BIMINI CAPITAL MANAGEMENT INC
For the period ended Sep 30, 2024. Filed Nov 1, 2024.
View on SEC.govAbout this filing
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.
Sep 30, 2024 · Filed Nov 1, 2024
BMNMStored price and day change unavailable
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious 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 OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-01.
0001437749-24-032917
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 128 previous paragraphs and 129 current paragraphs.
91 unchanged; 29 reworded; 8 added; 8 removed; 0 previous and 1 current paragraphs rearranged.
Tables are not compared: 38 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 (8)
Current report
The trajectory of the economy that existed as the second quarter of 2024 ended continued into the third quarter. The trend was apparent in the incoming economic data, the level of interest rates and the outlook for monetary policy on the part of the Fed. With respect to the latter, the Fed finally lowered the Fed Funds rate in late September by 50 basis points, the first interest rate cut since the Fed stopped tightening monetary policy in March of 2023. The move was well telegraphed by various Fed officials during their public comments leading up to the event, as the Fed was careful not to surprise the market with the cut. Throughout the third quarter, incoming labor market and inflation data was consistent with the Fed’s view that inflation was approaching its 2% target and would soon get there. The Fed’s focus has shifted to the labor market and ensuring the supply/demand balance that had led to a low unemployment rate and outsized wage gains did not slow too much and jeopardize its efforts to fulfill its second mandate of full employment. Further, elevated interest rate levels had materially impacted the housing market and other interest rate sensitive sectors of the economy, so the Fed feared that if the labor market cooled too much then economic growth could as well. The manufacturing side of the economy was already weak, so all things considered the Fed’s movement of monetary policy back towards the neutral rate appears to be consistent with its mandates.
Current report
Unlike the inflation and labor market data, consumer spending levels and economic growth generally – as measured by GDP – were still quite robust during the third quarter and, in the case of the latter, trending at or above sustainable trend growth rates. However, as long as inflation data continued to move towards its target level – and such data was already there when three- or six-month measures were annualized – the Fed appeared comfortable lowering the Fed Funds rate to ensure the labor market did not cool too much. As the fourth quarter of 2024 begins, the latest reading on the labor market appears to have reversed the slowing trend apparent over the last several months as the September reading was very strong, previous months data was revised higher and the unemployment rate declined. Also, in late September, the government revised previously released data on gross domestic income (“GDI”), another measure of economic growth. GDI data over the past several quarters had been quite low and inconsistent with GDP data and consumer spending levels. Most economists believed the GDI data painted the more accurate picture of the true level of economic growth in the economy. However, the GDI data was revised higher and was now consistent with the GDP data. Together with the latest labor market data, the economy now appears quite healthy and the market expects that the Fed will be more conservative in the timing and extent of further reductions in the Fed Funds rate.
Current report
Over the course of the third quarter of 2024, interest rates continued to decrease as they had through the last two months of the second quarter. After the yield on the 10-year T-Note peaked at 4.7% in late April 2024, the yield trended downward until hitting a year-to-date low near 3.6% on September 16, 2024. However, the GDI revisions in late September, coupled with the resurgence in the labor market data released in early October, drove 10-year U.S. Treasury rates back above 4% in early October. Otherwise, the U.S Treasury and swap curves steepened throughout the third quarter of 2024. The spread between the 2-year and 10-year T-Notes turned positive in early September 2024 for the first time since mid-2022, ending the longest period of inversion ever recorded.
Current report
As noted above, the Fed reduced the overnight Fed Funds rate at its meeting in September by 50 basis points. Given developments discussed above that occurred prior to the Fed’s meeting in September – cooling inflation data, a slowing labor market and comments by Fed officials regarding their desire to start to remove overly restrictive monetary policy – the market anticipated two such 50 basis point cuts and at least one additional 25 basis point cut by year-end based on price levels in the futures and related markets. The developments late in the third quarter of 2024 and early in the fourth quarter of 2024 – the GDI revisions, September labor market report and even the September inflation report released in early October, which was slightly higher than expectations – have reduced market expectations of further Fed Funds rate cuts this year to less than two more 25 basis point cuts. Some economists believe the economy may have achieved a “soft” landing after the 500+ basis point hikes initiated by the Fed. A soft landing refers to the outcome where the economy does not suffer a contraction or even slowdown growth following a tightening cycle by the Fed. Such instances are very rare, and it remains to be seen if this will prove to be the case.
Current report
Interest rate volatility embedded in interest rate derivatives, as measured by the MOVE index, was elevated throughout the third quarter of 2024 and even increased further still late in the quarter after the Fed Funds rate cut, likely in response to the developments discussed above, geopolitical events in the Middle East and uncertainty surrounding the U.S. presidential election in November. The value of the index approached a year-to-date high reading in early October. Given that uncertainty surrounding these same events remains, it is likely interest rate volatility will remain elevated through the fourth quarter of 2024.
Current report
Declining interest rates across the maturity spectrum of the treasury curve led all fixed income sectors of the market to generate positive absolute returns for the third quarter of 2024 although excess returns versus comparable duration swaps were far less robust. Agency RMBS absolute returns for the quarter were 4.7% and 4.9% for conventional Agency RMBS – the non-GNMA component of the Agency RMBS index. These absolute returns compare to 5.7% for investment grade debt, 5.3% for high yield debt, 4.8% for US treasuries, 4.6% for Agency debt, and 4.5% for Agency CMBS. Excess returns versus comparable duration swaps for the quarter for Agency RBS were 0.7% and 0.9% for the non-GNMA component of the Agency RMBS index. Excess returns for the other major components of the domestic fixed income markets (excluding treasuries) for the third quarter of 2024 were 1.4% for investment grade debt, 0.3% for high yield debt, -0.1% for Agency debt, and 0.2% for Agency CMBS.
Current report
The long-awaited impacts of tight monetary policy orchestrated by the Fed appear to have finally slowed inflation sufficiently such that the Fed could re-focus on its second mandate – full employment in the economy. The labor market data over the course of the second and third quarters of 2024 reflected greater balance between the supply and demand for labor, such that hiring and wage growth were slowing and the unemployment rate was rising gradually. In late September 2024, the Fed reduced the Fed funds rate by 50 basis points, and the market anticipated it was the first of many such cuts. In contrast, growth in the economy, as measured by both GDP and GDI as well as consumer spending, has remained robust throughout. However, the non-farm payroll report for September 2024, released in early October, as well as the latest readings on inflation were robust and exceeded market expectations. Should such signs of economic strength continue, the Fed may be more conservative in the timing and extent of further reductions in the Fed Funds rate than the market had expected at the beginning of the third quarter.
Current report
Interest rates decreased over the course of the third quarter of 2024, continuing the trend started in late April 2024. The U.S. Treasury curve also steepened as the market anticipated additional easing of monetary policy by the Fed and the spread between the 2-year and 10-year T-Notes finally turned positive in early September 2024 after being inverted since mid-2022, the longest inversion ever. Cheaper funding levels coupled with a still healthy economy were supportive of risk assets, and domestic fixed income securities all generated positive returns for the quarter. Agency RMBS also generated positive excess returns versus comparable duration swaps. Based on recent positive economic data, it is unclear how much further the Fed will go in relaxing monetary policy. Further, geo-political events around the world, especially in the Middle East, as well as the U.S. presidential election in November, are cause for uncertainty in the outlook for markets and the economy. The market in which the Company and Orchid Island invest the preponderance of their capital, the Agency RMBS market, has performed well so far in 2024, and potential returns available in the market remain attractive.
Removed paragraphs (8)
Previous 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.
Previous 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.
Previous 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.
Previous 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.
Previous 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.
Previous 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.
Previous 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.
Previous 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.
Reworded paragraphs (29)
Previous wording
On March 7, 2024, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the "2024 Repurchase Plan"). Pursuant to the 2024 Repurchase Plan, we can purchase shares of our Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases can be executed through various means, including, without limitation, open market transactions. The 2024 Repurchase Plan does not obligate the Company to purchase any shares and expires on March 7, 2026.
Current wording
On March 7, 2024, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the "2024 Repurchase Plan"). Pursuant to the 2024 Repurchase Plan, we can purchase shares of our Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases can be executed through various means, including, without limitation, open market transactions. The 2024 Repurchase Plan does not obligate the Company to purchase any shares and expires on March 7, 2026. There have been no repurchases in 2024.
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 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.
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 was 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. 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 six and three months ended June 30, 2024, as compared to the six and three months ended June 30, 2023.
Current wording
Described below are the Company’s results of operations for the nine and three months ended September 30, 2024, as compared to the nine and three months ended September 30, 2023.
Previous 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.
Current wording
Consolidated net income for the nine months ended September 30, 2024 was $0.2 million, or $0.02 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net income of $0.9 million, or $0.09 basic and diluted income per share of Class A Common Stock, for the nine months ended September 30, 2023. Consolidated net income for the three months ended September 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 loss of $0.4 million, or $0.04 basic and diluted income per share of Class A Common Stock, for the three months ended September 30, 2023.
Previous 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.
Current wording
The components of net income for the nine and three months ended September 30, 2024 and 2023, along with the changes in those components are presented in the table below.
Previous wording
We use derivative instruments, primarily U.S. Treasury Note (“T-Note”) and SOFR futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Current wording
We use derivative instruments, primarily U.S. Treasury Note (“T-Note”) and SOFR futures contracts to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Previous wording
Segment information for the six months ended June 30, 2024 and 2023 is as follows:
Current wording
Segment information for the nine months ended September 30, 2024 and 2023 is as follows:
Previous wording
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, Orchid pays the following fees to the Company:
Current wording
The Company also provides certain repurchase agreement trading, clearing and administrative services to Orchid. In consideration for such services, Orchid pays the following fees to the Company:
Previous 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.
Current wording
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the nine months ended September 30, 2024, we generated $428,000 of net portfolio interest income, consisting of $4.2 million of interest income from MBS assets offset by $3.7 million of interest expense on repurchase liabilities. For the comparable period ended September 30, 2023, we generated $59,000 of net portfolio interest income, consisting of $2.0 million of interest income from MBS assets offset by $1.9 million of interest expense on repurchase liabilities. The $2.2 million increase in interest income was due to a 145 basis point ("bp") increase in yields, combined with an $35.3 million increase in average MBS holdings. There was a $1.8 million increase in interest expense for the nine months ended September 30, 2024 that was due to a 102 bp increase in cost of funds, combined with a $33.7 million increase in average repurchase liabilities.
Previous 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.
Current wording
Our economic interest expense on repurchase liabilities for the nine months ended September 30, 2024 and 2023 was $3.7 million and $2.0 million, respectively, resulting in $457,000 and $(3,000) of economic net portfolio interest income (expense), respectively.
Previous wording
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.
Current wording
During the three months ended September 30, 2024, we generated $112,000 of net portfolio interest income, consisting of $1.5 million of interest income from MBS assets offset by $1.4 million of interest expense on repurchase liabilities. For the comparable period ended September 30, 2023, we generated $7,000 of net portfolio interest income, consisting of $838,000 of interest income from MBS assets offset by $831,000 of interest expense on repurchase liabilities. The $647,000 increase in interest income was due to a 129 bp increase in yields, combined with an $28.1 million increase in average MBS holdings. There was a $542,000 increase in interest expense for the three months ended September 30, 2024 that was due to a 93 bp increase in cost of funds, combined with a $26.9 million increase in average repurchase liabilities.
Previous wording
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 wording
Our economic interest expense on repurchase liabilities for the three months ended September 30, 2024 and 2023 was $1,409,000 and $842,000, respectively, resulting in $76,000 and $(4,000) of economic net portfolio interest income (expense), 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 six months ended June 30, 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 nine months ended September 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 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.
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 45 bps above the average one-month SOFR and 24 bps above the average six-month SOFR for the quarter ended September 30, 2024. Our average economic cost of funds was 59 bps below the average one-month SOFR and 38 bps below the average six-month SOFR for the quarter ended September 30, 2024. The average term to maturity of the outstanding repurchase agreements was 24 days at September 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 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.
Current wording
During the nine months ended September 30, 2024 and 2023, we owned 569,071 shares of Orchid common stock, respectively. Orchid paid total dividends of $1.08 and $1.44 per share during the nine months ended September 30, 2024 and 2023, respectively, resulting in dividend income on this common stock investment of approximately $0.6 million and $0.8 million, respectively. Orchid paid total dividends of $0.36 and $0.48 per share during the three months ended September 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 $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.
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 $1.8 million and $1.7 million for the nine months ended September 30, 2024 and 2023, respectively. The average rate of interest paid for the nine months ended September 30, 2024 was 9.09% compared to 8.62% 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 September 30, 2024 and 2023, respectively. The average rate of interest paid for the three months ended September 30, 2024 was 9.04% compared to 9.07% for the comparable period in 2023.
Previous wording
The table below presents our gains or losses and other income for the six and three months ended June 30, 2024 and 2023.
Current wording
The table below presents our gains or losses and other income for the nine and three months ended September 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. 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.
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 nine months ended September 30, 2024, we received proceeds of $46.3 million from the sales of RMBS. We did not sell any MBS during the nine months ended September 30, 2023.
Previous 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.
Current wording
For the nine and three months ended September 30, 2024, our total operating expenses were approximately $8.4 million and $2.6 million, respectively, compared to $6.7 million and $2.1 million, respectively, for the nine and three months ended September 30, 2023. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2024 and 2023.
Previous 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.
Current wording
We recorded an income tax provision (benefit) for the nine months ended September 30, 2024 and 2023 of approximately $1.1 million and $(0.3) million, respectively, on consolidated pre-tax book income of $1.2 million and $0.6 million, respectively. The total income tax provision (benefit) recorded for the three months ended September 30, 2024 and 2023 was $0.5 million and $(0.8) million, respectively, on consolidated pre-tax book (loss) income of $0.8 million and $(1.2) 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 nine and three months ended September 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 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.
Current wording
As of September 30, 2024, our MBS portfolio consisted of $118.4 million of agency or government MBS at fair value and had a weighted average coupon of 5.24%. During the nine months ended September 30, 2024, we received principal repayments of $10.1 million compared to $3.3 million for the comparable period ended September 30, 2023. The average prepayment speeds for the quarters ended September 30, 2024 and 2023 were 6.3% and 4.8%, respectively.
Previous wording
As of June 30, 2024, 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.
Current wording
As of September 30, 2024, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with six of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with us. These borrowings are secured by our MBS.
Previous 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.
Current wording
As of September 30, 2024, we had obligations outstanding under the repurchase agreements of approximately $113.0 million with a net weighted average borrowing cost of 5.20%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 15 to 46 days, with a weighted average maturity of 24 days. Securing the repurchase agreement obligation as of September 30, 2024 are MBS with an estimated fair value, including accrued interest, of $118.8 million. Through October 31, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2024 with maturities through January 24, 2025.
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 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.
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 September 30, 2024, we had cash and cash equivalents of $4.6 million. We generated cash flows of $14.0 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $89.1 million during the nine months ended September 30, 2024. In addition, during the nine months ended September 30, 2024, we received approximately $9.4 million in management fees and expense reimbursements as manager of Orchid and approximately $0.6 million in dividends from our investment in Orchid common stock.
Previous 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.
Current wording
Orchid Island Capital reported net income for the third quarter 2024 of $17.4 million and its shareholders’ equity increased from $555.9 million to $656.0 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
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 wording
Within the stack of 30-year, fixed rate Agency RMBS (the asset class in which the Company invests the vast majority of its capital), given the decrease in interest rates over the course of the third quarter of 2024 absolute returns tracked the duration of the securities - the higher the duration, the higher the return. The return for 2.0% coupon securities was 6.7% for the second quarter, the highest return, and 2.6% for 7.0% coupon securities, the lowest return and coupon. Within the stack of 30-year, fixed rate Agency RMBS, excess returns versus comparable duration swaps for the third quarter (a proxy for hedged returns) generally followed the same pattern, with lower coupon, longer duration coupons (3% and lower) with excess returns between 1.1% and 1.4%, the highest coupons (6.5% and 7.0%) at 0.2% and the intermediate coupons gradually declining as coupons declined.
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. 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.
Current 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 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 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.
Current wording
On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, 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
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 wording
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. In remarks given on September 10, 2024, Michael Barr, the Fed's Vice Chair for Supervision, confirmed that the Basel III Endgame was being rewritten to, among other things, reduce the risk weights for residential real estate and retail exposures, extend the scope of the reduced risk weight for certain low-risk corporate debt, and eliminate the minimum haircut for securities financing transactions.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
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 its 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 its balance sheet by a maximum of $25 billion of U.S. Treasuries and remove the cap on Agency RMBS reduction, with any amounts in excess of $35 billion per month being reinvested in U.S. Treasury securities. Relatively high interest rates and slow prepayment speeds have kept the balance sheet reduction for Agency RMBS below $20 billion per month throughout 2024, although an increase in mortgage refinance applications following the announcement of the Fed Funds rate cut in September 2024 may accelerate the process. As of August 2024, the Fed had reduced its balance sheet for Agency RMBS by approximately $440 billion from the peak to $2.3 trillion, shedding approximately 32% of the Agency RMBS added during pandemic quantitative easing and representing the lowest level since June 2021.