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EX-32.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20200630x322.htm
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EX-31.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20200630x312.htm
EX-31.1 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20200630x311.htm
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 June 30, 2020

 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)



Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No ◻
Indicate by check mark whether the registrant has submitted electronically 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
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
August 14, 2020
11,608,555
Class B Common Stock, $0.001 par value
August 14, 2020
31,938
Class C Common Stock, $0.001 par value
August 14, 2020
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
   
26
 
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
53
 
ITEM 4. Controls and Procedures
   
53
 
         
PART II. OTHER INFORMATION
 
         
ITEM 1. Legal Proceedings
   
54
 
ITEM 1A. Risk Factors
   
54
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
54
 
ITEM 3. Defaults Upon Senior Securities
   
54
 
ITEM 4. Mine Safety Disclosures
   
54
 
ITEM 5. Other Information
   
54
 
ITEM 6. Exhibits
   
55
 
SIGNATURES
   
56
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
(Unaudited)
       
   
June 30, 2020
   
December 31, 2019
 
ASSETS:
           
Mortgage-backed securities, at fair value
           
Pledged to counterparties
 
$
52,784,236
   
$
217,793,209
 
Unpledged
   
33,281
     
47,744
 
Total mortgage-backed securities
   
52,817,517
     
217,840,953
 
Cash and cash equivalents
   
4,669,314
     
8,070,067
 
Restricted cash
   
1,005,680
     
4,315,050
 
Orchid Island Capital, Inc. common stock, at fair value
   
11,753,131
     
8,892,211
 
Accrued interest receivable
   
194,229
     
750,875
 
Property and equipment, net
   
2,128,064
     
2,162,975
 
Real property held for sale
   
450,000
     
450,000
 
Deferred tax assets
   
24,601,800
     
33,288,536
 
Other assets
   
3,686,271
     
3,718,281
 
Total Assets
 
$
101,306,006
   
$
279,488,948
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Repurchase agreements
 
$
51,617,000
   
$
209,954,000
 
Long-term debt
   
27,623,161
     
27,481,121
 
Accrued interest payable
   
69,864
     
645,302
 
Other liabilities
   
883,812
     
1,431,534
 
Total Liabilities
   
80,193,837
     
239,511,957
 
                 
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 June 30, 2020 and December 31, 2019
   
-
     
-
 
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 11,608,555
               
shares issued and outstanding as of June 30, 2020 and 11,608,555 shares issued
               
and outstanding as of December 31, 2019
   
11,609
     
11,609
 
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of June 30, 2020 and December 31, 2019
   
32
     
32
 
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of June 30, 2020 and December 31, 2019
   
32
     
32
 
Additional paid-in capital
   
332,642,758
     
332,642,758
 
Accumulated deficit
   
(311,542,262
)
   
(292,677,440
)
Stockholders’ Equity
   
21,112,169
     
39,976,991
 
Total Liabilities and Stockholders' Equity
 
$
101,306,006
   
$
279,488,948
 
See Notes to Condensed Consolidated Financial Statements
 

-1-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
For the Six and Three Months Ended June 30, 2020 and 2019
 
                         
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenues:
                       
Advisory services
 
$
3,339,680
   
$
3,261,116
   
$
1,615,083
   
$
1,653,796
 
Interest income
   
2,563,281
     
4,324,093
     
523,287
     
2,133,677
 
Dividend income from Orchid Island Capital, Inc. common stock
   
753,518
     
729,617
     
388,709
     
364,809
 
Total revenues
   
6,656,479
     
8,314,826
     
2,527,079
     
4,152,282
 
Interest expense
                               
Repurchase agreements
   
(987,417
)
   
(2,652,893
)
   
(59,601
)
   
(1,340,029
)
Long-term debt
   
(631,958
)
   
(806,147
)
   
(282,457
)
   
(399,592
)
Net revenues
   
5,037,104
     
4,855,786
     
2,185,021
     
2,412,661
 
                                 
Other income (expense):
                               
Unrealized gains on mortgage-backed securities
   
27,855
     
5,276,251
     
602,136
     
2,224,016
 
Realized losses on mortgage-backed securities
   
(5,804,656
)
   
-
     
-
     
-
 
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
   
(754,792
)
   
(45,601
)
   
3,653,312
     
(334,408
)
Losses on derivative instruments
   
(5,292,421
)
   
(5,621,756
)
   
(1,690
)
   
(3,364,345
)
Gains on retained interests in securitizations
   
-
     
275,115
     
-
     
-
 
Other income
   
642
     
494
     
318
     
248
 
Total other (expense) income
   
(11,823,372
)
   
(115,497
)
   
4,254,076
     
(1,474,489
)
                                 
Expenses:
                               
Compensation and related benefits
   
2,146,667
     
2,087,625
     
1,046,623
     
1,016,844
 
Directors' fees and liability insurance
   
345,693
     
321,308
     
181,112
     
160,666
 
Audit, legal and other professional fees
   
346,641
     
284,027
     
187,348
     
145,395
 
Administrative and other expenses
   
552,045
     
526,029
     
270,005
     
275,058
 
Total expenses
   
3,391,046
     
3,218,989
     
1,685,088
     
1,597,963
 
                                 
Net (loss) income before income tax provision (benefit)
   
(10,177,314
)
   
1,521,300
     
4,754,009
     
(659,791
)
Income tax provision (benefit)
   
8,687,508
     
404,419
     
1,285,884
     
(158,069
)
                                 
Net (loss) income
 
$
(18,864,822
)
 
$
1,116,881
   
$
3,468,125
   
$
(501,722
)
                                 
Basic and Diluted Net (loss) income Per Share of:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)
CLASS B COMMON STOCK
                               
Basic and Diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)
Weighted Average Shares Outstanding:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
   
11,608,555
     
12,708,587
     
11,608,555
     
12,708,555
 
CLASS B COMMON STOCK
                               
Basic and Diluted
   
31,938
     
31,938
     
31,938
     
31,938
 
See Notes to Condensed Consolidated Financial Statements
 

-2-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
(Unaudited)
 
For the Six and Three Months Ended June 30, 2020 and 2019
 
                               
         
Stockholders' Equity
     
   
Common Stock
 
Additional
 
Accumulated
     
   
Shares
   
Par Value
 
Paid-in Capital
 
Deficit
 
Total
 
Balances, January 1, 2019
   
12,773,145
   
$
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
   
(714
)
   
-
     
(1,542
)
   
-
     
(1,542
)
Balances, March 31, 2019
   
12,772,431
   
$
12,773
   
$
334,917,723
   
$
(304,358,814
)
 
$
30,571,682
 
Net loss
   
-
     
-
     
-
     
(501,722
)
   
(501,722
)
Balances, June 30, 2019
   
12,772,431
   
$
12,773
   
$
334,917,723
   
$
(304,860,536
)
 
$
30,069,960
 
                                         
Balances, January 1, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(292,677,440
)
 
$
39,976,991
 
Net loss
   
-
     
-
     
-
     
(22,332,947
)
   
(22,332,947
)
Balances, March 31, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(315,010,387
)
 
$
17,644,044
 
Net income
   
-
     
-
     
-
     
3,468,125
     
3,468,125
 
Balances, June 30, 2020
   
11,672,431
   
$
11,673
   
$
332,642,758
   
$
(311,542,262
)
 
$
21,112,169
 
See Notes to Condensed Consolidated Financial Statements
 

-3-

BIMINI CAPITAL MANAGEMENT, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Six Months Ended June 30, 2020 and 2019
 
             
   
2020
   
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
 
$
(18,864,822
)
 
$
1,116,881
 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
               
Depreciation
   
34,911
     
36,716
 
Deferred income tax provision
   
8,686,736
     
599,030
 
Losses (gains) on mortgage-backed securities, net
   
5,776,801
     
(5,276,251
)
Gains on retained interests in securitizations
   
-
     
(275,115
)
Unrealized losses on Orchid Island Capital, Inc. common stock
   
754,792
     
45,601
 
Realized and unrealized losses on forward settling TBA securities
   
1,441,406
     
1,801,321
 
Changes in operating assets and liabilities:
               
Accrued interest receivable
   
556,646
     
30,342
 
Other assets
   
32,010
     
(28,261
)
Accrued interest payable
   
(575,438
)
   
140,223
 
Other liabilities
   
(489,128
)
   
(395,183
)
NET CASH USED IN OPERATING ACTIVITIES
   
(2,646,086
)
   
(2,204,696
)
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
   
(20,823,373
)
   
(3,285,372
)
Sales
   
171,155,249
     
-
 
Principal repayments
   
8,914,759
     
9,815,353
 
Proceeds from termination of retained interests
   
-
     
275,115
 
Net settlement of forward settling TBA contracts
   
(1,500,000
)
   
(2,559,863
)
Purchases of Orchid Island Capital, Inc. common stock
   
(3,615,712
)
   
-
 
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
154,130,923
     
4,245,233
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
   
430,466,397
     
574,564,000
 
Principal repayments on repurchase agreements
   
(588,903,397
)
   
(574,304,000
)
Net proceeds on long-term debt
   
142,040
     
-
 
Class A common shares repurchased and retired
   
-
     
(1,542
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
   
(158,194,960
)
   
258,458
 
                 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
   
(6,710,123
)
   
2,298,995
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
   
12,385,117
     
6,240,488
 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
 
$
5,674,994
   
$
8,539,483
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
Interest expense
 
$
2,194,813
   
$
3,318,817
 
Income taxes
 
$
13,465
   
$
(46,700
)
See Notes to Condensed Consolidated Financial Statements
 
-4-

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2020

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

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), 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”)

A variable interest entity ("VIE") is consolidated 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 six and three month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

-5-

The consolidated balance sheet at December 31, 2019 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, 2019.

COVID-19 Impact

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions. In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several hedge positions. The Agency MBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of June 30, 2020, we had timely satisfied all margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through June 30, 2020.

We sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million. Substantially all of the realized losses were a direct result of the adverse MBS market conditions associated with COVID-19. We had no additional sales of MBS during the three months ended June 30, 2020.
Our MBS portfolio had a fair market value of approximately $52.8 million as of June 30, 2020, compared to $217.8 million as of December 31, 2019 and $54.4 million at March 31, 2020.
Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $51.6 million, compared to $210.0 million as of December 31, 2019 and $52.4 million as of March 31, 2020.
We recorded an additional valuation allowance against our deferred tax assets of approximately $11.2 million during the three months ended March 31, 2020. We did not record any additional valuation allowance during the three months ended June 30, 2020.
Our stockholders’ equity was $21.1 million as of June 30, 2020, compared to $40.0 million as of December 31, 2019 and $17.6 million as of March 31, 2020.

In response to the Shelter in Place order issued in Florida, management has invoked the Company’s Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.

In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has provided billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest rate loan.  The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.

-6-

The CARES Act also makes technical corrections to, or modifies on a temporary basis, certain provisions of the U.S. Income Tax Code. Significant income tax impacts of the CARES Act include the ability to carry back an NOL for 5 years and an increase in the interest expense disallowance limitations from 30% to 50% of adjusted taxable income.  The Company has assessed the potential impact of the CARES Act on the Company’s 2019 income tax return to be filed later in 2020, as well as the 2020 tax provision. Those changes did not significantly impact the consolidated financial statements.

The Company has evaluated the other provisions of the CARES Act and does not believe it will have a material effect on the Company’s business, results of operations and financial condition. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. During the forbearance period the Company will continue to receive scheduled principal and interest each month on its Agency RMBS securities. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

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 and derivatives, determining the amounts of asset valuation allowances, the impairment for the real property held for sale, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period. Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information available as of June 30, 2020, however uncertainty over the ultimate impact that COVID-19 will have on the global economy generally, and on our business in particular, makes any estimates and assumptions as of June 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.

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 June 30, 2020 and December 31, 2019.

(in thousands)
           
 
June 30, 2020
 
December 31, 2019
 
Cash and cash equivalents
 
$
4,669,314
   
$
8,070,067
 
Restricted cash
   
1,005,680
     
4,315,050
 
Total cash, cash equivalents and restricted cash
 
$
5,674,994
   
$
12,385,117
 

-7-

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. 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.

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”) mortgage backed certificates issued by Freddie Mac, Fannie Mae or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans. We refer to MBS and CMOs as PT MBS. We refer to IO and IIO securities as structured MBS. The Company has elected to account for its investment in MBS under the fair value option.  Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management’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.

Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.  The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third-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.
-8-


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.

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. These retained interests currently have a recorded fair value of zero, as the prospect of future cash flows being received is very uncertain, but they may generate cash flows in the future. Any cash received from the retained interests is 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 derivative instruments in the future.

The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

Derivative instruments are carried at fair value, and changes in fair value are recorded in the consolidated operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities.

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

The fair value of financial instruments for which it is practicable to estimate that value is disclosed, 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 June 30, 2020 and December 31, 2019, due to the short-term nature of these financial instruments.

-9-

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.

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. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

Share-Based Compensation

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.

Earnings Per Share

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.

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.

-10-

The Company’s U.S. federal income tax returns for years ended on or after December 31, 2016 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 its includable subsidiaries, and Royal Palm, and its includable subsidiaries, file as separate tax paying entities.

The Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period.  The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the 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

On January 1, 2020, we adopted Accounting Standards Update (“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 model). The Company’s adoption of this ASU did not have a material impact on its consolidated financial statements as its financial assets were already measured at fair value through earnings.

In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”  ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.

NOTE 2. 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.

-11-


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, 2021 and provides for automatic one-year extension options thereafter. Should Orchid terminate the management agreement without cause, it will be obligated to pay 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 automatic renewal term.

The following table summarizes the advisory services revenue from Orchid for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                       
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Management fee
 
$
2,645
   
$
2,611
   
$
1,268
   
$
1,327
 
Allocated overhead
   
695
     
650
     
347
     
327
 
Total
 
$
3,340
   
$
3,261
   
$
1,615
   
$
1,654
 

At June 30, 2020 and December 31, 2019, the net amount due from Orchid was approximately $0.6 million and $0.6 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 June 30, 2020 and December 31, 2019:

(in thousands)
           
   
June 30, 2020
   
December 31, 2019
 
Fixed-rate MBS
 
$
52,345
   
$
216,231
 
Interest-Only MBS
   
442
     
1,024
 
Inverse Interest-Only MBS
   
31
     
586
 
Total
 
$
52,818
   
$
217,841
 

NOTE 4.   REPURCHASE AGREEMENTS

The Company pledges certain of its MBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of June 30, 2020, the Company had met all margin call requirements.
-12-


As of June 30, 2020 and December 31, 2019, 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
 
June 30, 2020
                             
Fair value of securities pledged, including accrued
                             
interest receivable
 
$
-
   
$
41,868
   
$
-
   
$
11,108
   
$
52,976
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
-
   
$
40,972
   
$
-
   
$
10,645
   
$
51,617
 
Net weighted average borrowing rate
   
-
     
0.27
%
   
-
     
0.30
%
   
0.28
%
December 31, 2019
                                       
Fair value of securities pledged, including accrued
                                       
interest receivable
 
$
-
   
$
137,992
   
$
80,550
   
$
-
   
$
218,542
 
Repurchase agreement liabilities associated with
                                       
these securities
 
$
-
   
$
132,573
   
$
77,381
   
$
-
   
$
209,954
 
Net weighted average borrowing rate
   
-
     
2.02
%
   
1.92
%
   
-
     
1.98
%

In addition, cash pledged to counterparties for repurchase agreements was approximately $1.0 million and $3.8 million as of June 30, 2020 and December 31, 2019, respectively.

If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any.  At June 30, 2020 and December 31, 2019, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $2.3 million and $11.8 million, respectively.  The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at June 30, 2020 and December 31, 2019.

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Liabilities, at Fair Value

The table below summarizes fair value information about our derivative liabilities as of June 30, 2020 and December 31, 2019.

(in thousands)
           
Derivative Instruments and Related Accounts
Balance Sheet Location
 
June 30, 2020
   
December 31, 2019
 
Liabilities
           
TBA Securities
Other liabilities
 
$
-
   
$
59
 
Total derivative liabilities, at fair value
   
$
-
   
$
59
 
                   
Margin Balances Posted To (From) Counterparties
                 
Futures contracts
Restricted cash
 
$
2
   
$
537
 
Total margin balances on derivative contracts
   
$
2
   
$
537
 

-13-



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 and T-note futures positions at June 30, 2020 and December 31, 2019.

($ in thousands)
                       
As of June 30, 2020
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2021
 
$
1,000
     
1.02
%
   
0.19
%
 
$
(8
)
Total / Weighted Average
 
$
1,000
     
1.02
%
   
0.19
%
 
$
(8
)

($ in thousands)
                       
As of December 31, 2019
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2020
 
$
120,000
     
2.90
%
   
1.67
%
 
$
(1,480
)
2021
   
80,000
     
2.80
%
   
1.57
%
   
(984
)
Total / Weighted Average
 
$
102,500
     
2.86
%
   
1.63
%
 
$
(2,464
)
Treasury Note Futures Contracts
                               
March 2020- 5-year T-Note futures(2)
                               
(Mar 2020 - Mar 2025 Hedge Period)
 
$
20,000
     
1.96
%
   
2.06
%
 
$
88
 

($ in thousands)
                       
As of December 31, 2019
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2020
 
$
19,500
     
1.92
%
   
1.68
%
 
$
(46
)
Total / Weighted Average
 
$
19,500
     
1.92
%
   
1.68
%
 
$
(46
)

(1)
Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
(2)
T-Note futures contracts were valued at a price of $118.61 at December 31, 2019.  The notional contract values of the short positions were $23.7 million.
-14-


The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019. There were no outstanding TBA securities at June 30, 2020.

($ in thousands)
           
     
Notional
         
Net
     
Amount
 
Cost
 
Market
 
Carrying
     
Long (Short)(1)
 
Basis(2)
 
Value(3)
 
Value(4)
December 31, 2019
               
30-Year TBA Securities:
               
 
3.5%
$
(50,000)
$
(51,414)
$
(51,438)
$
(24)
 
4.5%
 
(50,000)
 
(52,621)
 
(52,656)
 
(35)
   
$
(100,000)
$
(104,035)
$
(104,094)
$
(59)

(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 on Derivative Instruments

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Eurodollar futures contracts (short positions)
                       
Repurchase agreement funding hedges
 
$
(2,328
)
 
$
(2,831
)
 
$
-
   
$
(1,860
)
Junior subordinated debt funding hedges
   
(517
)
   
(409
)
   
(2
)
   
(189
)
T-Note futures contracts (short positions)
                               
Repurchase agreement funding hedges
   
(1,006
)
   
(581
)
   
-
     
(581
)
Net TBA securities
   
(1,441
)
   
(1,801
)
   
-
     
(734
)
Losses on derivative instruments
 
$
(5,292
)
 
$
(5,622
)
 
$
(2
)
 
$
(3,364
)

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. It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
-15-


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 June 30, 2020 and December 31, 2019.

($ in thousands)
                                   
   
June 30, 2020
   
December 31, 2019
 
   
Repurchase
   
Derivative
         
Repurchase
   
Derivative
       
Assets Pledged to Counterparties
 
Agreements
   
Agreements
   
Total
   
Agreements
   
Agreements
   
Total
 
PT MBS - at fair value
 
$
52,345
   
$
-
   
$
52,345
   
$
216,231
   
$
-
   
$
216,231
 
Structured MBS - at fair value
   
439
     
-
     
439
     
1,562
     
-
     
1,562
 
Accrued interest on pledged securities
   
192
     
-
     
192
     
749
     
-
     
749
 
Restricted cash
   
1,004
     
2
     
1,006
     
3,778
     
537
     
4,315
 
Total
 
$
53,980
   
$
2
   
$
53,982
   
$
222,320
   
$
537
   
$
222,857
 

Assets Pledged from Counterparties

The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements and derivative agreements as of June 30, 2020 and December 31, 2019. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements or other liabilities in the consolidated balance sheets.

($ in thousands)
           
Assets Pledged to Bimini
 
June 30, 2020
   
December 31, 2019
 
Repurchase agreements
 
$
204
   
$
-
 
Total
 
$
204
   
$
-
 

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 June 30, 2020 and December 31, 2019.

(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
 
June 30, 2020
                                   
Repurchase Agreements
 
$
51,617
   
$
-
   
$
51,617
   
$
(50,613
)
 
$
(1,004
)
 
$
-
 
   
$
51,617
   
$
-
   
$
51,617
   
$
(50,613
)
 
$
(1,004
)
 
$
-
 
December 31, 2019
                                               
Repurchase Agreements
 
$
209,954
   
$
-
   
$
209,954
   
$
(206,176
)
 
$
(3,778
)
 
$
-
 
TBA securities
   
59
     
-
     
59
     
-
     
-
     
59
 
   
$
210,013
   
$
-
   
$
210,013
   
$
(206,176
)
 
$
(3,778
)
 
$
59
 

-16-

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

NOTE 8.  LONG-TERM DEBT

Long-term debt at June 30, 2020 and December 31, 2019 is summarized as follows:

(in thousands)
           
   
June 30, 2020
   
December 31, 2019
 
Junior subordinated debt
 
$
26,804
   
$
26,804
 
Note payable
   
667
     
677
 
Paycheck Protection Plan ("PPP") loan
   
152
     
-
 
Total
 
$
27,623
   
$
27,481
 

Junior Subordinated Debt

During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) of which 100% of the common equity 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 June 30, 2020 and December 31, 2019, 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 June 30, 2020, the interest rate was 3.81%. 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 substantive decision-making ability over BCTII’s activities. Since Bimini Capital's investment in BCTII’s common equity securities was financed directly by BCTII as a result of its loan of the proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not consolidated the financial statements of BCTII into its consolidated financial statements, and this investment is accounted for on the equity method.

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

Note Payable

On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
-17-


Paycheck Protection Plan Loan

On April 13, 2020, the Company received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan.  As discussed in Note 1, PPP loans may be forgiven, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met.  These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part.  Payments are deferred for the first six months of the loan. The Company believes that all of the proceeds were used for eligible purposes and the outstanding principal and accrued interest will ultimately be forgiven.

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

(in thousands)
     
Last six months of 2020
 
$
10
 
2021
   
22
 
2022
   
175
 
2023
   
24
 
2024
   
25
 
After 2024
   
27,367
 
Total
 
$
27,623
 

NOTE 9.  COMMON STOCK

There were no issuances of Bimini Capital's Class A Common Stock, Class B Common Stock or Class C Common Stock during the six months ended June 30, 2020 and 2019.

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 has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020.  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 June 30, 2020, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share. There were no shares repurchased during the six months ended June 30, 2020.

Tender Offer

In July 2019, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of Bimini Capital’s Class A common stock at a price of $2.00 per share.
-18-



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.

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.  There were no performance units issued or outstanding during the six months ended June 30, 2020 and 2019.

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.

On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination operations ceased in 2007.  The demand is based on Royal Palm’s alleged breaches of certain representations and warranties in the related MLPA’s.  The Company believes the demands are without merit and intends to defend against the demand vigorously.  No provision or accrual has been recorded as of June 30, 2020 related to the Citigroup demand.

Management is not aware of any other significant reported or unreported contingencies at June 30, 2020.

NOTE 12.  INCOME TAXES

The total income tax provision recorded for the six and three months ended June 30, 2020 was $8.7 million and $1.3 million, respectively, on consolidated pre-tax book (loss) income of $(10.2) million and $4.8 million in the six and three months ended June 30, 2020, respectively. The total income tax provision (benefit) recorded for the six and three months ended June 30, 2019 was $0.4 million and $(0.2) million, respectively, on consolidated pre-tax book income (loss) of $1.5 million and $(0.7) million in the six and three months ended June 30, 2019, respectively.

-19-


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

As a result of adverse economic impacts of COVID-19 on its business, the Company performed an assessment of the need for additional valuation allowances against existing deferred tax assets as of March 31, 2020. Following the more-likely-than-not standard that benefits will not be realized in the future, the Company determined an additional valuation allowance of approximately $11.2 million was necessary for the net operating loss carryforwards and capital loss carryforwards during the three months ended March 31, 2020. With the rapidly evolving and changing landscape caused by the pandemic, the Company will continue to closely monitor the impacts of COVID-19 on the Company’s ability to realize its deferred tax assets, and it may increase valuation allowances in the future as new information becomes available.

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. 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 June 30, 2020 and 2019.

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 June 30, 2020 and 2019.

The table below reconciles the numerator and denominator of EPS for the six and three months ended June 30, 2020 and 2019.

(in thousands, except per-share information)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Basic and diluted EPS per Class A common share:
                       
(Loss) income attributable to Class A common shares:
                       
Basic and diluted
 
$
(18,813
)
 
$
1,114
   
$
3,458
   
$
(501
)
Weighted average common shares:
                               
Class A common shares outstanding at the balance sheet date
   
11,609
     
12,709
     
11,609
     
12,709
 
Weighted average shares-basic and diluted
   
11,609
     
12,709
     
11,609
     
12,709
 
(Loss) income per Class A common share:
                               
Basic and diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)

-20-


(in thousands, except per-share information)
                       
    
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Basic and diluted EPS per Class B common share:
                       
(Loss) income attributable to Class B common shares:
                       
Basic and diluted
 
$
(52
)
 
$
3
   
$
10
   
$
(1
)
Weighted average common shares:
                               
Class B common shares outstanding at the balance sheet date
   
32
     
32
     
32
     
32
 
Weighted average shares-basic and diluted
   
32
     
32
     
32
     
32
 
(Loss) income per Class B common share:
                               
Basic and diluted
 
$
(1.62
)
 
$
0.09
   
$
0.30
   
$
(0.04
)

NOTE 14.   FAIR VALUE

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

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

MBS, Orchid common stock, retained interests and TBA securities were all recorded at fair value on a recurring basis during the six and three months ended June 30, 2020 and 2019. 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, and this model resulted in a value of zero at both June 30, 2020 and December 31, 2019.

-21-


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.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:

(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)
 
June 30, 2020
                       
Mortgage-backed securities
 
$
52,818
   
$
-
   
$
52,818
   
$
-
 
Orchid Island Capital, Inc. common stock
   
11,753
     
11,753
     
-
     
-
 
December 31, 2019
                               
Mortgage-backed securities
 
$
217,841
   
$
-
   
$
217,841
   
$
-
 
Orchid Island Capital, Inc. common stock
   
8,892
     
8,892
     
-
     
-
 
TBA securities
   
(59
)
   
-
     
(59
)
   
-
 

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 six months ended June 30, 2020 and 2019:

(in thousands)
           
   
Retained Interests in Securitizations
 
   
Six Months Ended June 30,
 
   
2020
   
2019
 
Balances, January 1
 
$
-
   
$
-
 
Gain included in earnings
   
-
     
275
 
Collections
   
-
     
(275
)
Balances, June 30
 
$
-
   
$
-
 

During the six months ended June 30, 2020 and 2019, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
-22-


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 six months ended June 30, 2020 and 2019, were approximately $3.4 million and $3.3 million, respectively, accounting for approximately 50% and 39% of consolidated revenues, respectively.

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

Segment information for the six months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
3,340
$
-
$
-
$
-
$
3,340
Advisory services, other operating segments(1)
 
84
 
-
 
-
 
(84)
 
-
Interest and dividend income
 
-
 
3,317
 
-
 
-
 
3,317
Interest expense
 
-
 
(988)
 
 (632)(2)
 
-
 
(1,620)
Net revenues
 
3,424
 
2,329
 
(632)
 
(84)
 
5,037
Other
 
-
 
(11,307)
 
 (516)(3)
 
-
 
(11,823)
Operating expenses(4)
 
(1,690)
 
(1,701)
 
-
 
-
 
(3,391)
Intercompany expenses(1)
 
-
 
(84)
 
-
 
84
 
-
Income (loss) before income taxes
$
1,734
$
(10,763)
$
(1,148)
$
-
$
(10,177)
                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
3,261
$
-
$
-
$
-
$
3,261
Advisory services, other operating segments(1)
 
137
 
-
 
-
 
(137)
 
-
Interest and dividend income
 
-
 
5,053
 
1
 
-
 
5,054
Interest expense
 
-
 
(2,653)
 
 (806)(2)
 
-
 
(3,459)
Net revenues
 
3,398
 
2,400
 
(805)
 
(137)
 
4,856
Other
 
-
 
18
 
 (134)(3)
 
-
 
(116)
Operating expenses(4)
 
(1,272)
 
(1,947)
 
-
 
-
 
(3,219)
Intercompany expenses(1)
 
-
 
(137)
 
-
 
137
 
-
Income (loss) before income taxes
$
2,126
$
334
$
(939)
$
-
$
1,521

-23-


Segment information for the three months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
1,615
$
-
$
-
$
-
$
1,615
Advisory services, other operating segments(1)
 
26
 
-
 
-
 
(26)
 
-
Interest and dividend income
 
-
 
912
 
-
 
-
 
912
Interest expense
 
-
 
(60)
 
 (282)(2)
 
-
 
(342)
Net revenues
 
1,641
 
852
 
(282)
 
(26)
 
2,185
Other
 
-
 
4,256
 
 (2)(3)
 
-
 
4,254
Operating expenses(4)
 
(1,067)
 
(618)
 
-
 
-
 
(1,685)
Intercompany expenses(1)
 
-
 
(26)
 
-
 
26
 
-
Income (loss) before income taxes
$
574
$
4,464
$
(284)
$
-
$
4,754
                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
1,654
$
-
$
-
$
-
$
1,654
Advisory services, other operating segments(1)
 
69
 
-
 
-
 
(69)
 
-
Interest and dividend income
 
-
 
2,498
 
-
 
-
 
2,498
Interest expense
 
-
 
(1,340)
 
 (400)(2)
 
-
 
(1,740)
Net revenues
 
1,723
 
1,158
 
(400)
 
(69)
 
2,412
Other
 
-
 
(1,286)
 
 (188)(3)
 
-
 
(1,474)
Operating expenses(4)
 
(642)
 
(956)
 
-
 
-
 
(1,598)
Intercompany expenses(1)
 
-
 
(69)
 
-
 
69
 
-
Income (loss) before income taxes
$
1,081
$
(1,153)
$
(588)
$
-
$
(660)

(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services.
(2)
Includes interest on long-term debt.
(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 as of June 30, 2020 and December 31, 2019 were as follows:

(in thousands)
                       
 
Asset
 
Investment
         
 
Management
 
Portfolio
 
Corporate
 
Total
 
June 30, 2020
 
$
1,500
   
$
84,913
     
14,893
   
$
101,306
 
December 31, 2019
   
1,457
     
263,223
     
14,809
     
279,489
 

NOTE 16. RELATED PARTY TRANSACTIONS

Relationships with Orchid

At June 30, 2020 and December 31, 2019, the Company owned 2,495,357 and 1,520,036 shares of Orchid common stock, respectively, representing approximately 3.8% and 2.4% of Orchid’s outstanding common stock on such dates.  The Company received dividends on this common stock investment of approximately $0.8 million and $0.4 million during the six and three months ended June 30, 2020, respectively, and $0.7 million and $0.4 million during the six and three months ended June 30, 2019, respectively.

-24-

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.
-25-

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

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

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

Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), 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.

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, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS. In addition, Royal Palm receives dividends from its investment in Orchid common shares.

Impact of the COVID-19 Pandemic

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions.  In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several of our hedge positions. The Agency MBS market largely stabilized after the Federal Reserve (the “Fed”) announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of June 30, 2020, we had timely satisfied all margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through June 30, 2020.

We sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million. Substantially all of the realized losses were a direct result of the adverse MBS market conditions associated with COVID-19. We had no additional sales of MBS during the three months ended June 30, 2020.
Our MBS portfolio had a fair market value of approximately $52.8 million as of June 30, 2020, compared to $217.8 million as of December 31, 2019 and $54.4 million at March 31, 2020.
Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $51.6 million, compared to $210.0 million as of December 31, 2019 and $52.4 million as of March 31, 2020.
We recorded an additional valuation allowance against our deferred tax assets of approximately $11.2 million during the three months ended March 31, 2020. We did not record any additional valuation allowance during the three months ended June 30, 2020.
Our stockholders’ equity was $21.1 million as of June 30, 2020, compared to $40.0 million as of December 31, 2019 and $17.6 million as of March 31, 2020.

-26-

Largely as a result of actions taken by the Federal Reserve (the “Fed”) in late March, Agency MBS valuations have increased and the market for these assets has stabilized.

In response to the Shelter in Place order issued in Florida, management has invoked the Company’s Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.

In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest loan.  The Company has evaluated the other provisions of the CARES Act and does not believe it will have material effect on our financial statements. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. During the forbearance period the Company will continue to receive scheduled principal and interest each month on its Agency RMBS securities. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

Stock Repurchase Plan

On March 26, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan (“Repurchase Plan”).  Pursuant to Repurchase Plan, we may purchase up to 500,000 shares of the Company’s 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 has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020.  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 June 30, 2020, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.

-27-


Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors (in addition to those related to the COVID-19 pandemic) 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, and supply of, investments in Agency MBS;

actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Open Market Committee (the “FOMC”), the Federal Housing Finance Agency (the “FHFA”) and the U.S. Treasury;

prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; 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 or tax rates; 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 six and three months ended June 30, 2020, as compared to the six and three months ended June 30, 2019.

Net (Loss) Income Summary

Consolidated net loss for the six months ended June 30, 2020 was $18.9 million, or $1.62 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net income of $1.1 million, or $0.09 basic and diluted income per share of Class A Common Stock, for the six months ended June 30, 2019.

Consolidated net income for the three months ended June 30, 2020 was $3.5 million, or $0.30 basic and diluted income per share of Class A Common Stock, as compared to consolidated net loss of $0.5 million, or $0.04 basic and diluted loss per share of Class A Common Stock, for the three months ended June 30, 2019.

-28-


The components of net (loss) income for the six and three months ended June 30, 2020 and 2019, along with the changes in those components are presented in the table below:

(in thousands)
                                   
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
Change
   
2020
   
2019
   
Change
 
Advisory services revenues
 
$
3,340
   
$
3,261
   
$
79
   
$
1,615
   
$
1,654
   
$
(39
)
Interest and dividend income
   
3,317
     
5,054
     
(1,737
)
   
912
     
2,498
     
(1,586
)
Interest expense
   
(1,620
)
   
(3,459
)
   
1,839
     
(342
)
   
(1,740
)
   
1,398
 
Net revenues
   
5,037
     
4,856
     
181
     
2,185
     
2,412
     
(227
)
Other (expense) income
   
(11,823
)
   
(116
)
   
(11,707
)
   
4,254
     
(1,474
)
   
5,728
 
Expenses
   
(3,391
)
   
(3,219
)
   
(172
)
   
(1,685
)
   
(1,598
)
   
(87
)
Net (loss) income before income tax provision (benefit)
   
(10,177
)
   
1,521
     
(11,698
)
   
4,754
     
(660
)
   
5,414
 
Income tax provision (benefit)
   
8,688
     
404
     
8,284
     
1,286
     
(158
)
   
1,444
 
Net (loss) income
 
$
(18,865
)
 
$
1,117
   
$
(19,982
)
 
$
3,468
   
$
(502
)
 
$
3,970
 

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 designated our derivative financial instruments as hedge accounting relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.

For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has 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.

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.

-29-

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 2020 and 2019.

Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
 
(in thousands)
                 
   
Recognized in
             
   
Statement of
   
TBA
       
   
Operations
   
Securities
   
Futures
 
Three Months Ended
 
(GAAP)
   
Loss
   
Contracts
 
June 30, 2020
 
$
(2
)
 
$
-
   
$
(2
)
March 31, 2020
   
(5,291
)
   
(1,441
)
   
(3,850
)
December 31, 2019
   
287
     
(192
)
   
479
 
September 30, 2019
   
(483
)
   
(204
)
   
(279
)
June 30, 2019
   
(3,364
)
   
(734
)
   
(2,630
)
March 31, 2019
   
(2,258
)
   
(1,067
)
   
(1,191
)
                         
(in thousands)
                       
   
Recognized in
                 
   
Statement of
   
TBA
         
   
Operations
   
Securities
   
Futures
 
Six Months Ended
 
(GAAP)
   
Loss
   
Contracts
 
June 30, 2020
 
$
(5,292
)
 
$
(1,441
)
 
$
(3,851
)
June 30, 2019
   
(5,622
)
   
(1,801
)
   
(3,821
)

Gains (Losses) on Derivative Instruments - Attributed to Current Period (Non-GAAP)
 
(in thousands)
                                         
 
Attributed to Current Period (Non-GAAP)
 
Attributed to Future Periods (Non-GAAP)
       
   
Repurchase
   
Long-Term
         
Repurchase
   
Long-Term
         
Statement of
 
Three Months Ended
 
Agreements
   
Debt
   
Total
   
Agreements
   
Debt
   
Total
   
Operations
 
June 30, 2020
 
$
(456
)
 
$
(40
)
 
$
(496
)
 
$
456
   
$
38
   
$
494
   
$
(2
)
March 31, 2020
   
(456
)
   
(40
)
   
(496
)
   
(2,879
)
   
(475
)
   
(3,354
)
   
(3,850
)
December 31, 2019
   
510
     
56
     
566
     
(50
)
   
(37
)
   
(87
)
   
479
 
September 30, 2019
   
(124
)
   
61
     
(63
)
   
(155
)
   
(61
)
   
(216
)
   
(279
)
June 30, 2019
   
(226
)
   
43
     
(183
)
   
(2,215
)
   
(232
)
   
(2,447
)
   
(2,630
)
March 31, 2019
   
5
     
65
     
70
     
(976
)
   
(285
)
   
(1,261
)
   
(1,191
)
                                                         
(in thousands)
                                                       
 
Attributed to Current Period (Non-GAAP)
 
Attributed to Current Period (Non-GAAP)
         
           
Junior
                   
Junior
                 
   
Repurchase
   
Subordinated
           
Repurchase
   
Subordinated
           
Statement of
 
Six Months Ended
 
Agreements
   
Debt
   
Total
   
Agreements
   
Debt
   
Total
   
Operations
 
June 30, 2020
 
$
(912
)
 
$
(80
)
 
$
(992
)
 
$
(2,422
)
 
$
(437
)
 
$
(2,859
)
 
$
(3,851
)
June 30, 2019
   
(221
)
   
108
     
(113
)
   
(3,191
)
   
(517
)
   
(3,708
)
 
$
(3,821
)


-30-

Economic Net Portfolio Interest Income
 
(in thousands)
 
         
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
               
Effect of
         
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
523
   
$
60
   
$
(456
)
 
$
516
   
$
463
   
$
7
 
March 31, 2020
   
2,040
     
928
     
(456
)
   
1,384
     
1,112
     
656
 
December 31, 2019
   
1,899
     
948
     
510
     
438
     
951
     
1,461
 
September 30, 2019
   
1,646
     
1,002
     
(124
)
   
1,126
     
644
     
520
 
June 30, 2019
   
2,134
     
1,340
     
(226
)
   
1,566
     
794
     
568
 
March 31, 2019
   
2,190
     
1,313
     
5
     
1,308
     
877
     
882
 
                                                 
(in thousands)
 
           
Interest Expense on Repurchase Agreements
   
Net Portfolio
 
                   
Effect of
           
Interest Income
 
   
Interest
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Income
   
Basis
   
Hedges(1)
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
2,563
   
$
988
   
$
(912
)
 
$
1,900
   
$
1,575
   
$
663
 
June 30, 2019
   
4,324
     
2,653
     
(221
)
   
2,874
     
1,671
     
1,450
 

(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 Long-Term Debt
             
   
Interest Income
         
Effect of
         
Net Interest Income (Loss)
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
June 30, 2020
 
$
463
   
$
7
   
$
282
   
$
(40
)
 
$
322
   
$
181
   
$
(315
)
March 31, 2020
   
1,112
     
656
     
350
     
(40
)
   
390
     
762
     
266
 
December 31, 2019
   
951
     
1,461
     
376
     
56
     
320
     
575
     
1,141
 
September 30, 2019
   
644
     
520
     
390
     
61
     
329
     
254
     
191
 
June 30, 2019
   
794
     
568
     
400
     
43
     
357
     
394
     
211
 
March 31, 2019
   
877
     
882
     
406
     
65
     
341
     
471
     
541
 
                                                         
(in thousands)
 
   
Net Portfolio
   
Interest Expense on Junior Subordinated Notes
                 
   
Interest Income
           
Effect of
           
Net Interest Income (Loss)
 
   
GAAP
   
Economic
   
GAAP
   
Non-GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Basis
   
Basis(1)
   
Basis
   
Hedges(2)
   
Basis(3)
   
Basis
   
Basis(4)
 
June 30, 2020
 
$
1,575
   
$
663
   
$
632
   
$
(80
)
 
$
712
   
$
943
   
$
(49
)
June 30, 2019
   
1,671
     
1,450
     
806
     
108
     
698
     
865
     
752
 

(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.

-31-


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 six months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
3,340
$
-
$
-
$
-
$
3,340
Advisory services, other operating segments(1)
 
84
 
-
 
-
 
(84)
 
-
Interest and dividend income
 
-
 
3,317
 
-
 
-
 
3,317
Interest expense
 
-
 
(988)
 
 (632)(2)
 
-
 
(1,620)
Net revenues
 
3,424
 
2,329
 
(632)
 
(84)
 
5,037
Other
 
-
 
(11,307)
 
 (516)(3)
 
-
 
(11,823)
Operating expenses(4)
 
(1,690)
 
(1,701)
 
-
 
-
 
(3,391)
Intercompany expenses(1)
 
-
 
(84)
 
-
 
84
 
-
Income (loss) before income taxes
$
1,734
$
(10,763)
$
(1,148)
$
-
$
(10,177)
                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
3,261
$
-
$
-
$
-
$
3,261
Advisory services, other operating segments(1)
 
137
 
-
 
-
 
(137)
 
-
Interest and dividend income
 
-
 
5,053
 
1
 
-
 
5,054
Interest expense
 
-
 
(2,653)
 
 (806)(2)
 
-
 
(3,459)
Net revenues
 
3,398
 
2,400
 
(805)
 
(137)
 
4,856
Other
 
-
 
18
 
 (134)(3)
 
-
 
(116)
Operating expenses(4)
 
(1,272)
 
(1,947)
 
-
 
-
 
(3,219)
Intercompany expenses(1)
 
-
 
(137)
 
-
 
137
 
-
Income (loss) before income taxes
$
2,126
$
334
$
(939)
$
-
$
1,521

Segment information for the three months ended June 30, 2020 and 2019 is as follows:

(in thousands)
                   
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2020
                   
Advisory services, external customers
$
1,615
$
-
$
-
$
-
$
1,615
Advisory services, other operating segments(1)
 
26
 
-
 
-
 
(26)
 
-
Interest and dividend income
 
-
 
912
 
-
 
-
 
912
Interest expense
 
-
 
(60)
 
 (282)(2)
 
-
 
(342)
Net revenues
 
1,641
 
852
 
(282)
 
(26)
 
2,185
Other
 
-
 
4,256
 
 (2)(3)
 
-
 
4,254
Operating expenses(4)
 
(1,067)
 
(618)
 
-
 
-
 
(1,685)
Intercompany expenses(1)
 
-
 
(26)
 
-
 
26
 
-
Income (loss) before income taxes
$
574
$
4,464
$
(284)
$
-
$
4,754
-32-


                     
 
Asset
Investment
     
 
Management
Portfolio
Corporate
Eliminations
Total
2019
                   
Advisory services, external customers
$
1,654
$
-
$
-
$
-
$
1,654
Advisory services, other operating segments(1)
 
69
 
-
 
-
 
(69)
 
-
Interest and dividend income
 
-
 
2,498
 
-
 
-
 
2,498
Interest expense
 
-
 
(1,340)
 
 (400)(2)
 
-
 
(1,740)
Net revenues
 
1,723
 
1,158
 
(400)
 
(69)
 
2,412
Other
 
-
 
(1,286)
 
 (188)(3)
 
-
 
(1,474)
Operating expenses(4)
 
(642)
 
(956)
 
-
 
-
 
(1,598)
Intercompany expenses(1)
 
-
 
(69)
 
-
 
69
 
-
Income (loss) before income taxes
$
1,081
$
(1,153)
$
(588)
$
-
$
(660)

(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(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
 
June 30, 2020
 
$
1,500
   
$
84,913
   
$
14,893
   
$
101,306
 
December 31, 2019
   
1,457
     
263,223
     
14,809
     
279,489
 

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 2021 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.

Orchid has reported its June 30, 2020 stockholders’ equity to be approximately $346.0 million, a decrease of approximately 13% from December 31, 2019.  Because of this decrease, Bimini expects to receive a proportional decrease in its management fee revenue going forward until Orchid is able to grow its equity base.

-33-


The following table summarizes the advisory services revenue received from Orchid in each quarter during 2020 and 2019.

(in thousands)
                             
   
Average
   
Average
   
Advisory Services
 
   
Orchid
   
Orchid
   
Management
   
Overhead
       
Three Months Ended
 
MBS
   
Equity
   
Fee
   
Allocation
   
Total
 
June 30, 2020
 
$
3,126,779
   
$
361,093
     
1,268
     
347
     
1,615
 
March 31, 2020
   
3,269,859
     
356,685
     
1,377
     
348
     
1,725
 
December 31, 2019
   
3,705,920
     
414,018
     
1,477
     
379
     
1,856
 
September 30, 2019
   
3,674,087
     
394,788
     
1,440
     
351
     
1,791
 
June 30, 2019
   
3,307,885
     
363,961
     
1,326
     
328
     
1,654
 
March 31, 2019
   
3,051,509
     
363,204
     
1,285
     
322
     
1,607
 

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 six months ended June 30, 2020, we generated $1.6 million of net portfolio interest income, consisting of $2.6 million of interest income from MBS assets offset by $1.0 million of interest expense on repurchase liabilities.  For the comparable period ended June 30, 2019, we generated $1.7 million of net portfolio interest income, consisting of approximately $4.3 million of interest income from MBS assets offset by approximately $2.7 million of interest expense on repurchase liabilities. The $1.7 million decrease in interest income for the six months ended June 30, 2020 was due to a $116.8 million decrease in average MBS balances, partially offset by a 132 basis point ("bp") increase in yields earned on the portfolio.  The $1.7 million decrease in interest expense for the six months ended June 30, 2020 was due to a combination of a $108.3 million decrease in average repurchase liabilities and a 50 bp decrease in cost of funds.

Our economic interest expense on repurchase liabilities for the six months ended June 30, 2020 and 2019 was $1.9 million and $2.9 million, respectively, resulting in $0.7 million and $1.5 million of economic net portfolio interest income, respectively.

During the three months ended June 30, 2020, we generated $0.5 million of net portfolio interest income, consisting of approximately $0.5 million of interest income from MBS assets offset by approximately $0.1 million of interest expense on repurchase liabilities.  For the three months ended June 30, 2019, we generated $0.8 million of net portfolio interest income, consisting of $2.1 million of interest income from MBS assets offset by $1.3 million of interest expense on repurchase liabilities.  The $1.6 million decrease in interest income for the three months ended June 30, 2020 was due to a $157.8 million decrease in average MBS balances, combined with a 14 bp decrease in yields earned on the portfolio. The $1.3 million decrease in interest expense for the six months ended June 30, 2020 was due to a combination of a $147.9 million decrease in average repurchase liabilities and a 222 bp decrease in cost of funds.

Our economic interest expense on repurchase liabilities for the three months ended June 30, 2020 and 2019 was $0.5 million and $1.6 million, respectively, resulting in $0.0 million and $0.6 million of economic net portfolio interest income, respectively.

-34-


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 six months ended June 30, 2020 and 2019 and each quarter in 2020 and 2019 on both a GAAP and economic basis.

($ in thousands)
                                               
   
Average
         
Yield on
   
Average
   
Interest Expense
   
Average Cost of Funds
 
   
MBS
   
Interest
   
Average
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Held(1)
   
Income(2)
   
MBS
   
Agreements(1)
   
Basis
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
53,630
   
$
523
     
3.90
%
 
$
51,987
   
$
60
   
$
516
     
0.46
%
   
3.97
%
March 31, 2020
   
136,142
     
2,040
     
5.99
%
   
131,156
     
928
     
1,384
     
2.83
%
   
4.22
%
December 31, 2019
   
190,534
     
1,898
     
3.99
%
   
182,215
     
948
     
438
     
2.08
%
   
0.96
%
September 30, 2019
   
187,199
     
1,646
     
3.52
%
   
177,566
     
1,002
     
1,126
     
2.26
%
   
2.54
%
June 30, 2019
   
211,406
     
2,134
     
4.04
%
   
199,901
     
1,340
     
1,566
     
2.68
%
   
3.13
%
March 31, 2019
   
212,033
     
2,190
     
4.13
%
   
199,771
     
1,313
     
1,308
     
2.63
%
   
2.62
%
                                                                 
($ in thousands)
                                                               
   
Average
           
Yield on
   
Average
   
Interest Expense
   
Average Cost of Funds
 
   
MBS
   
Interest
   
Average
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Held(1)
   
Income(2)
   
MBS
   
Agreements(1)
   
Basis
   
Basis(2)
   
Basis
   
Basis(3)
 
June 30, 2020
 
$
94,886
   
$
2,563
     
5.40
%
 
$
91,571
   
$
988
   
$
1,900
     
2.16
%
   
4.15
%
June 30, 2019
   
211,719
     
4,324
     
4.08
%
   
199,836
     
2,653
     
2,874
     
2.66
%
   
2.88
%

($ in thousands)
                       
   
Net Portfolio
   
Net Portfolio
 
   
Interest Income
   
Interest Spread
 
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Basis
   
Basis(2)
   
Basis
   
Basis(4)
 
June 30, 2020
   
463
     
7
     
3.44
%
   
(0.07
)%
March 31, 2020
   
1,112
     
656
     
3.16
%
   
1.77
%
December 31, 2019
   
951
     
1,461
     
1.91
%
   
3.03
%
September 30, 2019
   
644
     
520
     
1.26
%
   
0.98
%
June 30, 2019
   
794
     
568
     
1.36
%
   
0.91
%
March 31, 2019
   
877
     
882
     
1.50
%
   
1.51
%
                                 
($ in thousands)
                               
   
Net Portfolio
   
Net Portfolio
 
   
Interest Income
   
Interest Spread
 
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Basis
   
Basis(2)
   
Basis
   
Basis(4)
 
June 30, 2020
 
$
1,575
   
$
663
     
3.24
%
   
1.25
%
June 30, 2019
   
1,671
     
1,450
     
1.42
%
   
1.20
%

(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 36 and 37 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances.
(2)
Economic interest expense and economic net interest income presented in the tables above and the tables on page 37 include the effect of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS.
(4)
Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS.

-35-


Interest Income and Average Earning Asset Yield

Our interest income was $2.6 million for the six months ended June 30, 2020 and $4.3 million for the six months ended June 30, 2019.  Average MBS holdings were $94.9 million and $211.7 million for the six months ended June 30, 2020 and 2019, respectively. The $1.7 million decrease in interest income was due to a $116.8 million decrease in average MBS holdings, partially offset by a 132 bp increase in yields.

Our interest income was $0.5 million for the three months ended June 30, 2020 and $2.1 million for the three months ended June 30, 2019.  Average MBS holdings were $53.6 million and $211.4 million for the three months ended June 30, 2020 and 2019, respectively. The $1.6 million decrease in interest income was due to a $157.8 million decrease in average MBS holdings, combined with a 14 bp decrease in yields.

The tables below present the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and PT MBS, for the six months ended June 30, 2020 and 2019, and for each quarter during 2020 and 2019.

($ in thousands)
                                                     
   
Average MBS Held
   
Interest Income
   
Realized Yield on Average MBS
 
   
PT
   
Structured
         
PT
   
Structured
         
PT
   
Structured
       
Three Months Ended
 
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
 
June 30, 2020
 
$
53,101
   
$
529
   
$
53,630
   
$
502
   
$
21
   
$
523
     
3.78
%
   
16.12
%
   
3.90
%
March 31, 2020
   
135,044
     
1,098
     
136,142
     
2,029
     
11
     
2,040
     
6.01
%
   
3.93
%
   
5.99
%
December 31, 2019
   
188,884
     
1,650
     
190,534
     
1,870
     
28
     
1,898
     
3.96
%
   
6.90
%
   
3.99
%
September 30, 2019
   
185,309
     
1,890
     
187,199
     
1,652
     
(6
)
   
1,646
     
3.57
%
   
(1.15
)%
   
3.52
%
June 30, 2019
   
209,171
     
2,235
     
211,406
     
2,111
     
23
     
2,134
     
4.04
%
   
4.01
%
   
4.04
%
March 31, 2019
   
209,469
     
2,564
     
212,033
     
2,143
     
47
     
2,190
     
4.09
%
   
7.42
%
   
4.13
%
                                                                         
($ in thousands)
                                                                       
   
Average MBS Held
   
Interest Income
   
Realized Yield on Average MBS
 
   
PT
   
Structured
           
PT
   
Structured
           
PT
   
Structured
         
Six Months Ended
 
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
   
MBS
   
MBS
   
Total
 
June 30, 2020
 
$
94,073
   
$
813
   
$
94,886
   
$
2,531
   
$
32
   
$
2,563
     
5.38
%
   
7.89
%
   
5.40
%
June 30, 2019
   
209,320
     
2,399
     
211,719
     
4,254
     
70
     
4,324
     
4.06
%
   
5.83
%
   
4.08
%

Interest Expense on Repurchase Agreements and the Cost of Funds

Our average outstanding balances under repurchase agreements were $91.6 million and $199.8 million, generating interest expense of $1.0 million and $2.7 million for the six months ended June 30, 2020 and 2019, respectively.  Our average cost of funds was 2.16% and 2.66% for six months ended June 30, 2020 and 2019, respectively.  There was a 50 bp decrease in the average cost of funds and a $108.3 million decrease in average outstanding repurchase agreements during the six months ended June 30, 2020, compared to the six months ended June 30, 2019. 

Our economic interest expense was $1.9 million and $2.9 million for the six months ended June 30, 2020 and 2019, respectively. There was a 127 bp increase in the average economic cost of funds to 4.15% for the six months ended June 30, 2020 from 2.88% for the six months ended June 30, 2019.  The $1.0 million decrease in economic interest expense was due to the $108.3 million decrease in average outstanding repurchase agreements during the six months ended June 30, 2020, combined with the negative performance of our derivative holdings attributed to the current period.

-36-


Our average outstanding balances under repurchase agreements were $52.0 million and $199.9 million, generating interest expense of $0.1 million and $1.3 million for the three months ended June 30, 2020 and 2019, respectively.  Our average cost of funds was 0.46% and 2.68% for three months ended June 30, 2020 and 2019, respectively.  There was a 222 bp decrease in the average cost of funds and a $147.9 million decrease in average outstanding repurchase agreements during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.  

Our economic interest expense was $0.5 million and $1.6 million for the three months ended June 30, 2020 and 2019, respectively. There was an 84 bp increase in the average economic cost of funds to 3.97% for the three months ended June 30, 2020 from 3.13% for the three months ended June 30, 2019.

Because all of our repurchase agreements are short-term, changes in market rates have a more immediate impact on our interest expense.  Our average cost of funds calculated on a GAAP basis was 9 bps below the average one-month LIBOR and 24 bps below the average six-month LIBOR for the quarter ended June 30, 2020. Our average economic cost of funds was 342 bps above the average one-month LIBOR and 327 bps above the average six-month LIBOR for the quarter ended June 30, 2020. The average term to maturity of the outstanding repurchase agreements increased from 24 days at December 31, 2019 to 61 days at June 30, 2020.

The tables below present the average outstanding balances under our repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for the six months ended June 30, 2020 and 2019, and for each quarter in 2020 and 2019, on both a GAAP and economic basis.

($ in thousands)
                             
   
Average
                         
   
Balance of
   
Interest Expense
   
Average Cost of Funds
 
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Three Months Ended
 
Agreements
   
Basis
   
Basis
   
Basis
   
Basis
 
June 30, 2020
 
$
51,987
   
$
60
   
$
516
     
0.46
%
   
3.97
%
March 31, 2020
   
131,156
     
928
     
1,384
     
2.83
%
   
4.22
%
December 31, 2019
   
182,215
     
948
     
438
     
2.08
%
   
0.96
%
September 30, 2019
   
177,566
     
1,002
     
1,126
     
2.26
%
   
2.54
%
June 30, 2019
   
199,901
     
1,340
     
1,566
     
2.68
%
   
3.13
%
March 31, 2019
   
199,771
     
1,313
     
1,308
     
2.63
%
   
2.62
%
                                         
($ in thousands)
                                       
   
Average
                                 
   
Balance of
   
Interest Expense
   
Average Cost of Funds
 
   
Repurchase
   
GAAP
   
Economic
   
GAAP
   
Economic
 
Six Months Ended
 
Agreements
   
Basis
   
Basis
   
Basis
   
Basis
 
June 30, 2020
 
$
91,571
   
$
988
   
$
1,900
     
2.16
%
   
4.15
%
June 30, 2019
   
199,836
     
2,653
     
2,874
     
2.66
%
   
2.88
%

               
Average GAAP Cost of Funds
   
Average Economic Cost of Funds
 
               
Relative to Average
   
Relative to Average
 
   
Average LIBOR
   
One-Month
   
Six-Month
   
One-Month
   
Six-Month
 
Three Months Ended
 
One-Month
   
Six-Month
   
LIBOR
   
LIBOR
   
LIBOR
   
LIBOR
 
June 30, 2020
   
0.55
%
   
0.70
%
   
(0.09
)%
   
(0.24
)%
   
3.42
%
   
3.27
%
March 31, 2020
   
1.34
%
   
1.43
%
   
1.49
%
   
1.40
%
   
2.88
%
   
2.79
%
December 31, 2019
   
1.90
%
   
1.98
%
   
0.18
%
   
0.10
%
   
(0.94
)%
   
(1.02
)%
September 30, 2019
   
2.22
%
   
2.18
%
   
0.04
%
   
0.08
%
   
0.32
%
   
0.36
%
June 30, 2019
   
2.45
%
   
2.49
%
   
0.23
%
   
0.19
%
   
0.68
%
   
0.64
%
March 31, 2019
   
2.50
%
   
2.77
%
   
0.13
%
   
(0.14
)%
   
0.12
%
   
(0.15
)%
                                                 
-37-


                                     
               
Average GAAP Cost of Funds
   
Average Economic Cost of Funds
 
               
Relative to Average
   
Relative to Average
 
   
Average LIBOR
   
One-Month
   
Six-Month
   
One-Month
   
Six-Month
 
Six Months Ended
 
One-Month
   
Six-Month
   
LIBOR
   
LIBOR
   
LIBOR
   
LIBOR
 
June 30, 2020
   
0.94
%
   
1.06
%
   
1.22
%
   
1.10
%
   
3.21
%
   
3.09
%
June 30, 2019
   
2.48
%
   
2.63
%
   
0.18
%
   
0.03
%
   
0.40
%
   
0.25
%

Dividend Income

We owned 1,520,036 shares of Orchid common stock as of March 31, 2020. During the three months ended June 30, 2020, we acquired 975,321 additional shares of Orchid common stock, bringing our total ownership to 2,495,357 shares. Orchid paid total dividends of $0.405 per share and $0.165 per share during the six and three months ended June 30, 2020, respectively, and $0.48 per share and $0.24 per share during the six and three months ended June 30, 2019, respectively.  During the six and three months ended June 30, 2020, we received dividends on this common stock investment of approximately $0.8 million and $0.4 million, respectively, compared to $0.7 million and $0.4 million during the six and three months ended June 30, 2019, respectively.

Long-Term Debt

Junior Subordinated Notes

Interest expense on our junior subordinated debt securities was $0.6 million and $0.8 million for the six months ended June 30, 2020 and 2019, respectively.  The average rate of interest paid for the six months ended June 30, 2020 was 4.68% compared to 6.17% for the comparable period in 2019.

Interest expense on our junior subordinated debt securities was $0.3 million and $0.4 million for the three month periods ended June 30, 2020 and 2019, respectively.  The average rate of interest paid for the three months ended June 30, 2020 was 4.17% compared to 6.08% for the comparable period in 2019.

The junior subordinated debt securities pay interest at a floating rate.  The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date.  As of June 30, 2020, the interest rate was 3.81%.

Note Payable

On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.

Paycheck Protection Plan Loan

On April 13, 2020, the Company received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan.  PPP loans may be forgiven, in whole or in part, if the proceeds are  used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met.  These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part.  Payments are deferred for the first six months of the loan.

-38-


Gains or Losses and Other Income

The table below presents our gains or losses and other income for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                                   
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
Change
   
2020
   
2019
   
Change
 
Realized losses on sales of MBS
 
$
(5,805
)
 
$
-
   
$
(5,805
)
 
$
-
   
$
-
   
$
-
 
Unrealized gains on MBS
   
28
     
5,276
     
(5,248
)
   
602
     
2,224
     
(1,622
)
Total (losses) gains on MBS
   
(5,777
)
   
5,276
     
(11,053
)
   
602
     
2,224
     
(1,622
)
Losses on derivative instruments
   
(5,292
)
   
(5,622
)
   
330
     
(2
)
   
(3,364
)
   
3,362
 
Gains on retained interests in securitizations
   
-
     
275
     
(275
)
   
-
     
-
     
-
 
Unrealized (losses) gains on
                                               
Orchid Island Capital, Inc. common stock
   
(755
)
   
(46
)
   
(709
)
   
3,653
     
(334
)
   
3,987
 

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. During the six months ended June 30, 2020, the Company received proceeds of $171.2 million from the sales of MBS. Most of these sales occurred during the second half of March 2020 as we sold assets in order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity and reduce risk associated with the market turmoil brought about by COVID-19. We did not sell any MBS during the six months ended June 30, 2019.

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 for each quarter end during 2020 and 2019.

   
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)
 
June 30, 2020
   
0.29
%
   
0.65
%
   
2.60
%
   
3.16
%
   
0.31
%
March 31, 2020
   
0.38
%
   
0.70
%
   
2.89
%
   
3.45
%
   
1.10
%
December 31, 2019
   
1.69
%
   
1.92
%
   
3.18
%
   
3.72
%
   
1.91
%
September 30, 2019
   
1.55
%
   
1.68
%
   
3.12
%
   
3.61
%
   
2.13
%
June 30, 2019
   
1.76
%
   
2.00
%
   
3.24
%
   
3.80
%
   
2.40
%
March 31, 2019
   
2.24
%
   
2.41
%
   
3.72
%
   
4.27
%
   
2.61
%

(1)
Historical 5 Year and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.
(2)
Historical 15 Year and 30 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration Ltd.

-39-


Operating Expenses

For the six and three months ended June 30, 2020, our total operating expenses were approximately $3.4 million and $1.7 million, respectively, compared to approximately $3.2 million and $1.6 million for the six and three months ended June 30, 2019, respectively.   The table below presents a breakdown of operating expenses for the six and three months ended June 30, 2020 and 2019.

(in thousands)
                                   
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2020
   
2019
   
Change
   
2020
   
2019
   
Change
 
Compensation and related benefits
 
$
2,147
   
$
2,088
   
$
59
   
$
1,047
   
$
1,017
   
$
30
 
Legal fees
   
95
     
96
     
(1
)
   
75
     
70
     
5
 
Accounting, auditing and other professional fees
   
251
     
188
     
63
     
112
     
75
     
37
 
Directors’ fees and liability insurance
   
346
     
321
     
25
     
181
     
161
     
20
 
Administrative and other expenses
   
552
     
526
     
26
     
270
     
275
     
(5
)
   
$
3,391
   
$
3,219
   
$
172
   
$
1,685
   
$
1,598
   
$
87
 

Income Tax Provision

We recorded an income tax provision for the six and three months ended June 30, 2020 of approximately $8.7 million and $1.3 million, respectively, on consolidated pre-tax book (loss) income of $(10.2) million and $4.8 million in the six and three months ended June 30, 2020, respectively. We recorded an income tax provision (benefit) for the six and three months ended June 30, 2019 of approximately $0.4 million and $(0.2) million, respectively, on consolidated pre-tax book income (loss) of $1.5 million and $(0.7) million in the six and three months ended June 30, 2019, respectively.

As a result of adverse economic impacts of COVID-19 on our business, management performed an assessment of the need for additional valuation allowances against existing deferred tax assets. Following the more-likely-than-not standard that benefits will not be realized in the future, we determined an additional valuation allowance of approximately $11.2 million was necessary during the three months ended March 31, 2020 for the net operating loss carryforwards and capital loss carryforwards. With the rapidly evolving and changing landscape caused by the pandemic, we will continue to closely monitor the impacts of COVID-19 on the Company’s ability to realize its deferred tax assets and may increase valuation allowances in the future as new information becomes available.

Financial Condition:

Mortgage-Backed Securities

As of June 30, 2020, our MBS portfolio consisted of $52.8 million of agency or government MBS at fair value and had a weighted average coupon of 4.17%.  During the six months ended June 30, 2020, we received principal repayments of $8.9 million compared to $9.8 million for the comparable period ended June 30, 2019.  The average prepayment speeds for the quarters ended June 30, 2020 and 2019 were 15.3% and 10.5%, respectively.

-40-


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 (%)
 
June 30, 2020
   
12.4
     
25.0
     
15.3
 
March 31, 2020
   
11.6
     
18.1
     
13.7
 
December 31, 2019
   
15.6
     
15.6
     
15.6
 
September 30, 2019
   
9.5
     
16.2
     
10.5
 
June 30, 2019
   
9.9
     
14.6
     
10.5
 
March 31, 2019
   
5.7
     
13.4
     
6.8
 

The following tables summarize certain characteristics of our PT MBS and structured MBS as of June 30, 2020 and December 31, 2019:

($ in thousands)
           
         
Weighted
 
     
Percentage
 
Average
 
     
of
Weighted
Maturity
 
   
Fair
Entire
Average
in
Longest
Asset Category
 
Value
Portfolio
Coupon
Months
Maturity
June 30, 2020
           
Fixed Rate MBS
$
52,345
99.1%
4.18%
332
1-Feb-50
Interest-Only MBS
 
442
0.8%
3.60%
292
15-Jul-48
Inverse Interest-Only MBS
 
31
0.1%
5.19%
227
15-May-39
Total MBS Portfolio
$
52,818
100.0%
4.17%
331
1-Feb-50
December 31, 2019
           
Fixed Rate MBS
$
216,231
99.3%
4.25%
316
1-Nov-49
Interest-Only MBS
 
1,024
0.4%
3.65%
281
15-Jul-48
Inverse Interest-Only MBS
 
586
0.3%
4.77%
254
25-Apr-41
Total MBS Portfolio
$
217,841
100.0%
4.25%
316
1-Nov-49

($ in thousands)
                       
   
June 30, 2020
   
December 31, 2019
 
         
Percentage of
         
Percentage of
 
Agency
 
Fair Value
   
Entire Portfolio
   
Fair Value
   
Entire Portfolio
 
Fannie Mae
 
$
25,552
     
48.4
%
 
$
203,321
     
93.3
%
Freddie Mac
   
27,263
     
51.6
%
   
14,499
     
6.7
%
Ginnie Mae
   
3
     
0.0
%
   
21
     
0.0
%
Total Portfolio
 
$
52,818
     
100.0
%
 
$
217,841
     
100.0
%

   
June 30, 2020
   
December 31, 2019
 
Weighted Average Pass-through Purchase Price
 
$
108.92
   
$
107.12
 
Weighted Average Structured Purchase Price
 
$
5.38
   
$
6.39
 
Weighted Average Pass-through Current Price
 
$
111.54
   
$
108.77
 
Weighted Average Structured Current Price
 
$
3.34
   
$
6.91
 
Effective Duration (1)
   
3.155
     
3.196
 

(1)
Effective duration is the approximate percentage change in price for a 100 basis point change in rates.  An effective duration of 3.155 indicates that an interest rate increase of 1.0% would be expected to cause a 3.155% decrease in the value of the MBS in our investment portfolio at June 30, 2020.  An effective duration of 3.196 indicates that an interest rate increase of 1.0% would be expected to cause a 3.196% decrease in the value of the MBS in our investment portfolio at December 31, 2019. 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.

-41-

The following table presents a summary of our portfolio assets acquired during the six months ended June 30, 2020 and 2019.

($ in thousands)
                                   
 
Six Months Ended June 30,
 
 
2020
 
2019
 
   
Total Cost
   
Average Price
   
Weighted Average Yield
   
Total Cost
   
Average Price
   
Weighted Average Yield
 
PT MBS
 
$
20,823
   
$
110.83
     
2.64
%
 
$
3,285
   
$
104.12
     
3.35
%

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 that they are reasonably priced by the market.  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 duration 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.

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.

-42-


The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of June 30, 2020, 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
 
$
52,345
   
$
1,582
   
$
(1,962
)
 
$
(4,378
)
   
3.02
%
   
(3.75
)%
   
(8.36
)%
Interest-Only MBS
   
442
     
(53
)
   
118
     
245
     
(12.12
)%
   
26.85
%
   
55.43
%
Inverse Interest-Only MBS
   
31
     
2
     
(4
)
   
(9
)
   
5.29
%
   
(14.40
)%
   
(28.18
)%
Total MBS Portfolio
 
$
52,818
   
$
1,531
   
$
(1,848
)
 
$
(4,142
)
   
2.90
%
   
(3.50
)%
   
(7.84
)%

($ in thousands)
                                         
   
Notional
   
$ Change in Fair Value
   
% Change in Fair Value
 
   
Amount(1)
   
-100BPS
   
+100BPS
   
+200BPS
   
-100BPS
   
+100BPS
   
+200BPS
 
Eurodollar Futures Contracts
                                         
Junior Subordinated Debt Hedges
 
$
1,000
   
$
(10
)
 
$
10
   
$
20
     
(1.00
)%
   
1.00
%
   
2.00
%
   
$
1,000
   
$
(10
)
 
$
10
   
$
20
                         
                                                         
Gross Totals
         
$
1,521
   
$
(1,838
)
 
$
(4,122
)
                       

(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 June 30, 2020, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with five of these counterparties.  We believe these facilities provide borrowing capacity in excess of our needs.  None of these lenders are affiliated with us. These borrowings are secured by our MBS.

As of June 30, 2020, we had obligations outstanding under the repurchase agreements of approximately $51.6 million with a net weighted average borrowing cost of 0.28%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 2 to 317 days, with a weighted average maturity of 61 days.  Securing the repurchase agreement obligation as of June 30, 2020 are MBS with an estimated fair value, including accrued interest, of $53.0 million and a weighted average maturity of 332 months.  Through August 14, 2020, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 30, 2020 with maturities through June 30, 2021.

-43-


The table below presents information about our period-end, maximum and average repurchase agreement obligations for each quarter in 2020 and 2019.

($ 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
 
June 30, 2020
 
$
51,617
   
$
52,068
   
$
51,987
   
$
(370
)
   
(0.71
)%
March 31, 2020
   
52,357
     
214,921
     
131,156
     
(78,799
)
   
(60.08
)%(1)
December 31, 2019
   
209,954
     
239,243
     
182,215
     
27,739
     
15.22
%(2)
September 30, 2019
   
154,475
     
200,552
     
177,566
     
(23,091
)
   
(13.00
)%(3)
June 30, 2019
   
200,656
     
200,776
     
199,901
     
755
     
0.38
%
March 31, 2019
   
199,146
     
200,113
     
199,771
     
(625
)
   
(0.31
)%

(1)
The lower ending balance relative to the average balance during the quarter ended March 31, 2020 reflects the Company’s response to the COVID-19 pandemic. During the quarter ended March 31, 2020, the Company's investment in PT MBS decreased $162.4 million.
(2)
The higher ending balance relative to the average balance during the quarter ended December 31, 2019 reflects the reinvestment of the portfolio. During the quarter ended December 31, 2019, the Company's investment in PT MBS increased $54.7 million.
(3)
The lower ending balance relative to the average balance during the quarter ended September 31, 2019 reflects the decrease in the portfolio to fund the July 2019 Tender Offer. During the quarter ended September 31, 2019, the Company's investment in PT MBS decreased $47.5 million.

Liquidity and Capital Resources

Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead and fulfill margin calls.  Our primary 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 investments also generate liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio. In addition, subsequent to June 30, 2020, we received a refund of approximately $1.3 million in U.S. Federal income taxes.

The COVID-19 pandemic has adversely affected our liquidity, assets under management and operating results.  As disclosed in detail elsewhere in this report, during March 2020, we significantly reduced our MBS assets to meet margin calls and repay debts.  This reduction in our investment portfolio will impact our ability to generate income in the future.  In addition, for the foreseeable future we may receive reduced income from our management of the Orchid portfolio.  However, management believes that we currently have sufficient liquidity and capital resources available for at least one year from the date of issuance of this Form 10-Q for (a) the management of our existing MBS portfolio, (b) to service our management agreement to Orchid, (c) to make all scheduled payments on borrowings, (d) for the payment of overhead and operating expenses, and (e) the payment of other accrued obligations.

Our hedging strategy typically involves taking short positions in Eurodollar futures, T-Note futures, TBAs 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.

-44-


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.

In future periods we expect to continue to finance our activities through repurchase agreements.  As of June 30, 2020, we had cash and cash equivalents of $4.7 million.  We generated cash flows of $12.0 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $91.6 million during the six months ended June 30, 2020.  In addition, during the six months ended June 30, 2020, we received approximately $3.4 million in management fees and expense reimbursements as manager of Orchid and approximately $0.8 million in dividends from our investment in Orchid common stock.

In order to generate additional cash to be invested in our MBS portfolio, on October 30, 2019, we obtained a $680,000 loan secured by a mortgage on the Company’s office property.  The loan is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89%, through October 30, 2024. Thereafter, interest accrued based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of five years, plus 3.25%.  Net loan proceeds were approximately $651,000.  In addition. we are also seeking to sell real property that is not used in the Company’s business.  As of June 30, 2020, that property had a carrying value of $450,000.  When that property is sold, we intend to invest the net sale proceeds in our MBS portfolio.

On April 13, 2020, we received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan.  PPP loans may be forgiven, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met.  These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part.  Payments are deferred for the first six months of the loan. The Company believes that all of the proceeds were used for eligible purposes and the outstanding principal and accrued interest will ultimately be forgiven.

-45-


The table below summarizes the effect that certain future contractual obligations existing as of June 30, 2020 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
 
$
51,617
   
$
-
   
$
-
   
$
-
   
$
51,617
 
Interest expense on repurchase agreements(1)
   
51
     
-
     
-
     
-
     
51
 
Junior subordinated notes(2)
   
-
     
-
     
-
     
26,000
     
26,000
 
Interest expense on junior subordinated notes(1)
   
1,049
     
2,010
     
2,013
     
10,521
     
15,593
 
Principal and interest on mortgage loan(1)
   
54
     
107
     
104
     
771
     
1,036
 
Totals
 
$
52,771
   
$
2,117
   
$
2,117
   
$
37,292
   
$
94,297
 

(1)
Interest expense on repurchase agreements, junior subordinated notes and mortgage loan are based on current interest rates as of June 30, 2020 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.

The COVID-19 pandemic discussed above impacted Orchid Island Capital as well.  Recently Orchid reported a shareholders equity of approximately $346 million as of June 30, 2020; up from $308 million as of March 31, 2020, but down from approximately $396 million at December 31, 2019. In the near term the management fees we receive from Orchid will be proportionately reduced. However, 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 Company has acquired an additional 975,321 shares of Orchid since March 31, 2020 as the shares of Orchid were trading at a significant discount to Orchid’s reported book value as of March 31, 2020.

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.

-46-


Interest Rates and the MBS Market

The COVID-19 coronavirus that emerged in China in late 2019 and spread to the U.S. during the first quarter of 2020 continued to drive economic activity and markets around the globe during the second quarter.  The severe contraction in economic activity in the U.S. that took place in March and April slowly reversed during the second quarter.  As businesses across the country closed, shelter-in-place policies took effect throughout most of the U.S. and social distancing was widely practiced. As a result, the spread of the virus slowed and new cases grew at a decelerating rate.  These developments led various state and local governments to slowly reverse these restrictions starting in early May.  As the restrictive policies were unwound, economic activity resumed and the economic data released in May, June and early July showed the economy was beginning to recover.  Financial markets recovered as well and continued stimulus, from both the Fed - via monetary policy and the implementation of various programs designed to stabilize various funding markets – as well as additional aid programs from the Federal government, acted as a stimulant to the recovery.  The strong monetary and fiscal support also reduced uncertainty about the ability of the economy to recover.  Consistently the Fed in particular has made it clear they will continue to do whatever is necessary to support smooth operations of all financial markets and  act as a lender of last resort when needed and appropriate for them to do so.

While the economy gradually reopened and economic activity began to recover, the virus re-emerged and the number of new cases of the virus started to grow rapidly – even more rapidly than before the shut-down.  This started to occur around mid-June, just as most of the economy and country was resuming all or most forms of activity – inside dining at restaurants, bars, gyms, movie theaters, etc.  As the number of new cases have rapidly grown, it has become apparent governments may need to resume at least some of the tight restrictions that were implemented during the March/April period.  This will likely entail restricting or eliminating the activities that are assumed to have facilitated the sudden re-emergence of the virus.  Examples include closing or restricting bars, inside dining at restaurants and any other activity where large numbers of people are nearby in an enclosed area.  The use of face masks is becoming mandatory in many areas as well.  This will certainly impact economic activity, although the economic data covering the current period will not be reported until a later date, so we will not be able to gauge to what extent activity has slowed.  These developments also cast doubt over the timing of when the economy will be able to sustainably resume normal activity.  This in turn raises uncertainty over the level of economic growth that will occur, and the extent of further accommodation needed from the Fed and Congress.  A presidential election in November also looms.

Throughout the second quarter of 2020 and into the third quarter interest rates in the U.S. Treasury market have been fairly stable.  The yield on the 10-year U.S. Treasury note has remained within a 32.5 bps range, and excluding a brief period in early June, the range has been approximately half that.  The equity markets have exhibited substantially more volatility, although they continue to recover from the depths of the contraction of March of this year.  The backstop to the recovery is a Fed that continuously signals a willingness to provide as much accommodation as needed and the belief in additional stimulus from Washington, although subject to political wrangling that tends to slow the response.  Given the uncertainty surrounding the recovery and the timing of when “normal” economic activity may resume, the level of interest rates, especially short term rates, are likely to remain very low and the Fed Funds target range pegged to the effective lower bound of 0%.  The Fed has signaled a reluctance to see negative interest rates in the U.S. many times, so their role in maintaining rates at these levels will likely be through forward guidance and/or yield curve control – a practice observed in Japan and Australia.

-47-


Given the current level of rates and the likelihood rates will remain low means that prepayment speeds will likely remain elevated.  During the depths of the virus outbreak when social distancing, shelter-in-place and very low levels of any kind of activity in general were constraining the refinancing of mortgages, it seemed prepayment activity would not be as responsive to low rates as feared.  This has not turned out to be the case.  Starting in April, prepayment reports have consistently surprised the market to the upside.  They would be higher still if originators were not capacity constrained.  The primary/secondary spread, or the spread between the current coupon mortgage security (priced at par) and rates available to borrowers is very high – reflecting capacity constraints primarily.  Over time it is assumed this spread will narrow as originators add capacity, There is room for rates available to borrowers to decline well below 3% if the primary/secondary spread were to return to historical norms.  As a result, refinancing activity is likely to remain very elevated for the foreseeable future.  We expect that eventually most borrowers that can will refinance their mortgage.  At that point, prepayment speeds will moderate, perhaps meaningfully so.  To the extent rates eventually move higher, we expect that prepayment activity would plummet.  That day, if it ever comes, does not appear to be near. Such an event will require a return to sustained economic growth. That in turn is predicated on the evolution of the virus and the emergence of an effective, widely available vaccine, if one is to be found.

The Agency MBS sector performance for the second quarter of 2020 was not as robust as the first quarter, but still positive at 0.8% for the second quarter, and 3.6% year-to-date.  On an absolute return basis for the quarter, Agency MBS trailed most credit sectors – both corporate and non-Agency MBS/CMBS, as well as Agency CMBS.  As the economy recovered, supported by substantial interventions from the Fed and Congress, most sectors of the fixed income markets recovered.  For most, while returns were strong for the second quarter – in the high single digits and low double digits in the case of corporate debt and non-Agency MBS, respectively, year-to-date returns are more modest and in all but a few cases negative year-to-date versus comparable duration U.S. Treasuries.  Agency MBS have generated a -0.8% excess return year-to-date.  While negative, this return still exceeds those of most of the fixed income markets.

In the current environment prepayment speeds are expected to remain high.  Further, for the month of July the Fed purchased over $100 billion of Agency MBS. The Fed generally purchases between $40 and $45 billion per month as part of their quantitative easing program plus reinvest prepayments on their existing portfolio.  The latter figure was approximately $57 billion in July.  The Fed tends to purchase the coupons currently in production.  As they appear to be an indiscriminate buyer, they remove most of the worst securities in terms of prepayments behavior from the market.  This is the case for the coupons they purchase.  For those coupons they do not purchase, the market must absorb all that are produced.  As a result, the coupons the Fed purchases tend to outperform those not purchased by the Fed.  For the latter coupons, specified pools, with favorable prepayment characteristics, become more valuable to investors.  Current premiums charged for such securities are at the highest levels ever observed. This is likely to be the case as long as current conditions persist.

Recent Legislative and Regulatory Developments

The Fed conducted large scale overnight repo operations from late 2019 until July 2020 to address disruptions in the U.S. Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully tamed volatile funding costs that had threatened to cause disruption across the financial system.

The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps on March 3, 2020.

-48-


The markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets continued to deteriorate following this announcement as investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the COVID-19 pandemic. Many of these markets experienced severe dislocations during the week following March 15, 2020, which resulted in forced sales of assets to satisfy margin calls. To address these issues in the fixed income and funding markets, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and Agency MBS in the amounts needed to support smooth market functioning. With these purchases, market conditions improved substantially, and in early April, the Fed began to gradually reduce the pace of these purchases. On June 30, 2020, Chairman Powell also announced the Fed’s intention to increase its holdings of U.S. Treasury securities and Agency MBS over the coming months, at least at the current pace, to sustain smooth market functioning and thereby foster the effective transmission of monetary policy to broader financial conditions. Since March, the Fed has taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.  In addition, on June 30, 2020, Fed Chairman Powell announced expectations to maintain interest rates at this level until the Fed is confident that the economy has weathered recent events and is on track to achieve maximum employment and price stability goals.

Congress and President Trump have adopted several pieces of legislation in response to the public health and economic impacts resulting from the COVID-19 pandemic. The first two pieces of legislation provided, among other things, emergency funding to develop a vaccine for COVID-19, medical supplies, grants for public health agencies, small business loans, assistance for health systems in other countries, expanded coronavirus testing, paid leave, enhanced unemployment insurance, expanded food security initiatives and increased federal Medicaid funding.

The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020.  The CARES Act provides many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity.  This over $2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health providers, loans and investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provides an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts.

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. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform.  At this time, however, no decisions have been made on any additional steps to be taken as part of the GSE reform plan and the economic impact of COVID-19 may delay GSE reform plans further. 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 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 Eurodollar futures and our junior subordinated debt; however, any impact cannot be estimated at this time.

The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic and the upcoming presidential and Congressional elections in the United States.

-49-

Effect on Us

Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:

Effects on our Assets

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

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

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

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

As described above, the Agency MBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency MBS market. If the Fed modifies, reduces or suspends its purchases of Agency MBS, our investment portfolio could be negatively impacted.

-50-


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.

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

In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.

Summary

After suffering through arguably the most dramatic contraction of economic activity and financial market turmoil ever witnessed during the first quarter of 2020, the second quarter was one of recovery – or so it appeared until mid-June.  As the economy slowly reopened from a near complete shut-down caused by the pervasive safety precautions taken as the COVID-19 virus spread throughout the U.S., economic activity rebounded.  However, as life returned to normal, and people could resume their lives as they existed prior to the outbreak, the virus spread again and reported cases surged, starting in mid-June. Safety precautions are being re-implemented to stem the spread of the virus once more.  Economic activity is generally reported with a lag, so we will not know the extent of the slowdown in economic activity caused by the re-emergence of the virus until a later date.

The financial markets are generally functioning properly, in large part because of the substantial intervention by the Fed.  The Fed has undertaken a quantitative easing program whereby they buy U.S. Treasuries and Agency MBS securities regularly throughout the week.  In addition, they have provided financing to essentially all aspects of the markets – from municipal securities to small and large corporations, as well as foreign central banks.  The financial markets are close to the condition that existed prior to the onset of the virus.  Interest rates remain at or near the lowest levels ever across the U.S. Treasury curve, and are likely to remain so until the economy is well on the road to recovery and inflation is nearing the Fed’s target level of 2%.  Given the excess capacity in the economy caused by the demand shock resulting from the virus, this could take several years.

-51-


With rates at such low levels refinancing activity is robust and likely to become even more so as originators add capacity.  This is in spite of the virus and various measures of social distancing and shelter-in-place prevalent throughout the economy. As originators add capacity, prevailing mortgage rates available to borrowers could fall well below 3%.  Eventually most borrowers will have the opportunity to refinance their mortgage and the effect of such low rates will diminish.  Another factor affecting the Agency MBS market is the quantitative easing on the part of the Fed.  During the month of July 2020 the Fed purchased over $100 billion of Agency MBS. The Fed generally purchases between $40 and $45 billion per month as part of their quantitative easing program plus reinvests prepayments on their existing portfolio.  The latter figure was approximately $57 billion in July.  Gross supply of Agency MBS for the month of July is anticipated to be between $135 billion and $150 billion. The Fed tends to purchase the coupons currently in production.  As they are an indiscriminate buyer, they remove most of the worst securities in terms of prepayments behavior from the market.  This is the case for the coupons they purchase.  For those coupons they do not purchase, the market must absorb all that are produced.  As a result, the coupons the Fed purchases tend to outperform those not purchased by the Fed.  For the latter coupons, specified pools, with favorable prepayment characteristics, become much more valuable to investors.  Current premiums charged for such securities are at the highest levels ever observed. This is likely to be the case as long as current conditions persist.

The Agency MBS sector performance for the second quarter of 2020 was not as robust as the first quarter, but still positive at 0.8% for the second quarter, and 3.6% year-to-date.  On an absolute return basis for the quarter, Agency MBS trailed most credit sectors – both corporate and non-Agency MBS/CMBS, as well as Agency CMBS.  As the economy recovered, supported by substantial interventions from the Fed and Congress, most sectors of the fixed income markets recovered.  For most, while returns were strong for the second quarter – in the high single digits and low double digits in the case of corporate debt and non-Agency MBS, respectively, year-to-date returns are more modest and in all but a few cases negative year-to-date versus comparable duration U.S. Treasuries.  Agency MBS have generated a -0.8% excess return versus U.S. Treasuries year-to-date.  While negative, this return still exceeds those of most of the fixed income markets.

With respect to the outlook going forward, the economy has yet to fully recover from the steep contraction during the first quarter of 2020, despite massive intervention by both the Fed and the Trump administration.  There remains significant uncertainty surrounding the timing of a full recovery in economic activity and a return to life as it existed before the virus emerged.  There is also considerable risk associated with the unprecedented deficits the Federal government has incurred in an effort to stabilize the economy, and such deficits are still expanding rapidly.

As of the date of this report, the only funding acquired by the Company under the CARES Act or other legislation adopted by Congress has been a $152,000 low interest loan made under the Paycheck Protection Program (“PPP”) of the CARES Act.

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, and these decisions and assessments can change significantly each reporting period. There have been no changes to the processes used to determine our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2019.

Capital Expenditures

At June 30, 2020, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At June 30, 2020, we did not have any off-balance sheet arrangements.

-52-

Inflation

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (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 material 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.
-53-

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination operations ceased in 2007.  The demand is based on Royal Palm’s alleged breaches of certain representations and warranties in the related MLPA’s.  The Company believes the demands are without merit and intends to defend against the demand vigorously.  No provision or accrual has been recorded as of June 30, 2020 related to the Citigroup demand.

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

ITEM 1A.  RISK FACTORS.

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 27, 2020, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 15, 2020.

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

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 maximum remaining number of shares that may be repurchased under this authorization is 429,596 shares. The authorization expires on November 15, 2020. The Company did not repurchase any of its common stock during the three months ended June 30, 2020.

The Company did not have any unregistered sales of its equity securities during the three months ended June 30, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No

 
 
 
 
 
 
 
 
 



*
Filed herewith.

**
Furnished herewith

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


Date: August 14, 2020
 
By:
 /s/ Robert E. Cauley
 
     
Robert E. Cauley
Chairman and Chief Executive Officer



Date: August 14, 2020
 
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)
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