BIMINI CAPITAL MANAGEMENT INC
For the period ended Jun 30, 2024. Filed Aug 2, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 2, 2024
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-03.
0001437749-24-014584
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-02.
0001437749-24-024401
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 126 previous paragraphs and 128 current paragraphs.
91 unchanged; 23 reworded; 12 added; 12 removed; 0 previous and 2 current paragraphs rearranged.
Tables are not compared: 36 previous and 38 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (12)
Current report
Net Income (Loss) Summary
Current report
Our economic interest expense on repurchase liabilities for the three months ended June 30, 2024 and 2023 was $1,113,000 and $582,000, respectively, resulting in $174,000 and $(15,000) of economic net portfolio interest income (expense), respectively.
Current report
The extended recovery from the devastating effects on the U.S. economy of the pandemic in 2020 continued in late 2023 and early 2024. While economic growth was strong, the labor market remained out of balance with corresponding wage pressures and inflation, particularly services inflation, remained well above the Federal Reserve’s (the “Fed") target level. These conditions persisted despite over 500 basis points of monetary policy tightening on the part of the Fed over the period from March of 2022 through July of 2023. Inflation was clearly moderating over the course of the second half of 2023, but growth remained quite strong, well above the economy’s long-run potential. Despite the strong growth, the Fed appeared to be on the brink of relaxing monetary policy beginning in 2024 based on the persistent trend lower in reported inflation figures in late 2023. The market was further encouraged by comments from various Fed governors, including the chairman, that there would be eases in 2024. This changed rapidly as 2024 unfolded and inflation readings reversed course and appeared to accelerate. The tone of comments by all Fed officials pivoted away from potential near-term easing to the need to maintain higher rates. The continued strength of the economy enabled the Fed to keep policy restrictive until inflation resumed moderating towards its 2% target range. The Fed also made it clear to markets that it was prepared to raise rates further if inflation did indeed accelerate further, although it did not anticipate this would be likely.
Current report
These trends continued into April as data for March was released and interest rates continued to increase from the low levels observed in December of 2023. However, as economic data for April, May and June was released, the data appeared to moderate. Inflation readings have resumed the trend observed in late 2023 and appear to be headed towards the Fed’s 2% target again. Job gains – as reflected in the monthly non-farm payroll reports released by the labor department – have moderated as well. Measures of consumer spending and business activity have slowed as well. While these readings are not consistent with a recession, they are consistent with growth rates at or near the economy's potential, which appears to indicate the supply/demand imbalances that existed for the last two years have receded. It appears the brief re-acceleration of inflation during the first quarter of 2024 will not be sustained and represents a one-off incident. Given this development, the Fed is anticipated to start loosening monetary policy during the second half of 2024. Current market pricing is for between two and three 25 basis point cuts by the end of the year, as the Fed is perceived to be equally concerned with slowing economic growth as they are with a re-acceleration of inflation.
Current report
Movements in interest rate levels across the curve as well as the shape of the curve followed the same pattern as the economic developments described above. As economic data remained strong in late 2023 and into early 2024 and inflation appeared to reaccelerate, long maturity rates steadily increased. Starting in late 2023, the yield on the 10-year U.S. Treasury note increased from 3.8% to just over 4.7% in late April. Likewise, the shape of the U.S. Treasury curve, as measured by the difference between the yields on the 2-year U.S. Treasury note and the 10-year U.S. Treasury note, flattened during the first quarter of 2024, becoming more inverted as the prospects for interest rate cuts by the Fed were priced out of the market.
Current report
As the economic data softened and inflation appeared to slow and resume a steady decline towards the Fed’s 2% target, starting with the April data released in May, the 10-year U.S. Treasury note yield declined from just over 4.7% in late April to approximately 4.4% at June 30, 2024 and just under 4.0% currently. However, the slope of the U.S. Treasury curve – again, as measured by the difference in yield between the 2-year and 10-year U.S. Treasury notes – continued to flatten until late June. In the last week of the second quarter, the yield curve began to steepen by over 20 basis points. However, the catalyst for the steepening in the curve that occurred in late June does not appear to have been driven by economic data, but perhaps by political developments in the United States and European Union, including both the evolving landscape of the U.S. presidential election in November and the recent elections in France and the United Kingdom, which resulted in a shift in control to more left-leaning parties with the potential for higher fiscal spending and government deficits.
Current report
Interest rate volatility embedded in interest rate derivatives, as measured by the MOVE index, reversed the pattern observed during the first quarter of 2024 – gradually declining – and spiked higher in early April, only to moderate again over the balance of the second quarter. The level of the index ended only slightly higher than the level at the beginning of the second quarter – the index value was 98.6 on June 30, 2024, versus 86.4 on March 28, 2024. The spike in early April was likely driven by strong jobs and inflation data for March released in early April of 2024.
Current report
As the economic data, particularly inflation, moderated over the course of the second quarter of 2024, market participants expected that should the trend continue, the Fed would soon begin loosening monetary policy and the curve slope would normalize and become positively sloped again. Risk assets of all kinds performed very well for the second quarter as investors became comfortable short-term rates had peaked and would soon be heading lower, reducing funding costs and enhancing levered returns on risk assets. Lower risk assets also generated positive returns, such as Agency RMBS, but the returns were modest. The Agency RMBS index generated a total return for the quarter of 0.2%, and 0.3% for Fannie Mae Agency RMBS. Versus comparable duration U.S. Treasuries (a proxy for hedge adjusted returns), the returns were (0.20%) and (0.25%), respectively. These returns for the second quarter of 2024 compare to 4.3% for the S&P 500, 1.1% for the high yield index and absolute returns of between 1.0% and 1.7% for the various sub-sectors of the non-Agency RMBS indices.
Current report
Within the stack of 30-year, fixed rate Agency RMBS (the asset class in which the Company invests the vast majority of its capital), absolute returns tracked the coupons of the securities - the higher the coupon, the higher the return. The return for 2.0% coupon securities was 0.1% for the second quarter, the lowest return, and 1.3% for 7.0% coupon securities, the highest return and coupon. Within the stack of 30-year, fixed rate Agency RMBS, excess returns versus comparable duration swaps for the second quarter (a proxy for hedged returns) were better for coupons on the lower and higher end of the coupon range, with returns for the middle coupons lagging. The lowest coupon securities, 2.0%, 2.5%, 3.0% and 3.5%, had excess returns of (0.1%). The highest coupons securities, 6.5% and 7.0%, had excess returns of (0.2%) and 0.0%, respectively. The middle coupon security returns, 4.0% coupons through 6.0% coupons, had excess returns between (0.3%) and (0.6%).
Current report
On July 27, 2023, the federal banking regulators, including the Office of the Comptroller of the Currency, (the "OCC") the FDIC and the Fed, jointly issued a proposed rule that would revise large bank capital requirements (the "Basel III Endgame"). The Basel III Endgame, if implemented as proposed, would significantly increase the credit weight risk for balance-sheet mortgages and for Agency RMBS sold to the GSEs, which could disincentivize banks from originating mortgages for sale to the GSEs and impact pricing in the Agency RMBS markets. The comment period for the Basel III Endgame closed on January 16, 2024, and the proposed rule was met with strong objections from the banking industry. In testimony before the United States Senate Committee on Banking, Housing and Urban Affairs in July 2024, Fed chairman Jerome Powell stated that the OCC, the FDIC and the Fed were in discussions to materially revise the proposed rule, and that there was consensus at the Fed to undergo another comment period. This would likely delay the process into 2025 and a new presidential administration.
Current report
The long-awaited pivot on the part of the Federal Reserve may finally be at hand. Persistently strong growth of the U.S. economy and above trend inflation appear to have moderated sufficiently that the Fed now sees the risks to the economy as balanced – implying there is equal risk of more growth or a slow-down. Because the Fed sees its current monetary policy as restrictive, the Fed may begin to reverse some of the tightening that occurred in 2022 and 2023 and ease monetary policy. Current market pricing is for between two and three 25 basis point cuts by year end with several more in 2025. Economic data released for April, May and June show moderating inflation that appears headed towards the Fed’s 2% target as well as a labor market more in balance with supply and demand roughly equal. Should such conditions persist, the Fed should begin lowering the Fed funds rate this year, perhaps starting in September.
Current report
The developments described above led risk assets to perform very well during the second quarter of 2024, with the S&P 500 returning nearly 5%. Less risky assets also generated positive returns for the quarter, although the returns were much more modest. Agency RMBS returns for the quarter were 0.2% (absolute total return) but returns versus comparable duration swaps (a proxy for hedge returns) were slightly negative, owing largely to very poor relative performance over the last week of the second quarter. Returns across the coupon stack of 30-year, fixed rate Agency RMBS, where the Company deploys most of its capital, were coupon dependent – ranging from 0.1% for the lowest coupons to 1.3% for the 7.0% coupon, the highest coupon. Returns versus hedges were mixed, with the “wings,” or the lowest and highest coupons, better than the “belly” or middle coupons.
Removed paragraphs (12)
Previous report
Net Income Summary
Previous report
Towards the end of 2023 it appeared the interest rate cycle was about to turn. The current interest rate cycle, which began when the Federal Reserve (the “Fed”) responded to the onset of the pandemic in March of 2020 by aggressively lowering the target range for their overnight funding rate, otherwise known as the Fed funds rate, and then began raising its policy rate from the effective lower bound just above 0% to a target range of 5.25% – 5.50% from March of 2022 through July of 2023. The Fed was focused on bringing inflation down from multi-decade highs in 2022 and appeared to be well on its way of reaching their policy target of 2.0%. The markets expected to see the next cycle begin when the Fed pivoted away from additional policy firming and towards the removal of tight monetary policy sometime in early to mid-2024. Comments by several Fed officials, including the chairman, appeared to confirm the Fed was about to do so. The markets reacted strongly to this development as risk assets of all types rallied and market pricing of future levels of the Fed’s policy rate implied the market expected up to six 25 basis point cuts over the course of 2024 as 2023 came to a close.
Previous report
While most measures of inflation were clearly declining over the second half of 2023 there was also clear evidence the economy was not slowing much at all. Most market participants had anticipated the significant tightening of monetary policy would slow the economy, if not cause a recession, and thus bring inflation down to the Fed’s policy target of 2%. However, economic growth, as measured by gross domestic product (“GDP”), was above trend during the second half of 2023. The labor market, as measured by the monthly non-farm payroll reports, averaged 213,000 new jobs per month over the course of the last six months of 2023, a level considered above the rate necessary to absorb new entrants into the labor market and thus keep the unemployment rate from increasing. For the first three months of 2024 the monthly average has increased to 280,000. More significantly, monthly inflation readings are above levels observed in late 2023 and it appears inflation may actually be re-accelerating. Public comments by various Fed officials have generally pushed back against market pricing which implied the market still expected the Fed to pivot soon and start to relax monetary policy. However, as we enter the second quarter, the market's pricing of future levels of the Fed’s policy rate are shifting upwards and a pivot in monetary policy does not appear to be imminent.
Previous report
As the market sensed the Fed was about to pivot and reverse the stance of monetary policy from additional firming to easing, interest rates decreased over the course of the last two months of 2023.
Previous report
Rates had peaked in October, reaching cycle highs at most points along the maturity curve. U.S. Treasury yields declined so much in November and December such that all U.S. Treasuries with a maturity longer than the 1-year bill declined by at least 70 basis points during the fourth quarter, in spite of the significant increases that occurred in October. As we entered 2024 and the outlook changed with respect to inflation and Fed monetary policy, these declines in yields have rapidly reversed. Over the course of the first quarter of 2024 the curve has flattened as the yield on the 2-year U.S. Treasury increased by approximately 40 basis points and the yield on the 10-year U.S. Treasury increased by just over 32 basis points, from 3.881% at December 31, 2023 to 4.208% at March 28, 2024. As the data has not softened to date during the second quarter yields continue to retrace the decline since the October 2023 peak and the yield on the 2 and 10-year U.S. Treasuries has increased to 5.0% and 4.7%, respectively.
Previous report
As mentioned above, market pricing implied the Fed would reduce its policy rate by six 25 basis point cuts in 2024 as 2023 came to a close. When the first quarter of 2024 ended market pricing was for only three 25 basis point cuts and current market pricing of Fed funds going forward only reflects one 25 basis point cut.
Previous report
In spite of the reversal in the rates market during the first quarter of 2024 as described above, interest rate volatility declined over the course of the quarter. A widely followed measure of interest rate volatility is the ICE Bank of America MOVE index. The index declined from a reading of approximately 127 on January 2, 2024, to a reading of approximately 86.4 on March 28, 2024. This was a significant development as implied volatility is a significant determinant of Agency MBS performance as it affects the pricing of the implied prepayment option in all residential mortgages.
Previous report
As with interest rates described above, by late October of 2023 Agency RMBS spreads to comparable duration U.S. Treasuries or swaps reached their widest point for the current cycle. As the market reversed and risk appetite rapidly recovered the spread contracted quickly – declining by over 50 basis points by year-end. However, unlike interest rates which reversed much of the decline seen during November and December, over the course of the first quarter of 2024 Agency RMBS spreads, while somewhat volatile, ended the quarter very close to where they were at the beginning of the quarter. As mentioned above, declining interest rate volatility supported Agency RMBS performance. However, the sector also benefitted from increased demand from banks and money managers deploying funds from growing flows into fixed income funds.
Previous report
Based on ICE Bank of America data for the fixed income indices, for the first quarter of 2024 Agency RMBS generated a return of -1.1% and -0.1% versus comparable duration swaps, respectively. The 30-year fixed rate sector generated returns of -1.3% and -0.2% versus comparable duration swaps, respectively. With respect to individual sectors of the Agency RMBS index, shorter duration sectors and coupons outperformed owing to the increase in interest rates. Across the 30-year fixed rate coupon stack returns varied from -2.1% for 2.0% coupons to 1.4% for 7.0% coupons. Excess returns for the same coupons were -0.6% and 0.8%, respectively, and the distribution of returns followed the durations of the various coupons in a consistent fashion.
Previous report
The Agency RMBS sector underperformed investment grade and sub-investment grade corporates on an absolute basis. Relative to comparable duration swaps for the first quarter, Agency RMBS trailed investment grade corporates by 140 basis points and sub-investment grades corporates by 190 basis points. The performance of Agency RMBS versus these two sectors of the fixed income markets is important as multi-sector asset managers who allocate funds across the fixed income markets view these three significant sectors on a relative value basis when making allocation decisions.
Previous report
The current economic and interest rate cycle that began with the onset of the COVID-19 pandemic in 2020 followed by the Federal Reserve raising its policy rate by 525 basis points in a little over a year in 2022/2023 was supposed to end in early 2024 as the Fed pivoted and started to remove its tight monetary policy. The economy and inflation are simply too strong for this to occur, at least not yet. While market participants still expect some easing of monetary policy over the course of 2024, as reflected in the pricing of forward overnight rates, the starting point continues to get pushed out further and further into the future and the magnitude of eases continues to decrease. Incoming economic data so far in 2024 is consistent with firming inflation and a solid economy, and the labor market shows no signs of weakness. Stimulative fiscal policy out of Washington is working against restrictive monetary policy from the Fed and while inflation has decreased significantly from the peak seen in 2023 it still remains far above the Fed’s target level of 2.0%.
Previous report
In spite of the ongoing strength of the economy and interest rates retracing much of the declines seen over the last two months of 2023, Agency MBS securities performed fairly well during the first quarter of 2024. While absolute returns and duration adjusted excess returns versus comparable duration treasuries were both negative for the quarter, they were only slightly negative, including the excess return of just -0.1%. At this juncture it is unclear how much longer the economy and inflation will remain too strong for the Fed and whether or not interest rates will continue to rise, and to what extent. When the first quarter of 2024 ended the spread of the current coupon, 30-year fixed rate Agency MBS was trading at a spread to comparable duration treasuries near the low end of the prevailing range since mid-2022, shortly after the Fed began its policy firming. As with the economy, inflation and interest rates, the outlook for the performance of Agency MBS is unclear and there is the possibility the sector could underperform in the near term if the current trends discussed above continue.
Reworded paragraphs (23)
Previous wording
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company could purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases could be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan expired on September 16, 2023 and did not obligate the Company to purchase any shares. From the commencement of the 2021 Repurchase Plan, through its expiration on September 16, 2023, the Company repurchased a total of 789,024 shares at an aggregate cost of approximately $1.3 million, including commissions and fees, for a weighted average price of $1.60 per share.
Current wording
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company could purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases could be executed through various means, including, without limitation, open market transactions. From the commencement of the 2021 Repurchase Plan, through its expiration on September 16, 2023, the Company repurchased a total of 789,024 shares at an aggregate cost of approximately $1.3 million, including commissions and fees, for a weighted average price of $1.60 per share.
Previous wording
The Inflation Reduction Act of 2022 (the "Act"), includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and other provisions. The excise tax is effective beginning in 2023. The Company was not subject to the tax in 2023, as its repurchases were less than the threshhold specified in the Act. While we may complete transactions subject to the new excise tax, we do not expect this tax to have a material impact to our financial condition or result of operations.
Current wording
The Inflation Reduction Act of 2022 (the "Act"), includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and other provisions. The excise tax is effective beginning in 2023. The Company was not subject to the tax in 2023, as its repurchases were less than the threshold specified in the Act. There have been no repurchases in 2024. While we may complete transactions subject to the new excise tax, we do not expect this tax to have a material impact to our financial condition or result of operations.
Previous wording
Described below are the Company’s results of operations for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.
Current wording
Described below are the Company’s results of operations for the six and three months ended June 30, 2024, as compared to the six and three months ended June 30, 2023.
Previous wording
Consolidated net income for the three months ended March 31, 2024 was $0.2 million, or $0.02 basic and diluted income per share of Class A Common Stock, as compared to a consolidated net income of $1.0 million, or $0.10 basic and diluted income per share of Class A Common Stock, for the three months ended March 31, 2023.
Current wording
Consolidated net loss for the six months ended June 30, 2024 was $0.1 million, or $0.01 basic and diluted loss per share of Class A Common Stock, as compared to a consolidated net income of $1.3 million, or $0.13 basic and diluted income per share of Class A Common Stock, for the six months ended June 30, 2023. Consolidated net loss for the three months ended June 30, 2024 was $0.3 million, or $0.03 basic and diluted loss per share of Class A Common Stock, as compared to a consolidated net income of $0.3 million, or $0.03 basic and diluted income per share of Class A Common Stock, for the three months ended June 30, 2023.
Previous wording
The components of net income for the three months ended March 31, 2024 and 2023, along with the changes in those components are presented in the table below.
Current wording
The components of net income for the six and three months ended June 30, 2024 and 2023, along with the changes in those components are presented in the table below.
Previous wording
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the three months ended March 31, 2024, we generated $186,000 of net portfolio interest income, consisting of $1,394,000 of interest income from MBS assets offset by $1,208,000 of interest expense on repurchase liabilities. For the comparable period ended March 31, 2023, we generated $49,000 of net portfolio interest income, consisting of $557,000 of interest income from MBS assets offset by $508,000 of interest expense on repurchase liabilities. The $837,000 increase in interest income was due to a 128 basis point ("bp") increase in yields, combined with an $44.9 million increase in average MBS holdings. There was a $700,000 increase in interest expense for the three months ended March 31, 2024 that was due to a 95 bp increase in cost of funds, combined with a $42.3 million increase in average repurchase liabilities.
Current wording
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, 2024, we generated $0.3 million of net portfolio interest income, consisting of $2.7 million of interest income from MBS assets offset by $2.4 million of interest expense on repurchase liabilities. For the comparable period ended June 30, 2023, we generated $52,000 of net portfolio interest income, consisting of $1.1 million of interest income from MBS assets offset by $1.1 million of interest expense on repurchase liabilities. The $1.5 million increase in interest income was due to a 155 basis point ("bp") increase in yields, combined with an $38.9 million increase in average MBS holdings. There was a $1.3 million increase in interest expense for the six months ended June 30, 2024 that was due to a 108 bp increase in cost of funds, combined with a $37.1 million increase in average repurchase liabilities.
Previous wording
Our economic interest expense on repurchase liabilities for the three months ended March 31, 2024 and 2023 was $1,187,000 and $541,000, respectively, resulting in $207,000 and $16,000 of economic net portfolio interest income, respectively.
Current wording
Our economic interest expense on repurchase liabilities for the six months ended June 30, 2024 and 2023 was $2.3 million and $1.2 million, respectively, resulting in $381,000 and $1,000 of economic net portfolio interest income, respectively.
Previous wording
The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for the three months ended March 31, 2024 and 2023 and each quarter in 2024 and 2023 on both a GAAP and economic basis.
Current wording
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, 2024 and 2023 and each quarter in 2024 and 2023 on both a GAAP and economic basis.
Previous wording
Since 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 31 bps above the average one-month SOFR and 24 bps above the average six-month SOFR for the quarter ended March 31, 2024. Our average economic cost of funds was 22 bps above the average one-month SOFR and 15 bps above the average six-month SOFR for the quarter ended March 31, 2024. The average term to maturity of the outstanding repurchase agreements was 44 days at March 31, 2024, compared to 29 days at December 31, 2023. 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 SOFR rates for each quarter in 2024 and 2023, on both a GAAP and economic basis.
Current wording
Since 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 19 bps above the average one-month SOFR and 14 bps above the average six-month SOFR for the quarter ended June 30, 2024. Our average economic cost of funds was 2 bps below the average one-month SOFR and 7 bps below the average six-month SOFR for the quarter ended June 30, 2024. The average term to maturity of the outstanding repurchase agreements was 69 days at June 30, 2024, compared to 29 days at December 31, 2023. 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 SOFR rates for each quarter in 2024 and 2023, on both a GAAP and economic basis.
Previous wording
During the three months ended March 31, 2024 and 2023, we owned 569,071 shares of Orchid common stock, respectively. Orchid paid total dividends of $0.36 and $0.48 per share during the three months ended March 31, 2024 and 2023, respectively, resulting in dividend income on this common stock investment of approximately $0.2 million and $0.3 million, respectively.
Current wording
During the six months ended June 30, 2024 and 2023, we owned 569,071 shares of Orchid common stock, respectively. Orchid paid total dividends of $0.72 and $0.96 per share during the six months ended June 30, 2024 and 2023, respectively, resulting in dividend income on this common stock investment of approximately $0.4 million and $0.6 million, respectively. Orchid paid total dividends of $0.36 and $0.48 per share during the three months ended June 30, 2024 and 2023, respectively, resulting in dividend income on this common stock investment of approximately $0.2 million and $0.3 million, respectively.
Previous wording
Prior to June 30, 2023, the junior subordinated debt securities paid interest at a floating rate, adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. Starting June 30, 2023, the underlying index converted from three-month LIBOR to CME Term SOFR plus a tenor spread adjustment of 0.26161%. The interest rate for subsequent accrual periods will be CME Term SOFR on the applicable reset date plus the tenor spread adjustment of 0.26161% plus the coupon spread of 3.50%. The CME Term SOFR index is in effect for all interest rate resets after July 3, 2023. The LIBOR and CME Term SOFR rate increases since January 2022 have increased our interest expense. Interest expense on our junior subordinated debt securities was $0.6 million and $0.5 million for the three months ended March 31, 2024 and 2023, respectively. The average rate of interest paid for the three months ended March 31, 2024 was 9.14% compared to 8.29% for the comparable period in 2023.
Current wording
Prior to June 30, 2023, the junior subordinated debt securities paid interest at a floating rate, adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. Starting June 30, 2023, the underlying index converted from three-month LIBOR to CME Term SOFR plus a tenor spread adjustment of 0.26161%. The interest rate for subsequent accrual periods will be CME Term SOFR on the applicable reset date plus the tenor spread adjustment of 0.26161% plus the coupon spread of 3.50%. The CME Term SOFR index is in effect for all interest rate resets after July 3, 2023. The LIBOR and CME Term SOFR rate increases since January 2022 have increased our interest expense. Interest expense on our junior subordinated debt securities was $1.2 million and $1.1 million for the six months ended June 30, 2024 and 2023, respectively. The average rate of interest paid for the six months ended June 30, 2024 was 9.11% compared to 8.39% for the comparable period in 2023. Interest expense on our junior subordinated debt securities was $0.6 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively. The average rate of interest paid for the three months ended June 30, 2024 was 9.09% compared to 8.49% for the comparable period in 2023.
Previous wording
The table below presents our gains or losses and other income for the three months ended March 31, 2024 and 2023.
Current wording
The table below presents our gains or losses and other income for the six and three months ended June 30, 2024 and 2023.
Previous wording
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. We did not sell any MBS during the three months ended March 31, 2024 and 2023.
Current wording
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, 2024, we received proceeds of $46.3 million from the sales of RMBS. We did not sell any MBS during the six months ended June 30, 2023.
Previous wording
For the three months ended March 31, 2024, our total operating expenses were approximately $3.0 million, compared to $2.3 million for the three months ended March 31, 2023. The table below presents a breakdown of operating expenses for the three months ended March 31, 2024 and 2023.
Current wording
For the six and three months ended June 30, 2024, our total operating expenses were approximately $5.8 million and $2.8 million, respectively, compared to $4.6 million and $2.2 million, respectively, for the six and three months ended June 30, 2023. The table below presents a breakdown of operating expenses for the six and three months ended June 30, 2024 and 2023.
Previous wording
We recorded an income tax provision for the three months ended March 31, 2024 and 2023 of approximately $0.4 million and $0.3 million, respectively, on consolidated pre-tax book income of $0.6 million and $1.4 million, respectively. The Company is unable to reliably estimate an annual effective tax rate; therefore, it uses the discrete-period computation method for determining its income tax (benefit) provision. Our income tax provision could be affected by numerous factors, including the projected utilization of net operating loss carryovers and changes in our deferred tax assets and liabilities and their valuations, and can result in significant variations in the customary relationship between pretax income and income tax expense.
Current wording
We recorded an income tax provision for the six months ended June 30, 2024 and 2023 of approximately $0.5 million and $0.4 million, respectively, on consolidated pre-tax book income of $0.4 million and $1.7 million, respectively. The total income tax provision recorded for the three months ended June 30, 2024 and 2023 was $0.1 million and $0.1 million, respectively, on consolidated pre-tax book (loss) income of $(0.2) million and $0.4 million, respectively. The Company uses the discrete-period computation method for determining its income tax (benefit) provision. Our income tax provision could be affected by numerous factors, including non-deductible expenses, the projected utilization of net operating loss carryovers and changes in our deferred tax assets and liabilities and their valuations, and can result in significant variations in the customary relationship between pretax income and income tax expense. The increase in the income tax provision relative to the pre-tax book income (loss) for the six and three months ended June 30, 2024 compared to the same periods in 2023 was primarily due to an increase in executive compensation subject to Section 162(m) limitations.
Previous wording
As of March 31, 2024, our MBS portfolio consisted of $88.7 million of agency or government MBS at fair value and had a weighted average coupon of 5.43%. During the three months ended March 31, 2024, we received principal repayments of $3.5 million compared to $0.9 million for the comparable period ended March 31, 2023. The average prepayment speeds for the quarters ended March 31, 2024 and 2023 were 16.5% and 5.0%, respectively.
Current wording
As of June 30, 2024, our MBS portfolio consisted of $86.4 million of agency or government MBS at fair value and had a weighted average coupon of 5.00%. During the six months ended June 30, 2024, we received principal repayments of $7.9 million compared to $1.9 million for the comparable period ended June 30, 2023. The average prepayment speeds for the quarters ended June 30, 2024 and 2023 were 10.0% and 9.6%, respectively.
Previous wording
As of March 31, 2024, we had obligations outstanding under the repurchase agreements of approximately $84.6 million with a net weighted average borrowing cost of 5.46%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 12 to 79 days, with a weighted average maturity of 44 days. Securing the repurchase agreement obligation as of March 31, 2024 are MBS with an estimated fair value, including accrued interest, of $89.0 million. Through May 2, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at March 31, 2024 with maturities through June 18, 2024.
Current wording
As of June 30, 2024, we had obligations outstanding under the repurchase agreements of approximately $82.9 million with a net weighted average borrowing cost of 5.47%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 12 to 89 days, with a weighted average maturity of 69 days. Securing the repurchase agreement obligation as of June 30, 2024 are MBS with an estimated fair value, including accrued interest, of $86.6 million. Through August 1, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 30, 2024 with maturities through September 27, 2024.
Previous wording
In future periods we expect to continue to finance our activities through repurchase agreements and through revenues from our advisory services business. As of March 31, 2024, we had cash and cash equivalents of $3.3 million. We generated cash flows of $4.9 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $85.8 million during the three months ended March 31, 2024. In addition, during the three months ended March 31, 2024, we received approximately $2.9 million in management fees and expense reimbursements as manager of Orchid and approximately $0.2 million in dividends from our investment in Orchid common stock.
Current wording
In future periods we expect to continue to finance our activities through repurchase agreements and through revenues from our advisory services business. As of June 30, 2024, we had cash and cash equivalents of $4.9 million. We generated cash flows of $10.6 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $84.8 million during the six months ended June 30, 2024. In addition, during the six months ended June 30, 2024, we received approximately $6.1 million in management fees and expense reimbursements as manager of Orchid and approximately $0.4 million in dividends from our investment in Orchid common stock.
Previous wording
Orchid Island Capital reported net income for the first quarter 2024 of $19.7 million and its shareholders equity increased from $469.9 million to $481.6 million. 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.
Current wording
Orchid Island Capital reported a net loss for the second quarter 2024 of $5.0 million and its shareholders’ equity increased from $481.6 million to $555.9 million. 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.
Previous wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. As interest rates have increased and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap during 2023. Recently the Fed has indicated they may taper their quantitative tightening by slowing the rate of run-off of their portfolio, although it is likely they will allow their holdings of Agency RMBS to continue at the current pace and slow the run-off of U.S. Treasuries in a way that achieves their desired rate of portfolio run-off.
Current wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce the balance sheet by a maximum of $25 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. As interest rates have remained high and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap. On September 30, 2019, the FHFA announced that Fannie Mae and Feddie 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 the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprises to continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises *will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to then current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises in the U.S. mortgage market.
Previous wording
On September 30, 2019, the FHFA announced that Fannie Mae and Feddie 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 the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements (the "January Agreements") allowing the Enterprises to continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises *will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to then current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises in the U.S. mortgage market. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January Agreements, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, to become effective Apr…
Excerpt shortened here; the source contains the full paragraph.
Current wording
On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the letter agreements, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, which became effective April 1, 2024, which will, among other things, reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replace the current exposure methodology with the standardized approach for counterparty credit risk as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions; update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduce a risk weight of 20% for guarantee assets.
Previous wording
If prepayment rates are relatively low, lower long-term interest rates can increase the value of our Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market coupon/yield for longer, enhancing the return from the security. 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.
Current wording
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 our Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market coupon/yield for longer, enhancing the return from the security. 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.
Previous wording
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 Fed Funds, SOFR and T-Note futures contracts or interest rate swaptions.
Current wording
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 Fed Funds, SOFR and T-Note futures contracts, dual digital options or interest rate swaptions.
Rearranged current paragraphs (2)
Current report — wording carried from elsewhere
Segment information for the six months ended June 30, 2024 and 2023 is as follows:
Current report — wording carried from elsewhere
During the three months ended June 30, 2024, we generated $0.1 million of net portfolio interest income, consisting of $1.3 million of interest income from MBS assets offset by $1.2 million of interest expense on repurchase liabilities. For the comparable period ended June 30, 2023, we generated $3,000 of net portfolio interest income, consisting of $567,000 of interest income from MBS assets offset by $564,000 of interest expense on repurchase liabilities. The $0.7 million increase in interest income was due to a 174 bp increase in yields, combined with an $32.8 million increase in average MBS holdings. There was a $0.6 million increase in interest expense for the three months ended June 30, 2024 that was due to a 118 bp increase in cost of funds, combined with a $31.8 million increase in average repurchase liabilities.