreements
   
Basis
   
Basis
   
Basis
   
Basis
 
Three Months Ended
                             
March 31, 2019
 
$
199,771
   
$
1,313
   
$
1,308
     
2.63
%
   
2.62
%
December 31, 2018
   
202,069
     
1,235
     
1,101
     
2.44
%
   
2.18
%
September 30, 2018
   
189,582
     
1,049
     
1,084
     
2.21
%
   
2.29
%
June 30, 2018
   
184,621
     
938
     
1,046
     
2.03
%
   
2.27
%
March 31, 2018
   
197,001
     
808
     
962
     
1.64
%
   
1.96
%

-32-

               
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
 
   
One-Month
   
Six-Month
   
LIBOR
   
LIBOR
   
LIBOR
   
LIBOR
 
Three Months Ended
                                   
March 31, 2019
   
2.50
%
   
2.77
%
   
0.13
%
   
(0.14
)%
   
0.12
%
   
(0.15
)%
December 31, 2018
   
2.39
%
   
2.74
%
   
0.05
%
   
(0.30
)%
   
(0.21
)%
   
(0.56
)%
September 30, 2018
   
2.17
%
   
2.55
%
   
0.04
%
   
(0.34
)%
   
0.12
%
   
(0.26
)%
June 30, 2018
   
1.99
%
   
2.48
%
   
0.04
%
   
(0.45
)%
   
0.28
%
   
(0.21
)%
March 31, 2018
   
1.69
%
   
2.11
%
   
(0.05
)%
   
(0.47
)%
   
0.27
%
   
(0.15
)%

Dividend Income

At both March 31, 2019 and December 31, 2018, we owned 1,520,036 shares of Orchid common stock.  Orchid paid total dividends of $0.24 per share and $0.31 per share during the three months ended March 31, 2019 and 2018, respectively.  During the three months ended March 31, 2019 and 2018, we received dividends on this common stock investment of approximately $0.3 million and $0.5 million, respectively.

Junior Subordinated Notes

Interest expense on our junior subordinated debt securities was approximately $0.4 million for the three month period ended March 31, 2019, compared to approximately $0.3 million for the same period in 2018.  The average rate of interest paid for the three months ended March 31, 2019 was 6.25% compared to 5.19% for the comparable period in 2018. The junior subordinated debt securities pay interest at a floating rate.  The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date.  As of March 31, 2019, the interest rate was 6.11%.

Gains or Losses and Other Income

The table below presents our gains or losses and other income for the three months ended March 31, 2019 and 2018.

(in thousands)
                 
   
2019
   
2018
   
Change
 
Unrealized gains (losses) on MBS
 
$
3,052
   
$
(4,880
)
 
$
7,932
 
(Losses) gains on derivative instruments
   
(2,257
)
   
1,741
     
(3,998
)
Gains (losses) on retained interests
   
275
     
(83
)
   
358
 
Unrealized gains (losses) on Orchid Island Capital, Inc. common stock
   
289
     
(2,903
)
   
3,192
 

We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from trading in these securities.   However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy.  We did not sell any MBS during the three months ended March 31, 2019 and 2018.

-33-


The fair value of our 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 as of each quarter end during 2019 and 2018.

   
5 Year
   
10 Year
   
15 Year
   
30 Year
   
Three
 
   
U.S. Treasury
   
U.S. Treasury
   
Fixed-Rate
   
Fixed-Rate
   
Month
 
   
Rate (1)
   
Rate (1)
   
Mortgage Rate (2)
   
Mortgage Rate (2)
   
Libor (3)
 
March 31, 2019
   
2.24
%
   
2.41
%
   
3.72
%
   
4.27
%
   
2.61
%
December 31, 2018
   
2.51
%
   
2.69
%
   
4.09
%
   
4.64
%
   
2.80
%
September 30, 2018
   
2.95
%
   
3.06
%
   
4.08
%
   
4.63
%
   
2.40
%
June 30, 2018
   
2.73
%
   
2.85
%
   
4.04
%
   
4.57
%
   
2.34
%
March 31, 2018
   
2.56
%
   
2.74
%
   
3.91
%
   
4.44
%
   
2.31
%

(1)
Historical 5 Year and 10 U.S. 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 is obtained from the Intercontinental Exchange Benchmark Administration Ltd.


Operating Expenses

For the three months ended March 31, 2019, our total operating expenses were approximately $1.6 million compared to approximately $1.7 million for the three months ended March 31, 2018. The table below presents a breakdown of operating expenses for the three months ended March 31, 2019 and 2018.

(in thousands)
                 
   
2019
   
2018
   
Change
 
Compensation and benefits
 
$
1,071
   
$
1,066
   
$
5
 
Legal fees
   
26
     
66
     
(40
)
Accounting, auditing and other professional fees
   
113
     
110
     
3
 
Directors’ fees and liability insurance
   
161
     
161
     
-
 
Other G&A expenses
   
250
     
336
     
(86
)
   
$
1,621
   
$
1,739
   
$
(118
)

Financial Condition:

Mortgage-Backed Securities

As of March 31, 2019, our MBS portfolio consisted of $211.6 million of agency or government MBS at fair value and had a weighted average coupon of 4.25%.  During the three months ended March 31, 2019, we received principal repayments of $3.8 million compared to $5.1 million for the comparable period ended March 31, 2018.  The average prepayment speeds for the quarters ended March 31, 2019 and 2018 were 6.8% and 8.6%, respectively.

-34-


The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our 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 (%)
 
March 31, 2019
   
5.7
     
13.4
     
6.8
 
December 31, 2018
   
5.5
     
11.7
     
6.6
 
September 30, 2018
   
8.6
     
13.5
     
9.5
 
June 30, 2018
   
13.4
     
11.6
     
13.1
 
March 31, 2018
   
7.2
     
16.8
     
8.6
 

The following tables summarize certain characteristics of our PT MBS and structured MBS as of March 31, 2019 and December 31, 2018:

($ in thousands)
           
         
Weighted
 
     
Percentage
 
Average
 
     
of
Weighted
Maturity
 
   
Fair
Entire
Average
in
Longest
Asset Category
 
Value
Portfolio
Coupon
Months
Maturity
March 31, 2019
           
Fixed Rate MBS
$
209,262
98.9%
4.26%
318
1-Aug-48
Interest-Only MBS
 
1,703
0.8%
3.69%
285
15-Jul-48
Inverse Interest-Only MBS
 
676
0.3%
4.08%
263
25-Apr-41
Total MBS Portfolio
$
211,641
100.0%
4.25%
322
1-Aug-48
December 31, 2018
           
Fixed Rate MBS
$
209,675
98.7%
4.26%
327
1-Aug-48
Interest-Only MBS
 
2,021
1.0%
3.69%
293
15-Jul-48
Inverse Interest-Only MBS
 
728
0.3%
4.06%
272
25-Apr-41
Total MBS Portfolio
$
212,424
100.0%
4.25%
327
1-Aug-48

($ in thousands)
                       
   
March 31, 2019
   
December 31, 2018
 
         
Percentage of
         
Percentage of
 
Agency
 
Fair Value
   
Entire Portfolio
   
Fair Value
   
Entire Portfolio
 
Fannie Mae
 
$
193,128
     
91.3
%
 
$
193,437
     
91.1
%
Freddie Mac
   
18,436
     
8.7
%
   
18,881
     
8.9
%
Ginnie Mae
   
77
     
0.0
%
   
106
     
0.0
%
Total Portfolio
 
$
211,641
     
100.0
%
 
$
212,424
     
100.0
%

-35-



   
March 31, 2019
   
December 31, 2018
 
Weighted Average Pass-through Purchase Price
 
$
106.81
   
$
106.81
 
Weighted Average Structured Purchase Price
 
$
6.39
   
$
6.39
 
Weighted Average Pass-through Current Price
 
$
105.57
   
$
103.87
 
Weighted Average Structured Current Price
 
$
7.92
   
$
8.67
 
Effective Duration (1)
   
3.280
     
3.935
 

(1)
Effective duration is the approximate percentage change in price for a 100 basis point change in rates.  An effective duration of 3.280 indicates that an interest rate increase of 1.0% would be expected to cause a 3.280% decrease in the value of the MBS in our investment portfolio at March 31, 2019.  An effective duration of 3.935 indicates that an interest rate increase of 1.0% would be expected to cause a 3.935% decrease in the value of the MBS in our investment portfolio at December 31, 2018. These figures include the structured securities in the portfolio but do include the effect of our hedges.   Effective duration quotes for individual investments are obtained from The Yield Book, Inc.

The following table presents a summary of our portfolio assets acquired during the three months ended March 31, 2019 and 2018.

($ in thousands)
                                   
 
Three Months Ended March 31,
 
 
2019
 
2018
 
   
Total Cost
   
Average Price
   
Weighted Average Yield
   
Total Cost
   
Average Price
   
Weighted Average Yield
 
PT MBS
 
$
-
   
$
-
     
-
   
$
5,081
   
$
106.17
     
2.65
%

Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally seek 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, we strive 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 our 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 our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages, loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.

The duration of our 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) causes 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 our MBS can alter the timing of the cash flows received by us. As a result, we gauge the interest rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.

-36-


We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration and effective duration using various third-party models or obtain 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 March 31, 2019, assuming rates instantaneously fall 100 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
 
$
209,262
   
$
5,577
   
$
(9,317
)
 
$
(20,811
)
   
2.66
%
   
(4.45
)%
   
(9.94
)%
Interest-Only MBS
   
1,703
     
(538
)
   
456
     
674
     
(31.61
)%
   
26.80
%
   
39.55
%
Inverse Interest-Only MBS
   
676
     
(65
)
   
(16
)
   
(153
)
   
(9.61
)%
   
(2.36
)%
   
(22.67
)%
Total MBS Portfolio
 
$
211,641
   
$
4,974
   
$
(8,877
)
 
$
(20,290
)
   
2.35
%
   
(4.19
)%
   
(9.59
)%

($ 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
 
$
127,273
   
$
314
   
$
3,500
   
$
7,000
     
0.09
%
   
1.02
%
   
2.05
%
Junior Subordinated Debt Hedges
   
26,000
     
(1
)
   
390
     
780
     
(0.00
)%
   
1.02
%
   
2.05
%
TBA Contracts
   
50,000
     
(1,802
)
   
2,959
     
6,361
     
3.62
%
   
(5.94
)%
   
(12.78
)%
   
$
203,273
   
$
(1,489
)
 
$
6,849
   
$
14,141
     
(0.08
)%
   
0.39
%
   
0.80
%
                                                         
Gross Totals
         
$
3,485
   
$
(2,028
)
 
$
(6,149
)
                       

(1)
Represents the average contract/notional amount of Eurodollar futures contracts.

In addition to changes in interest rates, other factors impact the fair value of our 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 our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Repurchase Agreements

As of March 31, 2019, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with six of these counterparties.  We believe these facilities provide borrowing capacity in excess of our needs.  None of these lenders are affiliated with us. These borrowings are secured by our MBS.

As of March 31, 2019, we had obligations outstanding under the repurchase agreements of approximately $199.1 million with a net weighted average borrowing cost of 2.71%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 1 to 68 days, with a weighted average maturity of 37 days.  Securing the repurchase agreement obligation as of March 31, 2019 are MBS with an estimated fair value, including accrued interest, of $212.3 million and a weighted average maturity of 319 months.  Through May 10, 2019, we have been able to maintain our repurchase facilities with comparable terms to those that existed at March 31, 2019 with maturities through June 30, 2019.

-37-

The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 2019 and 2018.

($ in thousands)
 
   
Ending
   
Maximum
   
Average
   
Difference Between Ending
 
   
Balance
   
Balance
   
Balance
   
Repurchase Agreements and
 
   
of Repurchase
   
of Repurchase
   
of Repurchase
   
Average Repurchase Agreements
 
Three Months Ended
 
Agreements
   
Agreements
   
Agreements
   
Amount
   
Percent
 
March 31, 2019
   
199,146
     
200,113
     
199,771
     
(625
)
   
(0.31
)%
December 31, 2018
   
200,396
     
203,746
     
202,069
     
(1,673
)
   
(0.83
)%
September 30, 2018
   
203,742
     
204,988
     
189,582
     
14,160
     
7.47
%
June 30, 2018
   
175,422
     
193,753
     
184,621
     
(9,199
)
   
(4.98
)%
March 31, 2018
   
193,820
     
204,998
     
197,001
     
(3,181
)
   
(1.61
)%

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. 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 hedging strategy typically involves taking short positions in Eurodollar futures, T-Note futures, TBSs or other instruments. Since inception we have primarily used short positions in Eurodollar futures.  When the market causes these short positions to decline in value we are required to meet margin calls with cash.  This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.

Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party.  A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.

Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing.  The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral.  Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty.  Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we.  Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis.

As discussed above, we invest a portion of our capital in structured MBS.  We generally do not apply leverage to this portion of our portfolio. The leverage inherent in the structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market.  This structured MBS strategy has been a core element of the Company’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.

-38-

In future periods we expect to continue to finance our activities through repurchase agreements.  As of March 31, 2019, we had cash and cash equivalents of $5.0 million.  We generated cash flows of $6.0 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $199.8 million during the three months ended March 31, 2019.  In addition, during the three months ended March 31, 2019, we received approximately $1.7 million in management fees and expense reimbursements as manager of Orchid and approximately $0.4 million in dividends from our investment in Orchid common stock.

The table below summarizes the effect that certain future contractual obligations existing as of March 31, 2019 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
 
$
199,146
   
$
-
   
$
-
   
$
-
   
$
199,146
 
Interest expense on repurchase agreements (1)
   
888
     
-
     
-
     
-
     
888
 
Junior subordinated notes (2)
   
-
     
-
     
-
     
26,000
     
26,000
 
Interest expense on junior subordinated notes (1)
   
1,690
     
3,222
     
3,226
     
18,872
     
27,010
 
Other
   
250
     
-
     
-
     
-
     
250
 
Totals
 
$
201,974
   
$
3,222
   
$
3,226
   
$
44,872
   
$
253,294
 

(1)
Interest expense on repurchase agreements and junior subordinated notes are based on current interest rates as of March 31, 2019 and the remaining term of liabilities existing at that date.
(2)
We hold a common equity interest in Bimini Capital Trust II.  The amount presented represents our net cash outlay.

Outlook

Orchid Island Capital Inc.

To the extent Orchid is able to increase its capital base over time, we will benefit via increased management fees.  In addition, Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid’s pro rata share of overhead as defined in the management agreement.  As a stockholder of Orchid, we will also continue to share in distributions, if any, paid by Orchid to its stockholders.  Our operating results are also impacted by changes in the market value of our holdings of Orchid common shares, although these market value changes do not impact our cash flows from Orchid.

The independent Board of Directors of Orchid has the ability to terminate the management agreement and thus end our ability to collect management fees and share overhead costs.  Should Orchid terminate the management agreement without cause, it will be obligated to pay us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the current automatic renewal term.

-39-


Interest Rates and the MBS Market

The turmoil that swept global markets came to an end during the first quarter of 2019.  The central banks in the United States, the European Union and China, as well as Japan, appear now to be aligned in their monetary policy.  The major central banks across the globe now have an accommodative stance. In the case of the U.S. Federal Reserve (the “Fed”), this meant the bank ended a prolonged tightening cycle in December 2018 and moved to a balanced outlook.  The Fed communicated its pivot away from tightening over the course of the three meetings in December 2018, January 2019 and March 2019.  Public comments by various Fed officials between these meetings reinforced the message.  At the March 2019 meeting, the Fed finally made it definitive that the tightening cycle was over, surprising the market somewhat and leading to a renewed rally lower in interest rates in the U.S. and triggering a further rally in risk assets across the globe. The Fed also announced it intends to slow the reduction of its balance sheet beginning later this year.  This means it will resume reinvestment of principal and interest payments on its portfolio, although reinvestments will be predominantly in U.S. Treasury securities.   At the Fed meeting that concluded on May 1, 2019, the Fed reiterated their balanced outlook and stated future shifts in monetary policy will be data dependent.

Growth in the U.S. economy during the first quarter of 2019 surprised the markets when it was reported the economy expanded at an annualized rate of 3.2%. Incoming domestic economic data has generally rebounded as financial conditions have eased and there appear to be green shoots in China and Europe, indicating that the worst may be over in those two very important economies.  The markets now appear comfortable in the assumptions that central banks will respond quickly to signs of economic distress and will not remove accommodation over the foreseeable future.  This outlook has allowed risk assets to perform very well and interest rates to stabilize as volatility recedes.

As the second quarter of 2019 gets underway, signs of the economic recovery across the globe continue to appear and risk assets have continued to perform well.  Interest rates have drifted slightly higher, although, in the case of the U.S., short maturity U.S. Treasury securities, out to the five-year point, remain at or below the effective Federal Funds level of 2.45%.  This is consistent with the notion that there will be no further rate increases from the Fed this cycle.

The Agency MBS market generated a return of 2.3% during the first quarter of 2019 (per ICE Data indices).   This compares with 13.6% for the S&P 500, 7.4% for the high yield corporate index, 5.0% for the investment grade corporate index, and 2.2% for the U.S. Treasury index. Various components of the credit sensitive MBS markets generated returns between 1.0% for floating rate agency credit risk transfer (“CRT”) M1 tranches to 5.4% for longer duration, fixed rate agency CRT B1 tranches.  This relative performance clearly demonstrates the markets’ preference for risky assets during the quarter.  Within the Agency MBS market, returns were generally a function of the duration of the security, with 30-year, fixed rate securities outperforming 15-year, fixed rate securities and lower coupon securities outperforming higher coupon securities. With interest rates still materially below levels seen during the fall of 2018, and seasonal prepayment activity expected to accelerate into the spring and summer, prepayment considerations are paramount in security selection and expected returns.  The reduction of purchases by the Fed represents another source of concern for Agency MBS investors. The market expects refinancing activity and seasonal home turnover to lead to increases in the supply of Agency MBS.  The extent to which sufficient demand materializes to meet the increased supply will likely be the primary driver of Agency MBS performance for the second quarter of 2019, and the rest of the year as well.

-40-


Recent Regulatory Developments

In September 2017, the FOMC announced that it would implement a balance sheet normalization policy by gradually decreasing the Fed’s reinvestment of U.S. Treasuries and Agency MBS. More specifically, principal payments received by the Fed will be reinvested only to the extent they exceed gradually rising caps until the FOMC determines that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively. In October 2017, the FOMC commenced this balance sheet normalization program. At the conclusion of the March 2019 FOMC meeting, the Fed said that the FOMC intends to slow the pace of the decline in its holdings of U.S. Treasuries and Agency MBS over coming quarters provided that the economy and money market conditions evolve about as expected. The Fed specified that the FOMC intends to reduce the run-off of its holdings of U.S. Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019, and continue to allow its holdings of Agency MBS to decline, consistent with the aim of holding primarily U.S. Treasury securities in the long run. Beginning in October 2019 principal payments from Agency MBS or agency debt will be reinvested in U.S. Treasury securities subject to a maximum of $20 billion per month, with any principal payments in excess of that maximum reinvested in Agency MBS.

In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new SOFR, a rate based on U.S. repo trading. The new benchmark rate will be based on overnight Treasury General Collateral repo rates. The rate-setting process will be managed and published by the Fed and the Treasury’s Office of Financial Research. Many banks believe that it may take four to five years to complete the transition to SOFR, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will likely become the new benchmark for hedges and a range of interest rate investments.

In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the development of a policy for comprehensive housing finance reform soon. At this time, however, no decisions have been made on any reform plan.

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 in 2019 and beyond.

Effect on Us

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

Effects on our Assets

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

Lower long-term interest rates can affect the value of our Agency MBS in a number of ways. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency MBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.

-41-

If prepayment levels increase, the value of our Agency MBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency MBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency MBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency MBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.

Higher long-term rates can also affect the value of our Agency MBS.  As long-term rates rise, rates available to borrowers also rise.  This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows.  As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency MBS declines.  Some of the instruments the Company uses to hedge our Agency MBS assets, such as Euro Dollar futures, swaps, interest rate futures and swaptions, are stable average life instruments.  This means that to the extent we use such instruments to hedge our Agency MBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value.  It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. We believe this makes interest only securities desirable hedge instruments for pass-through Agency MBS.

As the economy has rebounded from the financial crisis, the Fed has taken steps to remove the considerable accommodation that was employed to combat the crisis.  At the conclusion of its meeting in September 2017, the Fed announced it would implement caps on the amount of Agency MBS assets it would allow to run off, or not be re-invested, starting in October 2017.  Previously the Fed would re-invest all of the principal repayments it received each month on the Agency MBS assets it had acquired during its quantitative easing programs.  By capping the amount they would allow to run off each month, the Fed was effectively limiting the amount it would re-invest.  Per the Fed’s September 2017 announcement, the cap reached $20 billion per month in October 2018.  At the time of the Fed’s announcement in September 2017, its monthly re-investments were approximately $20 billion per month as well, so this implied the Fed would stop, or nearly stop, re-investing its monthly pay-downs beyond October 2018.  The purchases each month by the Fed have been a significant source of demand in the Agency MBS market and as it was reduced slowly over the course of 2018 and essentially eliminated beyond October 2018, the removal of this source of demand could negatively impact Agency MBS prices.  The extent this negatively impacts the Agency MBS market will be a function of the level of supply each month – as the supply/demand balance affects the price of any asset – and whether or not another source of demand emerges to replace the Fed. At the conclusion of the March 2019 FOMC meeting, the Fed said that the FOMC intends to slow the pace of the decline in its holdings of U.S. Treasuries and Agency MBS over coming quarters provided that the economy and money market conditions evolve about as expected. The Fed specified that the FOMC intends to reduce the run-off of its holdings of U.S. Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019, and continue to allow its holdings of Agency MBS to decline, consistent with the aim of holding primarily U.S. Treasury securities in the long run. Beginning in October 2019 principal payments from Agency MBS or agency debt will be reinvested in U.S. Treasury securities subject to a maximum of $20 billion per month, with any principal payments in excess of that maximum reinvested in Agency MBS.

-42-


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. 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 Federal Funds Rate and LIBOR. An increase in the Federal Funds Rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency MBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.

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

The severe market volatility that began in the fourth quarter of 2018 ended in early January 2019.  The catalyst was a sharp reversal in the monetary policy bias of the Fed.  The Fed ended a multi-year tightening cycle in December 2018, even though the Fed itself had expected to continue tightening into 2020, per its previous guidance.  Coupled with the European Central banks much more modest pivot away from potential tightening in 2019, the Fed’s actions brought all of the world’s major central banks into alignment with respect to their monetary policy.  The market sensed central banks would be there to backstop the global economy should economic weakness emerge, and there would be no further removal of accommodation over the foreseeable future.  This allowed risk assets to recover quickly during the first quarter and into the second quarter of 2019.  Economic data in the U.S. has recovered since December 2018 and January 2019 and, at least for now, appears to have stabilized.  Growth in the U.S. is expected to return to trend growth levels over the course of the year.  In Europe, the situation is a little more precarious, although Germany and the major economies of the European Union appear to have stopped deteriorating.  The People’s Bank of China continues to introduce stimulus into the Chinese economy, and the growth slowdown in China that occurred in 2018 appears to be bottoming out.  Combined, these developments reflect a global economy that is not as bad as feared in late 2018, and it is clear the world’s central banks are ready to supply further accommodation if needed.

The risk on tone to the market during the first quarter of 2019 led to the more credit sensitive sectors of the structured securities market to outperform.  This was consistent with other markets as well, as the S&P 500 generated a 13.6% return, while the high yield corporate and investment grade corporate indices generated returns of 7.4% and 5.0%, respectively.  The Agency MBS index generated a return of 2.3%, as duration was the primary driver of relative performance within the sector.  Returns by agency, maturity tenor and coupon ranged from approximately 1.4% to 2.8%.  Going forward, the Agency MBS market faces potential headwinds as the rally in rates since last fall, coupled with the turn in seasonal housing activity, should lead to a significant increase in the supply of Agency MBS, all in the absence of the largest source of demand, the Fed.

-43-


Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP.  GAAP requires our management to make some complex and subjective decisions and assessments.  Our most critical accounting policies involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2018.

Capital Expenditures

At March 31, 2019, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At March 31, 2019, 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 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 our 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.
-44-

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 20, 2019.

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

The table below presents the Company’s share repurchase activity for the three months ended March 31, 2019.

               
Shares Purchased
   
Maximum Number
 
   
Total Number
   
Weighted-Average
   
as Part of Publicly
   
of Shares That May Yet
 
   
of Shares
   
Price Paid
   
Announced
   
Be Repurchased Under
 
   
Repurchased
   
Per Share
   
Programs (2)
   
the Authorization (1)
 
January 1, 2019 - January 31, 2019
   
714
   
$
2.16
     
714
     
429,596
 
February 1, 2019 - February 28, 2019
   
-
     
-
     
-
     
429,596
 
March 1, 2019 - March 31, 2019
   
-
     
-
     
-
     
429,596
 
Totals / Weighted Average
   
714
   
$
2.16
     
714
     
429,596
 

(1)
On March 26, 2018, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Class A common stock. The authorization originally expired on November 15, 2018, but was extended by the Board of Directors until November 15, 2019.

The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2019.



ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.  OTHER INFORMATION

None.

-45-


ITEM 6. EXHIBITS

Exhibit No

 
 
 
 
 
 
 
 
 



*
Filed herewith.

**
Furnished herewith

***
Submitted electronically herewith .
-46-

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:   May 10, 2019
 
By:
 /s/ Robert E. Cauley
 
     
Robert E. Cauley
Chairman and Chief Executive Officer



Date:   May 10, 2019
 
By:
 /s/ G. Hunter Haas, IV
 
     
G. Hunter Haas, IV
President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
-47-


Exhibit 31.1

CERTIFICATIONS


I, Robert E. Cauley, certify that:
 
1.  
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant");
  
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  
4.  
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):
 
 
a)
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: May 10, 2019
 
   
/s/ Robert E. Cauley
 
Robert E. Cauley
 
Chairman of the Board and Chief Executive Officer
 


Exhibit 31.2

CERTIFICATIONS


I, G. Hunter Haas, certify that:
 
1.  
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant");
  
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  
4.  
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions):
 
 
a)
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: May 10, 2019
 
   
/s/ G. Hunter Haas, IV
 
G. Hunter Haas, IV
 
President and Chief Financial Officer
 


Exhibit 32.1

 
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

I, Robert E. Cauley, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 (the “Report”) filed with the Securities and Exchange Commission:

1.
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934



May 10, 2019
 
/s/ Robert E.Cauley
   
Robert E. Cauley,
Chairman of the Board and
Chief Executive Officer


Exhibit 32.2

 

 
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

I, G. Hunter Haas, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2019 (the “Report”) filed with the Securities and Exchange Commission:

1.
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934



May 10, 2019
 
/s/ G. Hunter Haas, IV
   
G. Hunter Haas, IV
President and Chief Financial Officer