We invest in Agency MBS to mitigate credit risk. Additionally, our Agency MBS are backed by a diversified base of mortgage loans to mitigate geographic, loan originator and other types of concentration risks.
We believe that the risk of adverse interest rate movements represents the most significant risk to the value of our portfolio. This risk arises because (i) the interest rate indices used to calculate the interest rates on the mortgages underlying our assets may be different from the interest rate indices used to calculate the interest rates on the related borrowings, and (ii) interest rate movements affecting our borrowings may not be reasonably correlated with interest rate movements affecting our assets. We attempt to mitigate our interest rate risk by using the techniques described below:
Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. We may enter into swaption agreements that provide us the option to enter into a pay fixed rate interest rate swap ("payer swaption"), or swaption agreements that provide us the option to enter into a receive fixed interest rate swap ("receiver swaptions").
Additionally, our structured Agency MBS generally exhibit sensitivities to movements in interest rates different than our pass-through Agency MBS. To the extent they do so, our structured Agency MBS may protect us against declines in the market value of our combined portfolio that result from adverse interest rate movements, although we cannot assure you that this will be the case.
The risk of mortgage prepayments is another significant risk to our portfolio. When prevailing interest rates fall below the coupon rate of a mortgage, mortgage prepayments are likely to increase. Conversely, when prevailing interest rates increase above the coupon rate of a mortgage, mortgage prepayments are likely to decrease.
When prepayment rates increase, we may not be able to reinvest the money received from prepayments at yields comparable to those of the securities prepaid. Additionally, some of our structured Agency MBS, such as IOs and IIOs, may be negatively affected by an increase in prepayment rates because their value is wholly contingent on the underlying mortgage loans having an outstanding principal balance.
A decrease in prepayment rates may also have an adverse effect on our portfolio. For example, if we invest in POs, the purchase price of such securities will be based, in part, on an assumed level of prepayments on the underlying mortgage loan. Because the returns on POs decrease the longer it takes the principal payments on the underlying loans to be paid, a decrease in prepayment rates could decrease our returns on these securities.
Because our business may be adversely affected if prepayment rates are different than our projections, we seek to invest in Agency MBS backed by mortgages with well-documented and predictable prepayment histories. To protect against increases in prepayment rates, we invest in Agency MBS backed by mortgages that we believe are less likely to be prepaid. For example, we invest in Agency MBS backed by mortgages (i) with loan balances low enough such that a borrower would likely have little incentive to refinance, (ii) extended to borrowers with credit histories weak enough to not be eligible to refinance their mortgage loans, (iii) that are newly originated fixed-rate or hybrid ARMs or (iv) that have interest rates low enough such that a borrower would likely have little incentive to refinance. To protect against decreases in prepayment rates, we may also invest in Agency MBS backed by mortgages with characteristics opposite to those described above, which would typically be more likely to be refinanced. We may also invest in certain types of structured Agency MBS as a means of mitigating our portfolio-wide prepayment risks. For example, certain tranches of CMOs are less sensitive to increases in prepayment rates, and we may invest in those tranches as a means of hedging against increases in prepayment rates.
· | Investing in REIT common stock; and |
Reducing our overall amount of leverage.
· | Reducing our overall amount of leverage. |
To the extent we are unable to adequately manage our interest rate exposure and are subjected to substantial margin calls, we may be forced to sell assets at an inopportune time which in turn could impair our liquidity and reduce our borrowing capacity and book value.
Investment Company Act Exemption
We operate our business so that we are exempt from registration under the Investment Company Act. We rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act, which applies to companies in the business of purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. In order to rely on the exemption provided by Section 3(c)(5)(C), we must maintain at least 55% of our assets in qualifying real estate assets. For the purposes of this test, structured Agency MBS are non-qualifying real estate assets. We monitor our portfolio periodically and prior to each investment to confirm that we continue to qualify for the exemption. To qualify for the exemption, we make investments so that at least 55% of the assets we own consist of qualifying mortgages and other liens on and interests in real estate, which we refer to as qualifying real estate assets, and so that at least 80% of the assets we own consist of real estate-related assets, including our qualifying real estate assets.
We treat whole-pool pass-through Agency MBS as qualifying real estate assets based on no-action letters issued by the staff of the SEC. In August 2011, the SEC, through a concept release, requested comments on interpretations of Section 3(c)(5)(C). To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may fail to qualify for this exemption. We manage our pass-through Agency MBS portfolio such that we have sufficient whole-pool pass-through Agency MBS to ensure we maintain our exemption from registration under the Investment Company Act. At present, we generally do not expect that our investments in structured Agency MBS will constitute qualifying real estate assets, but will constitute real estate-related assets for purposes of the Investment Company Act.
Employees
As of December 31, 2017,2019, we had 87 full-time employees.
Competition
Our net income depends on our ability to acquire Agency MBS for our portfolio at favorable spreads over our borrowing costs. Our net income also depends on our ability to execute the same investment strategy for the Orchid portfolio, for which we receive management fees and expense reimbursement payments. When we invest in Agency MBS and other investment assets, we compete with a variety of institutional investors, including mortgage REITs, insurance companies, mutual funds, pension funds, investment banking firms, banks and other financial institutions that invest in the same types of assets, the Federal Reserve Bank and other governmental entities or government sponsored entities. Many of these investors have greater financial resources and access to lower costs of capital than we do. The existence of these competitive entities, as well as the possibility of additional entities forming in the future, may increase the competition for the acquisition of mortgage related securities, resulting in higher prices and lower yields on assets.
Available Information
Our investor relations website is www.biminicapital.com. We make available on the website under "Financial Information/SEC filings," free of charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any other reports (including any amendments to such reports) as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. Information on our website, however, is not part of this Annual Report on Form 10-K. All reports filed with the SEC may also be read and copied at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Further information regarding the operation of the public reference room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC'sSEC’s website at www.sec.gov.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and related notes thereto, before making an investment decision regarding our common stock. Our business, financial condition or results of operations could be harmed by any of these risks. Similarly, these risks could cause the market price of our common stock to decline and you might lose all or part of your investment. Our forward-looking statements in this annual report are subject to the following risks and uncertainties. Our actual results could differ materially from those anticipated by our forward-looking statements as a result of the risk factors below.
Risks Related to Our Business
Increases in interest rates may negatively affect the value of our investments and increase the cost of our borrowings, which could result in reduced earnings or losses.
Under a normal yield curve, an investment in Agency MBS will decline in value if interest rates increase. In addition, net interest income could decrease if the yield curve becomes inverted or flat. While Fannie Mae, Freddie Mac or Ginnie Mae guarantee the principal and interest payments related to the Agency MBS we own, these guarantees dothis guarantee does not protect us from declines in market value caused by changes in interest rates. Declines in the market value of our investments may ultimately result in losses to us, which may reduce earnings and cash available to fund our operations.
Significant increases in both long-term and short-term interest rates pose a substantial risk associated with our investment in Agency MBS. If long-term rates were to increase significantly, the market value of our Agency MBS would decline, and the duration and weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our repurchase agreements used to finance the purchase of Agency MBS, which would decrease cash. Using this business model, we are particularly susceptible to the effects of an inverted yield curve, where short-term rates are higher than long-term rates. Although rare in a historical context, the U.S. and many countries in Europe have experienced inverted yield curves in recent months.curves. Given the volatile nature of the U.S. economy and the Federal Reserve's recent increase andFed’s possible future increases in short-term interest rates, there can be no guarantee that the yield curve will not become and/or remain inverted. If this occurs, it could result in a decline in the value of our Agency MBS, our business, financial position and results of operations.
An increase in interest rates may also cause a decrease in the volume of newly issued, or investor demand for, Agency MBS, which could materially adversely affect our ability to acquire assets that satisfy our investment objectives and our business, financial condition and results of operations.
Rising interest rates generally reduce the demand for consumer credit, including mortgage loans, due to the higher cost of borrowing. A reduction in the volume of mortgage loans may affect the volume of Agency MBS available to us, which could affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause Agency MBS that were issued prior to an interest rate increase to provide yields that exceed prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency MBS or Agency MBS with a yield that exceeds our borrowing costs, our ability to satisfy our investment objectives and to generate income, our business, financial condition and results of operations.
Interest rate mismatches between our Agency MBS and our borrowings may reduce our net interest margin during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations.
Our portfolio includes Agency MBS backed by ARMs, hybrid Arms and fixed-rate mortgages, and the mix of these securities in the portfolio may be increased or decreased over time. Additionally, the interest rates on ARMs and hybrid ARMs may vary over time based on changes in a short-term interest rate index, of which there are many.
We finance our acquisitions of pass-through Agency MBS with short-term financing. During periods of rising short-term interest rates, the income we earn on these securities will not change (with respect to Agency MBS backed by fixed-rate mortgage loans) or will not increase at the same rate (with respect to Agency MBS backed by ARMs and hybrid ARMs) as our related financing costs, which may reduce our net interest margin or result in losses.
We invest in structured Agency MBS, including CMOs, IOs, IIOs and POs. Although structured Agency MBS are generally subject to the same risks as our pass-through Agency MBS, certain types of risks may be enhanced depending on the type of structured Agency MBS in which we invest.
The structured Agency MBS in which we invest are securitizations (i) issued by Fannie Mae, Freddie Mac or Ginnie Mae, (ii) collateralized by Agency MBS and (iii) divided into various tranches that have different characteristics (such as different maturities or different coupon payments). These securities may carry greater risk than an investment in pass-through Agency MBS. For example, certain types of structured Agency MBS, such as IOs, IIOs and POs, are more sensitive to prepayment risks than pass-through Agency MBS. If we were to invest in structured Agency MBS that were more sensitive to prepayment risks relative to other types of structured Agency MBS or pass-through Agency MBS, we may increase our portfolio-wide prepayment risk.
Differences in the stated maturity of our fixed rate assets, or in the timing of interest rate adjustments on our adjustable-rate assets, and our borrowings may adversely affect our profitability.
We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with long-term maturities. In addition, we may have adjustable rate assets with interest rates that vary over time based upon changes in an objective index, such as LIBOR, or the U.S. Treasury rate.rate or the Secured Overnight Financing Rate (“SOFR”). These indices generally reflect short-term interest rates but these assets may not reset in a manner that matches our borrowings.
The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our investments generally bear interest at longer-term rates than we pay on our borrowings, a flattening of the yield curve would tend to decrease our net interest income and the market value of our investment portfolio. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve "inversion"), in which event, our borrowing costs may exceed our interest income and we could incurresult in operating losses.
We cannot predictNew laws may be passed affecting the impact, if any, on our earnings or cash available for distributions to our stockholders, to the extent we make any, of the proposed restructuring of the Federal Housing Finance Agency (the "FHFA"), Fannie Mae, Freddie Mac and Ginnie Mae to align the standards and practices of these entities.
On February 21, 2012, the FHFA released its Strategic Plan for Enterprise Conservatorships, which set forth three objectives for the next phase of therelationship between Fannie Mae and Freddie Mac, conservatorships: (i) build a new infrastructure foron the secondary mortgage market, (ii) gradually contractone hand, and the federal government, on the other, which could adversely affect the price of, or our ability to invest in and finance Agency RMBS.
The interest and principal payments we expect to receive on the Agency RMBS in which we invest are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Principal and Freddie Mac's presence ininterest payments on Ginnie Mae certificates are directly guaranteed by the marketplace while simplifyingU.S. government. Principal and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. On October 4, 2012,interest payments relating to the FHFA released its white paper entitled Building a New Infrastructure for the Secondary Mortgage Market, which proposes a newsecurities issued by Fannie Mae and Freddie Mac infrastructure built around two principles.are only guaranteed by each respective GSE.
First, replaceIn September 2008, Fannie Mae and Freddie Mac's current infrastructures with a common infrastructure that efficiently alignsMac were placed into the standards and practicesconservatorship of the two entities, beginning with overlapping core functions such as issuance, master servicing, bond administration, collateral managementFHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and data integration. TheEconomic Recovery Act of 2008. In addition to FHFA has taken steps to establish a common securitization platform ("CSP") for residential mortgage-backed securities reflecting feedback from a broad cross-section of industry participants. In July 2016,becoming the FHFA released an update on the CSP, detailing progress made in the development of a new infrastructure for the securitization of single-family mortgages by Fannie Mae and Freddie Mac. Developing the CSP is a key goal of FHFA's 2014 Strategic Plan for the Conservatorshipsconservator of Fannie Mae and Freddie Mac, which details the organizationalU.S. Department of the Treasury entered into Preferred Stock Purchase Agreements (“PSPAs”) with the FHFA and have taken various actions intended to provide Fannie Mae and Freddie Mac with additional liquidity in an effort to ensure their financial stability. In September 2019, the FHFA and the U.S. Treasury Department agreed to modifications to the PSPAs that will permit Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury suggested that the guarantee payment structure of Common Securitization Solutions, LLC, a joint venture company that was establishedFannie Mae and Freddie Mac in the U.S. housing finance market should be re-examined. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements. The U.S. Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an Agency RMBS and could have broad adverse market implications. If Fannie Mae or Freddie Mac was eliminated, or their structures were to leadchange in a material manner that is not compatible with our business model, we would not be able to acquire Agency RMBS from these entities, which could adversely affect our business operations.
The implementation of the work on this project. In December 2016,Single Security Initiative may adversely affect our results and financial condition.
The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac (the “Enterprises”), under the direction of the FHFA, announced thatthe Enterprises’ regulator and conservator, to develop a common, single mortgage-backed security issued by the Enterprises.
On June 3, 2019, with the implementation of Release 12 of the CSP was successfully implemented on November 21, 2016. This means that Freddie Mac now uses the CSP for data acceptance, issuance support, and bond administration activities related to current single-class, fixed-rate, mortgage-backed securities. The FHFA continues to review Release 2, which involves issuance bycommon securitization platform, Freddie Mac and Fannie Mae commenced use of a common, single mortgage-backed security, which will be known as the Uniform Mortgage-Backed Security. FHFA anticipates implementation of Release 2Security (“UMBS”). Fannie Mae pools are now eligible for conversion into UMBS pools and Freddie Mac pools can be exchanged for UMBS pools. The conversion is not mandatory. UMBS is intended to enhance liquidity in the second quarterTBA market as the two GSEs’ floats are combined, eliminating or reducing the market pricing subsidy that Freddie Mac currently provides to lenders to pool their loans with Freddie Mac instead of 2019. Second, establish an operating frameworkFannie Mae, and pave the way for future GSE reform by allowing new entrants to enter the MBS guarantee market.
The current float of Gold Participation Certificates (“Gold PCs”) issued by Freddie Mac is materially smaller than the float of Fannie Mae securities. To the extent Gold PCs are converted into UMBS, the float will contract further. A further decline could impact the liquidity of Gold PCs not converted into UMBS. Secondly, the TBA deliverable has appeared to deteriorate as the Fannie Mae and Freddie Mac that is consistent with housing finance reform progress that encourages and accommodates increased participation of private capital in assuming credit risk associatedpools with the secondary mortgage market.worst prepayment characteristics are delivered into new TBA securities, concentrating the poorest pools into the TBA deliverable, which has negatively impacted their performance. To the extent investors recognize the relative performance of Fannie Mae or Freddie Mac pools over the other, they may stipulate that they only wish to be delivered TBA securities with pools from the better performing GSE. By bifurcating the TBA deliverable, liquidity in the TBA market could be negatively impacted.
Our liquidity is typically reduced each month when we receive margin calls related to factor changes, and typically increased each month when we receive payment of principal and interest on Fannie Mae and Freddie Mac securities. Legacy Freddie Mac securities pay principal and interest earlier in the month than Fannie Mae and Uniform Mortgage Backed Securities (“UMBS”), meaning that legacy Freddie Mac positions reduce the period of time between meeting factor-related margin calls and receiving principal and interest. The percentage of legacy Freddie Mac positions in the market and in our portfolio will likely decrease over time as those securities are converted to UMBS or paid off.
The FHFA recognizes challenges faced in these formative stages which may or may not be surmountable, such asrecently released a Request For Input regarding pooling practices and other topics relating to aligning the absenceprepayment speeds of meaningful secondary mortgage market mechanisms beyond Fannie Mae, Freddie Mac and Ginnie Mae. As a result, there is significant uncertainty regarding the terms on which these proposals may be enacted. As a result, we cannot be certain what the effectsUMBS issued by each of the enactment will have onEnterprises. There is no certainty about what, if any, changes may result from the Request For Input. Some of the proposals described in the Request For Input, if implemented, could negatively impact the Agency RMBS market and could make it more difficult for us to comply with our book value, earnings or cash.exemption from registration under the Investment Company Act.
The reduction in the pace of purchases-12-
Purchases and sales of Agency MBS by the Fed may adversely affect the price and return associated with Agency RMBS.MBS.
The Federal Reserve (the "Fed")Fed owns approximately $1.7$1.4 trillion of Agency MBSRMBS as of December 31, 2017. The Fed's former2019. Starting in October 2017, the Fed began to phase out its policy was to reinvestof reinvesting principal payments from its holdings of Agency MBSRMBS into new Agency MBS purchases. During its meetingRMBS purchases, therefore causing a decline in September 2017, the FOMC directed the Open Market Trading Desk (the "Desk") at the Fed Bank of New Yorksecurity holdings over time. While it is very difficult to gradually reduce the reinvestment of principal payments from the Fed's securities holdings commencing in October 2017. Specifically, the FOMC directed the Desk to reinvest each month's principal payments from Treasury securities, agency debt, and Agency MBS only to the extent that such payments exceed gradually rising caps. The Fed also announced at the September 2017 meeting that it would be reducing its holdings of Treasury bonds and mortgage-backed securities, starting in October 2017.
While we cannot predict the impact of these actions by the Fed portfolio runoff on the prices and liquidity of Agency MBS, we expect that during periods in which the Fed purchases significant volumes of Agency MBS, yields on Agency MBS may be lower and refinancing volumes may be higher than they would have been absent their large scale purchases. As a result,RMBS, returns on Agency MBSRMBS may be adversely affected. There is also a risk that as the Fed reduces its purchases of Agency MBS or if it decides to sell some or all of its holdings of Agency MBS, the pricing of our Agency MBS portfolio may be adversely affected.
Increased levels of prepayments on the mortgages underlying our Agency MBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations.
In the case of residential mortgages, there are seldom any restrictions on borrowers'borrowers’ ability to prepay their loans. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, governmental action, general economic conditions and the relative interest rates on ARMs, hybrid ARMs and fixed-rate mortgage loans. With respect to PTpass-through Agency MBS, faster-than-expected prepayments could also materially adversely affect our business, financial condition and results of operations in various ways, including, the following:
· | A portion of our PT Agency MBS backed by ARMs and hybrid ARMs may initially bear interest at rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If a PT MBS backed by ARMs or hybrid ARMs is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that Agency MBS while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the remainder of its expected life. |
· | Ifif we are unable to quickly acquire new Agency MBS that generate comparable returns to replace the prepaid Agency MBS, our returns on capital may be lower than if we were able to quickly acquire new Agency MBS. |
When we acquire structured Agency MBS, we anticipate that the underlying mortgages will prepay at a projected rate, generating an expected yield. When the prepayment rates on the mortgages underlying our structured Agency MBS are higher than expected, our returns on those securities may be materially adversely affected. For example, the value of our IOs and IIOs are extremely sensitive to prepayments because holders of these securities do not have the right to receive any principal payments on the underlying mortgages. Therefore, if the mortgage loans underlying our IOs and IIOs are prepaid, such securities would cease to have any value, which, in turn, could materially adversely affect our business, financial condition and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment or other such risks.
A decrease in prepayment rates on the mortgages underlying our Agency MBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations.
Certain of our structured Agency MBS may be adversely affected by a decrease in prepayment rates. For example, because POs are similar to zero-coupon bonds, our expected returns on such securities will be contingent on our receiving the principal payments of the underlying mortgage loans at expected intervals that assume a certain prepayment rate. If prepayment rates are lower than expected, we will not receive principal payments as quickly as we anticipated and, therefore, our expected returns on these securities will be adversely affected, which, in turn, could materially adversely affect our business, financial condition and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment or other such risks.
Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS may reduce our net interest margin during periods of rising interest rates, which could materially adversely affect our business, financial condition and results of operations.
ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan. Our borrowings typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, our financing costs could increase without limitation while caps could limit the interest we earn on the ARMs and hybrid ARMs backing our Agency MBS. This problem is magnified for ARMs and hybrid ARMs that are not fully indexed because such periodic interest rate caps prevent the coupon on the security from fully reaching the specified rate in one reset. Further, some ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on Agency MBS backed by ARMs and hybrid ARMs than necessary to pay interest on our related borrowings. Interest rate caps on Agency MBS backed by ARMs and hybrid ARMs could reduce our net interest margin if interest rates were to increase beyond the level of the caps, which could materially adversely affect our business, financial condition and results of operations.
Failure to procure adequate repurchase agreement financing, or to renew or replace existing repurchase agreement financing as it matures, could materially adversely affect our business, financial condition and results of operations.
We intend to maintain master repurchase agreements with several counterparties. We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us in the future on terms that are acceptable to us. Any decline in the value of Agency MBS, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with the terms of any financing arrangements already in place. We may be unable to diversify the credit risk associated with our lenders. In the event that we cannot obtain sufficient funding on acceptable terms, our business, financial condition and results of operations.operations may be adversely affected.
Furthermore, because we intend to rely primarily on short-term borrowings to fund our acquisition of Agency MBS, our ability to achieve our investment objectiveobjectives will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are not able to renew or replace maturing borrowings, we will have to sell some or all of our assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk.
Adverse market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations.
Adverse market developments, including a sharp or prolonged rise in interest rates, a change in prepayment rates or increasing market concern about the value or liquidity of one or more types of Agency MBS, might reduce the market value of our portfolio, which might cause our lenders to initiate margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and not determined until we engage in a repurchase transaction under these agreements. Our fixed-rate Agency MBS generally are more susceptible to margin calls as increases in interest rates tend to more negatively affect the market value of fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat or occurrence of a margin call could force us to sell, either directly or through a foreclosure, our Agency MBS under adverse market conditions. Because of the significant leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call, which could materially adversely affect our business, financial condition and results of operations.
Hedging against interest rate exposure may not completely insulate us from interest rate risk and could materially adversely affect our business, financial condition and results of operations.
We may enter into interest rate cap or swap agreements or pursue other hedging strategies, including the purchase of puts, calls or other options and futures contracts in order to hedge the interest rate risk of our portfolio. In general, our hedging strategy depends on our view of our entire portfolio consisting of assets, liabilities and derivative instruments, in light of prevailing market conditions. We could misjudge the condition of our investment portfolio or the market. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal prepayments, the type of Agency MBS we hold and other changing market conditions. Hedging may fail to protect or could adversely affect us because, among other things:
· | hedging can be expensive, particularly during periods of rising and volatile interest rates; |
hedging can be expensive, particularly during periods of rising and volatile interest rates;
· | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |
available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
· | the duration of the hedge may not match the duration of the related liability; |
the duration of the hedge may not match the duration of the related liability;
· | certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge; |
certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge;
· | the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
· | the counterparty in the hedging transaction may default on its obligation to pay. |
the counterparty in the hedging transaction may default on its obligation to pay.
There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Alternatively, we may fail to properly assess a risk to our investment portfolio or may fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedging activities. The derivative financial instruments we select may not have the effect of reducing our interest rate risk. The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging activities could result in losses if the event against which we hedge does not occur.
Because of the foregoing risks, our hedging activity could materially adversely affect our business, financial condition and results of operations.
Our use of certain hedging techniques may expose us to counterparty risks.
To the extent that our hedging instruments are not traded on regulated exchanges, guaranteed by an exchange or its clearinghouse, or regulated by any U.S. or foreign governmental authorities, there may not be requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory, and commodityexchange and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if any of these issues causes a counterparty to fail to perform under a derivative agreement we could incur a significant loss.
For example, if a counterparty underswap exchange utilized in an interest rate swaptionswap agreement that we enter into as part of our hedging strategy cannot perform under the terms of the interest rate swaptionswap agreement, we may not receive payments due under that agreement, and, thus, we may lose any potential benefit associated with the interest rate swaption.swap. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under these swaptionswap agreements if the counterpartyexchange becomes insolvent or files for bankruptcy. Similarly, if an interest rate swaption counterparty fails to perform under the terms of the interest rate swaption agreement, in addition to not being able to exercise or otherwise cash settle the agreement, we could also incur a loss for the premium paid for that swaption.
Our use of leverage could materially adversely affect our business, financial condition and results of operations.
We calculate our leverage ratio by dividing our total liabilities by total equity at the end of each period. Under normal market conditions, we generally expect our leverage ratio to be less than 12 to 1, although at times our borrowings may be above or below this level. We incur this indebtedness by borrowing against a substantial portion of the market value of our pass-through Agency RMBS and a portion of our structured Agency RMBS. Our total indebtedness, however, is not expressly limited by our policies and will depend on our prospective lenders’ estimates of the stability of our portfolio’s cash flow. As a result, there is no limit on the amount of leverage that we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender’s margin requirements from our income and, to the extent we cannot, we might be forced to liquidate some of our Agency RMBS at unfavorable prices. Our use of leverage could materially adversely affect our business, financial condition and results of operations. For example, our borrowings are secured by our pass-through Agency RMBS and a portion of our structured Agency RMBS under repurchase agreements. A decline in the market value of the pass-through Agency RMBS or structured Agency RMBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency RMBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency RMBS, we would experience losses. If we experience losses as a result of our use of leverage, such losses could materially adversely affect our business, results of operations and financial condition.
It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts, which could negatively affect our financial condition and results of operations.
We may utilize TBA dollar roll transactions as a means of investing in and financing Agency MBS securities. TBA contracts enable us to purchase or sell, for future delivery, Agency MBS with certain principal and interest terms and certain types of collateral, but the particular Agency MBS to be delivered are not identified until shortly before the TBA settlement date. Prior to settlement of the TBA contract we may choose to move the settlement of the securities out to a later date by entering into an offsetting position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date, collectively referred to as a "dollar roll." The Agency MBS purchased for a forward settlement date under the TBA contract are typically priced at a discount to Agency MBS for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest income earned from carrying the underlying Agency MBS over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income.". Consequently, dollar roll transactions and such forward purchases of Agency MBS represent a form of off-balance sheet financing and increase our "at risk" leverage.
Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the Agency MBS purchased for a forward settlement date under the TBA contract are priced at a premium to Agency MBS for settlement in the current month. Additionally, sales of some or all of the Fed's holdings of Agency MBS or declines in purchases of Agency MBS by the Fed could adversely impact the dollar roll market. Under such conditions, it may be uneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash. We may not have sufficient funds or alternative financing sources available to settle such obligations. In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation, we are subject to margin calls on our TBA contracts. Further, our Master Securities Forward Transaction Agreements ("MSFTAs")clearing and custody agreements may require us to post additional margin above the levels established by the MBSD. Negative carry income on TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions and adversely affect our financial condition and results of operations.
Our forward settling transactions, including TBA transactions, subject us to certain risks, including price risks and counterparty risks.
We purchase a substantial portionsome of our Agency MBS through forward settling transactions, including TBAs. In a forward settling transaction, we enter into a forward purchase agreement with a counterparty to purchase either (i) an identified Agency MBS, or (ii) a TBA, or to-be-issued, Agency MBS with certain terms. As with any forward purchase contract, the value of the underlying Agency MBS may decrease between the contracttrade date and the settlement date. Furthermore, a transaction counterparty may fail to deliver the underlying Agency MBS at the settlement date. If any of these risks were to occur, our financial condition and results of operations may be materially adversely affected.
We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy.
We rely on analytical models, and information and other data supplied by third parties. These models and data may be used to value assets or potential asset acquisitions and dispositions and in connection with our asset management activities. If our models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon could expose us to potential risks.
Our reliance on models and data may induce us to purchase certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.
Some models, such as prepayment models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the predictive models used by us may differ substantially from those models used by other market participants, resulting in valuations based on these predictive models that may be substantially higher or lower for certain assets than actual market prices. Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation and are therefore more speculative and less reliable.
All valuation models rely on correct market data input. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is inputted correctly, "model prices"“model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose values are particularly sensitive to various factors. If our market data inputs are incorrect or our model prices differ substantially from market prices, our business, financial condition and results of operations.operations could be materially adversely affected.
Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed. As a result, the values of some of our assets are uncertain.
While in many cases our determination of the fair value of our assets is based on valuations provided by third-party dealers and pricing services, we can and do value assets based upon our judgment, and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. The valuation process during times of market distress can be particularly difficult and unpredictable and during such time the disparity of valuations provided by third-party dealers can widen.
Our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially adversely affected if our fair value determinations of these assets were materially higher than the values that would exist if a ready market existed for these assets.
Because the assets that we acquire might experience periods of illiquidity, we might be prevented from selling our Agency MBS at favorable times and prices, which could materially adversely affect our business, financial condition and results of operations.
Agency MBS generally experience periods of illiquidity. Such conditions are more likely to occur for structured Agency MBS because such securities are generally traded in markets much less liquid than the PTpass-through Agency MBS market. As a result, we may be unable to dispose of our Agency MBS at advantageous times and prices or in a timely manner. The lack of liquidity might result from the absence of a willing buyer or an established market for these assets as well as legal or contractual restrictions on resale. The illiquidity of Agency MBS could materially adversely affect our business, financial condition and results of operations.
Our use of leverage could materially adversely affect our business, financial condition and results of operations.
Under normal market conditions, we generally expect our leverage ratio to be less than 12 to 1, although at times our borrowings may be above this level. We incur this indebtedness by borrowing against a substantial portion of the market value of our PT Agency MBS and a portion of our structured Agency MBS. Our total indebtedness, however, is not expressly limited by our policies and will depend on our prospective lenders' estimates of the stability of our portfolio's cash flow. As a result, there is no limit on the amount of leverage that we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender's margin requirements from our income and, to the extent we cannot, we might be forced to liquidate some of our Agency MBS at unfavorable prices. Our use of leverage could materially adversely affect our business, financial condition and results of operation and our ability to pay distributions to our stockholders. For example, our repurchase agreement borrowings are secured by our PT Agency MBS and may be secured by a portion of our structured Agency MBS under repurchase agreements. A decline in the market value of the PT Agency MBS or structured Agency MBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency MBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency MBS, we would experience losses.
If we experience losses as a result of our use of leverage, such losses could materially adversely affect our business, results of operations and financial condition.
Our use of repurchase agreements may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.
Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any of our lenders files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either our lenders or us. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our investment under a repurchase agreement or to be compensated for any damages resulting from the lender'slender’s insolvency may be further limited by those statutes.
If a repurchase agreement counterparty defaults on their obligations to resell the Agency MBS back to us at the end ot the repurchase term, or if the value of the Agency MBS has declined by the end of the repurchase transaction term or if we default on our obligations under the repurchase transaction, we will lose money on these transactions, which, in turn, may materially adversely affect our business, financial condition and results of operations.
When we engage in a repurchase transaction, we initially sell securities to the financial institution under one of our master repurchase agreements in exchange for cash, and our counterparty is obligated to resell the securities to us at the end of the term of the transaction, which is typically from 24 to 90 days but may be up to 364 days or more. The cash we receive when we initially sell the securities is less than the value of those securities, which is referred to as the haircut. Many financial institutions from which we may obtain repurchase agreement financing have increased their haircuts in the past and may do so again in the future. If these haircuts are increased, we will be required to post additional cash or securities as collateral for our Agency MBS. If our counterparty defaults on its obligation to resell the securities to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities had declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we incur on our repurchase transactions could materially adversely affect our business, financial condition and results of operations.
If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our portfolio and carry out our investment strategy. There is no assurance we would be able to establish a suitable replacement facility on acceptable terms or at all.
We have issued long-term debt to fund our operations which can increase the volatility of our earnings and stockholders'stockholders’ equity.
In October 2005, Bimini Capital completed a private offering of trust preferred securities of Bimini Capital Trust II, of which $26.8 million are still outstanding. The Company must pay interest on these junior subordinated notes on a quarterly basis at a rate equal to current three month LIBOR rate plus 3.5%. To the extent the Company'sCompany’s does not generate sufficient earnings to cover the interest payments on the debt, our earnings and stockholders'stockholders’ equity may be negatively impacted.
The Company considers the junior subordinated notes as part of its long-term capital base. Therefore, for purposes of all disclosure in this report concerning our capital or leverage, the Company considers both stockholders'stockholders’ equity and the $26.8 million of junior subordinated notes to constitute capital.
The Company has also elected to account for its investments in MBS under the fair value option and, therefore, will report MBS on our financial statements at fair value with unrealized gains and losses included in earnings. Changes in the value of the MBS do not impact the outstanding balance of the junior subordinated notes but rather our stockholders'stockholders’ equity. Therefore, changes in the value of our MBS will be absorbed solely by our stockholders'stockholders’ equity. Because our stockholders equity is small in relation to our total capital, such changes may result in significant changes in our stockholders'stockholders’ equity.
Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments.
In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing facilities or exchanges upon which some of our hedging instruments, such as EurodollarT-Note, Fed Funds and Treasury NoteEurodollar futures contracts, are traded may require us to post additional collateral against our hedging instruments. In the event that future adverse economic developments or market uncertainty result in increased margin requirements for our hedging instruments, it could materially adversely affect our liquidity position, business, financial condition and results of operations.
We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments.
Our Board of Directors has the authority to change our investment strategy or asset allocation at any time without notice to or consent from our stockholders. To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this annual report. A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than as described in this annual report.
Competition might prevent us from acquiring Agency MBS at favorable yields, which could materially adversely affect our business, financial condition and results of operations.
We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to acquire Agency MBS at favorable spreads over our borrowing costs. In acquiring Agency MBS, we compete with a variety of institutional investors, including mortgage REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders, other entities that purchase Agency MBS, the Federal Reserve, other governmental entities and government-sponsored entities, many of which have greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. Government.government. Additionally, many of our competitors are required to maintain an exemption from the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments. Furthermore, competition for investments in Agency MBS may lead the price of such investments to increase, which may further limit our ability to generate desired returns. As a result, we may not be able to acquire sufficient Agency MBS at favorable spreads over our borrowing costs, which would materially adversely affect our business, financial condition and results of operations.
The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those of any of our third party service providers could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our business relationships or reputation, all of which could negatively impact our business and results of operations.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources or the information resources of our third party service providers. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The primary risks that could directly result from the occurrence of a cyber-incident include operational interruption and private data exposure. We have implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our focus on mitigating the risk of a cyber-incident, do not guarantee that our business and results of operations will not be negatively impacted by such an incident.
We are highly dependent on communications and information systems operated by third parties, and systems failures could significantly disrupt our business, which may, in turn, adversely affect our business, financial condition and results of operations.
Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell, finance and hedge our investments. These systems are operated by third parties and, as a result, we have limited ability to ensure their continued operation. In the event of a systems failure or interruption, we will have limited ability to affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including Agency MBS trading activities, which could have a material adverse effect on our business, financial condition and results of operations.
We depend primarily on two individuals to operate our business, and the loss of one or both of such persons could materially adversely affect our business, financial condition and results of operations.
We depend substantially on two individuals, Robert E. Cauley, our Chairman and Chief Executive Officer, and G. Hunter Haas, our President, Chief Investment Officer and Chief Financial Officer, to manage our business. We depend on the diligence, experience and skill of Mr. Cauley and Mr. Haas in managing all aspects of our business, including the selection, acquisition, structuring and monitoring of securities portfolios and associated borrowings. Although we have entered into contracts and compensation arrangements with Mr. Cauley and Mr. Haas that encourage their continued employment, those contracts may not prevent either Mr. Cauley or Mr. Haas from leaving our company. The loss of either of them could materially adversely affect our business, financial condition and results of operations.
If we issue debt securities, our operations may be restricted and we will be exposed to additional risk.
If we decide to issue debt securities in the future, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A Common Stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating restrictions could have a material adverse effect on our business, financial condition and results of operations.
No assurance can be given that the actions taken by a new administration of the U.S. Government for the purpose of seeking to stimulate the economy will achieve their intended effect or will benefit our business, and further, government or market developments could adversely affect us.
The incoming administration of the U.S. Government has announced that it may implement initiatives intended to stimulate the U.S. economy. No assurance can be given that these initiatives will beneficially impact the economy or our business. To the extent the markets respond favorably to these initiatives, if these initiatives do not function as intended or interest rates increase as a result of these initiatives, the pricing, supply, liquidity and value of our assets and the availability of financing on attractive terms may be materially adversely affected.
Adoption of the Basel III standards and other proposed supplementary regulatory standards may negatively impact our access to financing or affect the terms of our future financing arrangements.
In response to various financial crises and the volatility of financial markets, the Basel Committee on Banking Supervision, an international body comprised of senior representatives of bank supervisory authorities and central banks from 27 countries, including the United States, adopted the Basel III standards several years ago. The final package of Basel III reforms was approved by the G20 leaders in November 2010. In January 2013, the Basel Committee agreed to delay implementation of the Basel III standards and expanded the scope of assets permitted to be included in a bank's liquidity measurement. In 2014, the Basel Committee announced that it would propose additional changes to capital requirements for banks over the next few years. U.S. regulators have elected to implement substantially all of the Basel III standards. These new standards, including the Supplementary Leverage Ratio imposed by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, which will be fully phased in by 2019, will require banks to hold more capital, predominantly in the form of common equity, than under the currentprior capital framework. These increased bank capital requirements may constrain our ability to obtain attractive future financings and increase the cost of such financings if they are obtained.
In April 2014, U.S. regulators adopted rules requiring enhanced supplementary leverage ratio standards beginning in January 2018, which wouldthat impose capital requirements more stringent than those of the Basel III standards for the most systematically significant banking organizations in the U.S. Adoption and implementation of the Basel III standards and the supplemental regulatory standards adopted by U.S. regulators may negatively impact our access to financing or affect the terms of our future financing arrangements.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted. In particular, regulators and law enforcement agencies in the U.K. and elsewhere are conducting criminal and civil investigations into whether the banks that contributed information to the British Bankers’ Association (“BBA”) in connection with the daily calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR), may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.
At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented in the U.K. or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations.
The development of alternative reference rates is complex. In the United States, a committee was formed in 2014 to study the process and develop an alternative reference rate. The Alternative Reference Rate Committee (the “ARRC”) selected the SOFR, an overnight secured U.S. Treasury repo rate, as the new rate and adopted a Paced Transition Plan (“PTP”), which provides a framework for the transition from LIBOR to SOFR. SOFR is published daily at 8:00 a.m. Eastern Time by the NY Federal Reserve Bank for the previous business day’s trades. However, since SOFR is an overnight rate and many forms of loans or instruments used for hedging have much longer terms, there is a need for a term structure for the new reference rate. Various central banks, including the Fed, and the ARRC, are in the process of developing term rates to support cash markets that currently use LIBOR. Examples of the cash market would be floating rate notes, syndicated and bilateral corporate loans, securitizations, secured funding transactions and various mortgage and consumer loans – including many of the securities the Company owns from time to time such as IIOs. The Company also uses derivative securities tied to LIBOR to hedge its funding costs. Development of term rates for derivatives is being conducted by the International Swaps and Derivatives Association (“ISDA”). However, ARRC and ISDA may utilize different mechanisms to develop term rates which may cause potential mismatches between cash products or assets of the Company and hedge instruments. The process for determining term rates by both ARRC and ISDA is not finalized at this time.
On February 5, 2020, Fannie Mae and Freddie Mac announced that they will stop accepting LIBOR-indexed ARMs by the end of 2020. Additionally, the two GSEs announced that they will soon accept mortgages tied to the SOFR later in 2020.
More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”
Our investment in Orchid Island Capital, Inc. or other mortgage REIT common stock may fluctuate in value which materially adversely affect our business, financial condition and results of operations.
Investments in the securities of companies that own Agency MBS will be subject to all of the risks associated with the direct ownership of Agency MBS discussed above that could adversely affect the market price of the investment and the ability of the REIT to pay dividends. In addition, the market value of the common stock could be affected by market conditions beyond the Company's control.Company’s control, such as limited liquidity in trading market for the common stock. A decrease in the dividend payment rate or the market value of the common stock could have a material adverse effect on our business, financial condition and results of operations.
In addition, the Company’s ability to dispose of the common stock investment because selling investments in Orchid’s common equity securities may be hindered due to its relationship as Orchid’s manager and the possession of inside information. Also, if we or other significant investors sell or are perceived as intending to sell a substantial number of shares in a short period of time, the market price of our remaining shares could be adversely affected.
The termination of our management agreement with Orchid could significantly reduce our revenues.
Orchid is externally managed and advised by Bimini Advisors. As Manager, Bimini Advisors is responsible for administering Orchid'sOrchid’s business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel.
In exchange for these services, Bimini Advisors receives a monthly management fee. In addition, Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and Bimini Advisors allocates to Orchid its pro rata portion of certain overhead costs. The significance of these management fees and overhead reimbursements has increased, and is expected to continue to increase, as Orchid'sOrchid’s capital base continues to grow. If Orchid were to terminate the management agreement without cause, it would be obligated to pay to Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the initial term or automatic renewal term. The loss of these revenues, if it were to occur, would have a severe and immediate impact on the Company.
We may be subject to adverse legislative or regulatory changes that could reduce the market price of our common stock.
At any time, laws or regulations, or the administrative interpretations of those laws or regulations, which impact our business and Maryland corporations may be amended. In addition, the markets for MBS and derivatives, including interest rate swaps, have been the subject of intense scrutiny in recent years. We cannot predict when or if any new law, regulation or administrative interpretation, or any amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, revisions to these laws, regulations or administrative interpretations could cause us to change our investments. We could be materially adversely affected by any such change to any existing, or any new, law, regulation or administrative interpretation, which could reduce the market price of our common stock.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic and acts of terrorism.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other widespread health emergency (or concerns over the possibility of such an emergency) terrorist attacks could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our businesses. A coronavirus outbreak occurred in China in late 2019, and during the first quarter of 2020 the outbreak has evolved into a global pandemic. The coronavirus outbreak and its impact on global markets and Royal Palm's portfolio to date is discussed below in “Item 7. Management’s Discussion and Analysis – Outlook” and in Note 19 to our Consolidated Financial Statements. At this time we are not able to assess the long-term impact the coronavirus will have on our business.
A coronavirus outbreak occurred in China in late 2019, and during the first quarter of 2020 the outbreak has evolved into a global pandemic and has had a significant impact on financial markets and economic activity. Interest rates have declined significantly, establishing new all-time low yields across the US Treasury maturity curve. MBS valuations have also declined significantly as investors seek liquidity, causing elevated margin call activity.
We cannot predict the effect that responses from the Federal government will have on the financial markets or when those markets will normalize. To date, the Company has disposed of a significant portion of its MBS portfolio and may have to sell additional assets to meet its cash needs.
The coronavirus outbreak and its impact on global markets and Royal Palm’s portfolio during March 2020 is discussed below in “Item 7. Management’s Discussion and Analysis – Outlook” and in Note 19 to our Consolidated Financial Statements. At this time we are not able to assess the long-term impact the coronavirus will have on our business.
Risks Related to Our Organization and Structure
Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock.
We have operated and intend to continue to operate our business so as to be exempt from registration under the Investment Company Act, because we are "primarily“primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate."” Specifically, we invest and intend to continue to invest so that at least 55% of the assets that we own on an unconsolidated basis consist of qualifying mortgages and other liens and interests in real estate, which are collectively referred to as "qualifying“qualifying real estate assets,"” and so that at least 80% of the assets we own on an unconsolidated basis consist of real estate-related assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential mortgage pass-through securities issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets based on no-action letters issued by the SEC. To the extent that the SEC publishes new or different guidance with respect to these matters, we may fail to qualify for this exemption.
If we fail to qualify for this exemption, we could be required to restructure our activities in a manner that, or at a time when, we would not otherwise choose to do so, which could negatively affect the value of shares of our common stock and our ability to distribute dividends. For example, if the market value of our investments in CMOs or structured Agency MBS, neither of which are qualifying real estate assets for Investment Company Act purposes, were to increase by an amount that resulted in less than 55% of our assets being invested in pass-through Agency MBS, we might have to sell CMOs or structured Agency MBS in order to maintain our exemption from the Investment Company Act. The sale could occur during adverse market conditions, and we could be forced to accept a price below that which we believe is acceptable.
Alternatively, if we fail to qualify for this exemption, we may have to register under the Investment Company Act and we could become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters.
We may be required at times to adopt less efficient methods of financing certain of our securities, and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus. Our business will be materially and adversely affected if we fail to qualify for and maintain an exemption from regulation pursuant to the Investment Company Act.
Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition.
The Dodd-Frank Act established a comprehensive regulatory framework for derivative contracts commonly referred to as "swaps."“swaps.” As a result, any investment fund that trades in swaps may be considered a "commodity“commodity pool,"” which would cause its operators (in some cases the fund'sfund’s directors) to be regulated as "commodity“commodity pool operators," ("CPOs"” (“CPOs”). Under new rules adopted by the U.S. Commodity Futures Trading Commission, (the "CFTC"“CFTC”), those funds that become commodity pools solely because of their use of swaps must register with the National Futures Association (the "NFA"“NFA”). Registration requires compliance with the CFTC'sCFTC’s regulations and the NFA'sNFA’s rules with respect to capital raising, disclosure, reporting, recordkeeping and other business conduct.
We use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associated with changes in interest rates, mortgage spreads, yield curve shapes and market volatility. These hedging instruments may include interest rate swaps, interest rate futures and options on interest rate futures. We do not currently engage in any speculative derivatives activities or other non-hedging transactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading in commodity interests, and we do not consider the Company or its operations to be a commodity pool as to which CPO registration or compliance is required. We have received a no-action letter from the CFTC for relief from registration as a commodity pool operator and commodity trading advisor.
The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including their anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend or revoke the registration of or the no-action relief afforded to a person who fails to comply with commodities laws and regulations, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that the CFTC asserts that we are not entitled to the no-action letter relief claimed, we may be obligated to furnish additional disclosures and reports, among other things. Further, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event that we fail to comply with statutory requirements relating to derivatives or with the CFTC'sCFTC’s rules thereunder, including the no-action letter described above, we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial condition and results of operations.
Our Rights Plan could inhibit a change in our control that would otherwise be favorable to our stockholders.
In December 2015, our Board of Directors adopted a Rights Agreement (the "Rights Plan"“Rights Plan”) in an effort to protect against a possible limitation on our ability to use our net operating losses "(NOLs"“(NOLs”) and net capital losses ("NCLs"(“NCLs”) by discouraging investors from aggregating ownership of our Class A Common Stock and triggering an "ownership change"“ownership change” for purposes of Sections 382 and 383 of the Code. Under the terms of the Rights Plan, in general, if a person or group acquires ownership of 4.9% or more of the outstanding shares of our Class A Common Stock without the consent of our Board of Directors (an "Acquiring Person"“Acquiring Person”), all of our other stockholders will have the right to purchase securities from us at a discount to such securities'securities’ fair market value, thus causing substantial dilution to the Acquiring Person. As a result, the Rights Plan may have the effect of inhibiting or impeding a change in control not approved by our Board of Directors and, notwithstanding its purpose, could adversely affect our shareholders'shareholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, because our Board of Directors may consent to certain transactions, the Rights Plan gives our Board of Directors significant discretion over whether a potential acquirer'sacquirer’s efforts to acquire a large interest in us will be successful. There can be no assurance that the Rights Plan will prevent an "ownership change"“ownership change” within the meaning of Sections 382 and 383 of the Code, in which case we may lose all or most of the anticipated tax benefits associated with our prior losses.
Certain provisions of applicable law and our charter and bylaws may restrict business combination opportunities that would otherwise be favorable to our stockholders.
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders, including business combination provisions, supermajority vote and cause requirements for removal of directors, provisions that vacancies on our Board of Directors may be filled only by the remaining directors, for the full term of the directorship in which the vacancy occurred, the power of our Board of Directors to increase or decrease the aggregate number of authorized shares of stock or the number of shares of any class or series of stock, to cause us to issue additional shares of stock of any class or series and to fix the terms of one or more classes or series of stock without stockholder approval, the restrictions on ownership and transfer of our stock and advance notice requirements for director nominations and stockholder proposals. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that may be considered to be not in your best interests.
Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
· | actual receipt of an improper benefit or profit in money, property or services; or |
actual receipt of an improper benefit or profit in money, property or services; or
· | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
We have entered into indemnification agreements with our directors and executive officers that obligate us to indemnify them to the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present and former director or officer in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the provisions in our charter, bylaws and indemnification agreements or that might exist with other companies.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law ( the "MGCL"“MGCL”), may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:
· | "business combination" provisions that, subject to limitations, prohibit certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and |
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and
· | "control share" provisions that provide that a holder of "control shares" of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of issued and outstanding "control shares," subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
“control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have elected to opt-out of these provisions of the MGCL, in the case of the business combination provisions, by resolution of our Board of Directors (provided that such business combination is first approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person), and in the case of the control share provisions, pursuant to a provision in our bylaws. However, our Board of Directors may by resolution elect to repeal the foregoing opt-out from the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
U.S. Federal Income Tax Risks
An investment in our common stock has various income tax risks.
This summary of certain tax risks is limited to the U.S. federal income tax risks addressed below. Additional risks or issues may exist that are not addressed in this Form 10-K and that could affect the U.S. federal and state income tax treatment of us or our stockholders. This summary is not intended to be used and cannot be used by any stockholder to avoid penalties that may be imposed on stockholders under the Code. Management strongly urges shareholders to seek advice based on their particular circumstances from an independenttheir tax advisor concerning the effects of federal, state and local income tax law on an investment in our common stock.
Our ability to use net operating loss ("NOL"(“NOL”) carryovers and net capital loss ("NCL"(“NCL”) carryovers to reduce our taxable income may be limited.
We must have taxable income or net capital gains to benefit from our NOL and NCL, as well as certain other tax attributes. Although we believe that a significant portion of our NOLs will be available to use to offset the future taxable income of Bimini Capital and Royal Palm, no assurance can be provided that we will have taxable income or gains in the future to apply against our remaining NOLs and NCLs.
In addition, our NOL and NCL carryovers may be limited by Sections 382 and 383 of the Code if we undergo an "ownership“ownership change."” Generally, an "ownership change"“ownership change” occurs if certain persons or groups increase their aggregate ownership in our company by more than 50 percentage points looking back over the relevant testing period. If an ownership change occurs, our ability to use our NOLs and NCLs to reduce our taxable income in a future year would be limited to a Section 382 limitation equal to the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change. In the event of an ownership change, NOLs and NCLs that exceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period and such losses can be used to offset taxable income for years within the carryforward period subject to the Section 382 limitation in each year. However, if the carryforward period for any NOL or NCL were to expire before that loss had been fully utilized, the unused portion of that loss would be lost. The carryforward period for NOLs is 20 years from the year in which the losses giving rise to the NOLs were incurred, and the carryforward period for NCL is five years from the year in which the losses giving rise to the NCL were incurred. Our use of new NOLs or NCLs arising after the date of an ownership change would not be affected by the Section 382 limitation (unless there were another ownership change after those new losses arose).
Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses were generated. Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs and NCLs to reduce future taxable income. The determination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership among stockholders. We adopted the Rights Plan described above in order to discourage or prevent an ownership change. However, there can be no assurance that the Rights Plan will prevent an ownership change. In addition, we have not obtained, and currently do not plan to obtain, a ruling from the Internal Revenue Service, or IRS, regarding our conclusion as to whether our losses are subject to any such limitations. Furthermore, we may decide in the future that it is necessary or in our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will occur in the future.
Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Limitations imposed by Sections 382 and 383 of the Internal Revenue Code may discourage us from, among other things, redeeming our stock or issuing additional stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Changes in tax laws could adversely affect our future results.
We have recorded a deferred tax asset in the consolidated balance sheet based on the differences between the financial statement and income tax bases of assets using enacted tax rates. When U.S. corporate income tax rates change, we are required to reevaluate our deferred tax assets using the new tax rate. Changes in enacted tax rates require an adjustment to the carrying value of our deferred tax assets with a corresponding charge or benefit to earnings in the period of the tax rate change. Based on the size of our deferred tax assets, any such adjustment could be significant.
We adjusted the carrying value of our deferred tax assets in connection with the U.S. Tax Cuts and Jobs Act (the "Tax Reform Act"), which was signed into law on December 22, 2017. The Tax Reform Act significantly revised the U.S. corporate income tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. U.S. Generally Accepted Accounting Principles require that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, we recorded an income tax provision of $19.4 million for the year ended December 31, 2017, including a charge of $25.9 million during the fourth quarter due to a re-measurement of deferred tax assets and liabilities to reflect the lower corporate tax rate.
Failure to qualify as a REIT in prior years could subject us to federal income tax consequences.
Prior to our 2015 tax year, we operated in a manner that was intended to cause us to qualify as a REIT for federal income tax purposes. However, the tax laws governing REITs are extremely complex, and interpretations of the tax laws governing qualification as a REIT are limited. Qualifying as a REIT required us to meet numerous income and other tests. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of changes in our circumstances, no assurance can be given that we qualified for any particular year.
If we failed to qualify as a REIT prior to our 2015 tax year and we do not qualify for certain statutory relief provisions, we would have to pay federal income tax on our taxable income, if any, for the year of the failure and for the following four years.
Bimini Capital may recognize excess inclusion income that would increase the tax liability of its stockholders.
If Bimini Capital recognize excess inclusion income and that is allocated to its stockholders, this income cannot be offset by net operating losses of its stockholders. If the stockholder is a tax-exempt entity, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a foreign person, such income would be subject to federal income tax withholding without reduction or exemption pursuant to any otherwise applicable income tax treaty. In addition, to the extent Bimini Capital's stock is owned by tax-exempt "disqualified organizations," such as government-related entities that are not subject to tax on unrelated business taxable income, although Treasury regulations have not yet been drafted to clarify the law, it may incur a corporate level tax at the highest applicable corporate tax rate on the portion of our excess inclusion income that is allocable to such disqualified organizations.
Excess inclusion income could result if Bimini Capital holds a residual interest in a real estate mortgage investment conduit, or REMIC. Excess inclusion income also could be generated if Bimini Capital were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments received on its mortgage-related securities securing those debt obligations (i.e., if Bimini Capital were to own an interest in a taxable mortgage pool). Bimini Capital does not expect to acquire significant amounts of residual interests in REMICs, other than interests already owned by its subsidiary, which is treated as a separate taxable entity for these purposes. Bimini Capital intends to structure borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. Bimini Capital does, however, expect to enter into various repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgaged securities if Bimini Capital should default on its obligations.
Risks Related to Conflicts of Interest in Our Relationship with Orchid
Bimini Capital and Orchid may compete for opportunities to acquire assets, which are allocated in accordance with the Investment Allocation Agreement by and among Orchid and Bimini Advisors.
From time to time we may seek to purchase for Bimini Capital the same or similar assets that we seek to purchase for Orchid. In such an instance, we may allocate such opportunities in a manner that preferentially favors Orchid. We will make available to either Bimini Capital or Orchid opportunities to acquire assets that we determine, in our reasonable and good faith judgment, based on the objectives, policies and strategies, and other relevant factors, are appropriate for either entity in accordance with the Investment Allocation Agreement among Bimini Capital, Orchid and Bimini Advisors.
Because many of Bimini Capital'sCapital’s targeted assets are typically available only in specified quantities and because many of our targeted assets are also targeted assets for Orchid, we may not be able to buy as much of any given asset as required to satisfy the needs of both Bimini Capital and Orchid. In these cases, the Investment Allocation Agreement will require the allocation of such assets to both accounts in proportion to their needs and available capital. The Investment Allocation Agreement will permit departure from such proportional allocation when (i) allocating purchases of whole-pool Agency MBS, because those securities cannot be divided into multiple parts to be allocated among various accounts, and (ii) such allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the Investment Allocation Agreement allows for a protocol of allocating assets so that, on an overall basis, each account is treated equitably.
There are conflicts of interest in our relationships with Orchid, which could result in decisions that aremay be considered as being not in the best interests of Bimini Capital'sCapital’s stockholders.
We are subject to conflicts of interest arising out of Bimini Advisors relationship as Manager of Orchid. All of our executive officers may have conflicts between their duties to Bimini Capital and their duties to Orchid as its Manager.
Bimini Capital may acquire or sell assets in which Orchid may have an interest. Similarly, Orchid may acquire or sell assets in which Bimini Capital has or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, Bimini Capital may engage in transactions directly with Orchid, including the purchase and sale of all or a portion of a portfolio asset.
Our officers devote as much time to Bimini Capital and to Orchid as they deem appropriate. However, these officers may have conflicts in allocating their time and services among Bimini Capital and Orchid. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from employees, Orchid and other entities for which we may act as manager in the future will likewise require greater focus and attention, placing personnel resources in high demand. In such situations, Bimini Capital may not receive the necessary support and assistance it requires or would otherwise receive if it were not acting as manager of one or more other entities.
Mr. Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the future. Mr. Haas, our Chief Financial Officer, Chief Investment Officer and President, is a member of the Board of Directors of Orchid, serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the future. Mr. Dwyer and Mr. Jaumot, the two independent members of our Board of Directors, own shares of common stock of Orchid at the time of this filing and may continue to own shares in the future. Accordingly, Messrs. Cauley, Haas, Dwyer and Jaumot may have a conflict of interest with respect to actions by Bimini Capital or Bimini Advisors that relate to Orchid as its Manager.
Bimini continues to hold an investment in the common stock of Orchid. In evaluating opportunities for ourselves and Orchid, this may lead us to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks or decrease the returns of your investment in our common stock.
Orchid may elect not to renew the management agreement without cause which may adversely affect our business, financial condition and results of operations.
Orchid may elect not to renew the management agreement, even without cause. The management agreement is automatically renewed in accordance with the terms of the agreement, each year, on February 20. However, with the consent of the majority of their independent directors, and upon providing 180-days'180-days’ prior written notice, Orchid may elect not to renew the management agreement. If Orchid elects to not renew the agreement because of a decision by its Board of Directors that the management fee is unfair, Bimini Advisors will have the right to renegotiate a mutually agreeable management fee. If Orchid elects to not renew the management agreement without cause, it is required to pay Bimini Advisors a termination fee equal to three times the average annual management fee incurred during the prior 24-month period immediately preceding the most recently completed calendar quarter prior to the effective date of termination. Notwithstanding the termination fee, nonrenewal of the management agreement may adversely affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.
There is a limited market for our Class A Common Stock.
Our Class A Common Stock trades on the OTCQB under the symbol "BMNM"“BMNM”. We may apply to list our Class A Common Stock on a national securities market if, in the future; however,future, we qualify for such a listing. However, even if listed on a national securities market, the ability to buy and sell our Class A Common Stock may be limited due to our small public float, and significant sales may depress or result in a decline in the market price of our Class A Common Stock. Additionally, until such time that our Class A Common Stock is approved for listing on anothera national securities market, our ability to raise capital through the sale of additional securities may be limited. Accordingly, no assurance can be given as to:
· | the likelihood that an actual market for our common stock will develop, or be continued once developed; |
the likelihood that an actual market for our common stock will develop, or be continued once developed;
· | the liquidity of any such market; |
the liquidity of any such market;
· | the ability of any holder to sell shares of our common stock; or |
the ability of any holder to sell shares of our common stock; or
· | the prices that may be obtained for our common stock. |
the prices that may be obtained for our common stock.
We have not made distributions to our stockholders since 2011.
Our Board of Directors has not authorized the payment of any cash dividends to our stockholders since 2011. All distributions will be made at the discretion of our Board of Directors out of funds legally available therefor and will depend on our earnings, our financial condition and such other factors as our Board of Directors may deem relevant from time to time. As a result of the termination of our REIT status effective as of January 1, 2015, we are planning to retain any available funds and future earnings to fund the development and growth of our business. As a result, for the foreseeable future, we do not expect to make distributions.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, as well as warrants to purchase shares of common stock or convertible preferred stock. Upon the liquidation of the Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Furthermore, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue, and to classify or reclassify any unissued shares of common stock or preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Our stockholders are therefore subject to the risk of our future securities offerings reducing the market price of our common stock and diluting their common stock.
The market value of our common stock may be volatile.
The market value of shares of our common stock may be highly volatile and subject to wide price fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the share price or trading volume of our common stock include:
· | actual or anticipated variations in our operating results or distributions; |
actual or anticipated variations in our operating results or distributions;
· | changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry; |
changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;
· | increases in market interest rates that affect the value of our MBS portfolios; |
increases in market interest rates that affect the value of our MBS portfolios;
· | changes in our book value; |
changes in our book value;
· | changes in market valuations of similar companies; |
changes in market valuations of similar companies;
· | adverse market reaction to any increased indebtedness we incur in the future; |
adverse market reaction to any increased indebtedness we incur in the future;
· | departures of key management personnel; |
departures of key management personnel;
· | actions by institutional stockholders; |
actions by institutional stockholders;
· | speculation in the press or investment community; and |
speculation in the press or investment community; and
· | general market and economic conditions. |
general market and economic conditions.
We cannot make any assurances that the market price of our common stock will not fluctuate or decline significantly in the future.
Sales of our common stock eligible for future sale may harm our share price.
We cannot predictThere is very limited liquidity in the effect, if any, of future sales of shares of our common stock, or the availability of sharestrading market for future sales, on the market price of our common stock. Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock. The 2011 Long Term Incentive Compensation Plan provides for grants of up to an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the award, subject to a maximum aggregate number of shares of common stock that may be issued under the 2011 Long Term Incentive Compensation Plan of 4,000,000 shares of common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.None.
Our executive offices and principal administrative offices are located at 3305 Flamingo Drive, Vero Beach, Florida, 32963, in an office building which Bimini Capital owns. This facility is shared with our subsidiaries and Orchid. This property is suitable and adequate for our business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS.
We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.
ITEM 4. MINE SAFETY DISCLOSURES.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.SECURITIES.
Market Information
Our Class A Common Stock is traded over-the-counter under the symbol "BMNM"“BMNM”. As of February 7, 2018,March 27, 2020, we had 12,743,95911,608,555 shares of Class A Common Stock issued and outstanding, which were held by 147170 shareholders of record and 1,4841,179 beneficial owners whose shares were held in "street name"“street name” by brokers and depository institutions.
The following table is a summary of historical prices of our Class A Common Stock.
| | | High | | | Low | | | Close | | | Dividends Declared | |
| 2017 | | | | | | | | | | | | |
| First quarter | | $ | 3.00 | | | $ | 2.41 | | | $ | 2.65 | | | $ | - | |
| Second quarter | | | 3.00 | | | | 2.55 | | | | 2.80 | | | | - | |
| Third quarter | | | 2.95 | | | | 2.60 | | | | 2.79 | | | | - | |
| Fourth quarter | | | 2.79 | | | | 2.54 | | | | 2.61 | | | | - | |
| 2016 | | | | | | | | | | | | | | | . | |
| First quarter | | $ | 1.88 | | | $ | 0.59 | | | $ | 1.64 | | | $ | - | |
| Second quarter | | | 1.74 | | | | 1.07 | | | | 1.38 | | | | - | |
| Third quarter | | | 2.70 | | | | 1.26 | | | | 2.50 | | | | - | |
| Fourth quarter | | | 2.70 | | | | 1.69 | | | | 2.62 | | | | - | |
As of December 31, 2017,March 27, 2020, we had 31,938 shares of Class B Common Stock outstanding, which were held by 2 holders of record and 31,938 shares of Class C Common Stock outstanding, which were held by one holder of record. There is no established public trading market for our Class B Common Stock or Class C Common Stock.
Dividend Distribution Policy
We have not made a distribution to stockholders since 2011. We are planning to retain any available funds and future earnings to fund the development and growth of our business, so future distributions should not be expected.
Preferred Stock
Our charter authorizes us to issue preferred stock that could have a preference over our common stock with respect to distributions. We currently have no intentionIf we were to issue any preferred stock, but if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock.
Securities Authorized For Issuance Under Equity Compensation Plans
On August 12, 2011, Bimini Capital'sCapital’s shareholders approved the 2011 Long Term Compensation Plan (the "Plan"“Plan”). The Plan is intended to permit the grant of stock options, stock appreciation rights ("SARs"(“SARs”), stock awards, performance units and other equity-based and incentive awards up to an aggregate of 4,000,000 shares (but no more than 10% of the number of shares of Class A Common Stock outstanding on any particular grant date), subject to adjustments and limitations as provided in the Plan. The following table provides information as of December 31, 20172019 concerning shares of our common stock authorized for issuance under the Plan.
Plan.
| �� | | | | | | | | Number of securities | |
| | | | | | | | | remaining available for | |
| | | Total number of securities | | | Weighted-average | | | future issuance under | |
| | | to be issued upon exercise | | | exercise price of | | | equity compensation plans | |
| | | of outstanding options, | | | of outstanding options, | | | (excluding securities | |
| | | warrants and rights | | | warrants and rights | | | reflected in column (a)) | |
| Plan Category | | (a) | | | (b) | | | | |
| Equity compensation plans approved by | | | | | | | | | |
| by security holders | | | 41,000 | | | | - | | | | 2,621,667 | (2) |
| Equity compensation plans not approved | | | | | | | | | | | | |
by security holders(1) | | | - | | | | - | | | | - | |
| Total | | | 41,000 | | | | - | | | | 2,621,667 | |
| | | | | | | | Number of securities | |
| | | | | | | | remaining available for | |
| | Total number of securities | | | Weighted-average | | | future issuance under | |
| | to be issued upon exercise | | | exercise price of | | | equity compensation plans | |
| | of outstanding options, | | | of outstanding options, | | | (excluding securities | |
| | warrants and rights | | | warrants and rights | | | reflected in column (a)) | |
| Plan Category | | (a) | | | (b) | | | | |
| Equity compensation plans approved by | | | | | | | | | |
| by security holders | | | - | | | | - | | | | 2,621,667 | (2) |
| Equity compensation plans not approved | | | | | | | | | | | | |
by security holders(1) | | | - | | | | - | | | | - | |
| Total | | | - | | | | - | | | | 2,621,667 | |
| (1) | We do not have any equity compensation plans that have not been approved by our stockholders. |
(2) | Represents the maximum number of shares remaining available for future issuance under the terms of the Incentive Plan irrespective of the 10% limitation described above. Taking into account the 10% limitation and the number of shares of Class A Common Stock outstanding as of December 31, 2017,2019, no shares are available for future issuance under the terms of the Incentive Plan as of December 31, 2017.2019. |
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On March 26, 2018, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Class A common stock. The maximum remaining number of shares that may be repurchased under this authorization is 429,596 shares. The authorization expires on November 15, 2020. The Company did not repurchase any shares of its common stock during the three months ended December 31, 2017.
2019.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 8 of this Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under "Risk Factors"“Risk Factors” in this Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 2003. The Company'sCompany’s principal wholly-owned operating subsidiaries are Bimini Advisors Holdings, LLC andsubsidiary is Royal Palm Capital, LLC. We operate in two business segments: the asset management segment, which includes (a) the investment advisory services provided by Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which includes the investment activities conducted by Bimini Capital and Royal Palm.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (a(an investment advisor registered investment advisor)with the Securities and Exchange Commission), are collectively referred to as "Bimini“Bimini Advisors."” Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and expense reimbursements. As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. In addition, the Company receives dividends from its investment in Orchid common shares.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as "Royal Palm"“Royal Palm”) maintains an investment portfolio, consisting primarily of residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS, ("such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS"MBS”) and (ii) structured Agency MBS, such as collateralized mortgage obligations ("CMOs"), interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS. In addition, Royal Palm receives dividends from its investment in Orchid common shares.
Stock Repurchase Plan
On March 26, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan (“Repurchase Plan”). Pursuant to Repurchase Plan, we may purchase up to 500,000 shares of the Company’s Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. Share repurchases may be executed through various means, including, without limitation, open market transactions. The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020. The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.
Through December 31, 2019, we repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.
Tender Offer
In July 2019, we completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of our Class A common stock at a price of $2.00 per share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:
· | the difference between Agency MBS yields and our funding and hedging costs; |
the difference between Agency MBS yields and our funding and hedging costs;
· | competition for investments in Agency MBS; |
competition for, and supply of, investments in Agency MBS;
· | actions taken by the presidential administration, the Federal Reserve and the U.S. Treasury; |
actions taken by the U.S. government, including the presidential administration, the Federal Reserve (the “Fed”), the Federal Open Market Committee (the “FOMC”), The Federal Housing Finance Agency (the “FHFA”) and the U.S. Treasury;
· | prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; |
prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates;
· | the equity markets and the ability of Orchid to raise additional capital; and |
the equity markets and the ability of Orchid to raise additional capital; and
· | other market developments. |
other market developments.
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:
· | our access to funding and borrowing capacity; |
· | the market value of our investments; |
· | the requirements to qualify for a registration exemption under the Investment Company Act; |
· | our ability to use net operating loss carryforwards and net capital loss carryforwards to reduce our taxable income; |
· | the impact of possible future changes in tax laws; and |
· | our ability to manage the portfolio of Orchid and maintain our role as manager. |
-34-our access to funding and borrowing capacity;
On December 22, 2017, the U.S. Tax Cutsmarket value of our investments;
the requirements to qualify for a registration exemption under the Investment Company Act;
our ability to use net operating loss carryforwards and Jobs Act (the "Tax Reform Act") was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax code by, among other things, lowering the U.S. corporate tax rate from 35%net capital loss carryforwards to 21% effective January 1, 2018. On the same date, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 which specifies, among other things, that reasonable estimates of the income tax effects of the Tax Reform Act should be used, if determinable. U.S. Generally Accepted Accounting Principles ("GAAP") requires that reduce our taxable income;
the impact of possible future changes in tax legislation be recognized inlaws or tax rates; and
our ability to manage the period in which the law was enacted. As such, we recorded an income tax provisionportfolio of $19.4 million for the year ended December 31, 2017, including a charge of $25.9 million during the fourth quarter due to a remeasurement of deferred tax assetsOrchid and liabilities to reflect the lower corporate tax rate. The year 2017 tax provision represents the Company's current best estimate based on management's current interpretation of the Tax Reform Act and may changemaintain our role as the Company receives additional clarification and implementation guidance.manager.
Results of Operations
Described below are the Company'sCompany’s results of operations for the year ended December 31, 2017,2019, as compared to the year ended December 31, 2016.2018.
Net Income (Loss) Income Summary
Consolidated net lossincome for the year ended December 31, 20172019 was $16.5$13.3 million, or $1.30$1.09 basic and diluted lossincome per share of Class A Common Stock, as compared to consolidated net incomeloss of $3.4$26.8 million, or $0.27$2.10 basic and diluted incomeloss per share of Class A Common Stock, for the year ended December 31, 2016.2018.
The components of net income (loss) income for the years ended December 31, 20172019 and 2016,2018, along with the changes in those components are presented in the table below:
| (in thousands) | | | | | | | | | |
| | | 2017 | | | 2016 | | | Change | |
| Revenues | | $ | 16,004 | | | $ | 12,067 | | | $ | 3,937 | |
| Interest expense | | | (3,033 | ) | | | (1,856 | ) | | | (1,177 | ) |
| Net revenues | | | 12,971 | | | | 10,211 | | | | 2,760 | |
| Other (expense) income | | | (3,673 | ) | | | 60 | | | | (3,733 | ) |
| Expenses | | | (6,403 | ) | | | (5,743 | ) | | | (660 | ) |
| Net income before income tax provision | | | 2,895 | | | | 4,528 | | | | (1,633 | ) |
| Income tax provision | | | 19,378 | | | | 1,142 | | | | 18,236 | |
| Net (loss) income | | $ | (16,483 | ) | | $ | 3,386 | | | $ | (19,869 | ) |
| (in thousands) | | | | | | | | | |
| | | 2019 | | | 2018 | | | Change | |
| Advisory services revenue | | $ | 6,908 | | | $ | 7,771 | | | $ | (863 | ) |
| Interest and dividend income | | | 9,328 | | | | 9,988 | | | | (660 | ) |
| Interest expense | | | (6,175 | ) | | | (5,520 | ) | | | (655 | ) |
| Net revenues | | | 10,061 | | | | 12,239 | | | | (2,178 | ) |
| Other expense | | | (603 | ) | | | (11,448 | ) | | | 10,845 | |
| Expenses | | | (6,440 | ) | | | (6,442 | ) | | | 2 | |
| Net income (loss) before income tax (benefit) provision | | | 3,018 | | | | (5,651 | ) | | | 8,669 | |
| Income tax (benefit) provision | | | (10,282 | ) | | | 21,127 | | | | (31,409 | ) |
| Net income (loss) | | $ | 13,300 | | | $ | (26,778 | ) | | $ | 40,078 | |
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note ("T-Note"(“T-Note”) futures contracts and TBA short positions to hedge a portion of the interest rate risk on our repurchase agreements and junior subordinate notes in a rising rate environment.
We have not elected to designatedesignated our derivative holdings forfinancial instruments as hedge accounting treatment under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging.relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on specificcertain derivative instruments the Company uses that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on allthese derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on our borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income.
We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate our financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while the we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for the years ended December 31, 20172019 and 20162018 and for each quarter during 20172019 and 2016.2018.
| Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP) | |
| (in thousands) | | | | | | | | | |
| | | | | | Junior | | | | |
| | | Repurchase | | | Subordinated | | | | |
| Three Months Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | 546 | | | $ | 237 | | | $ | 783 | |
| September 30, 2017 | | | (13 | ) | | | (6 | ) | | | (19 | ) |
| June 30, 2017 | | | (581 | ) | | | (251 | ) | | | (832 | ) |
| March 31, 2017 | | | 15 | | | | 7 | | | | 22 | |
| December 31, 2016 | | | 496 | | | | 1,037 | | | | 1,533 | |
| September 30, 2016 | | | 326 | | | | 182 | | | | 508 | |
| June 30, 2016 | | | (353 | ) | | | (404 | ) | | | (757 | ) |
| March 31, 2016 | | | (787 | ) | | | (513 | ) | | | (1,300 | ) |
| | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | | | | | Junior | | | | | |
| | | Repurchase | | | Subordinated | | | | | |
| Years Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | (33 | ) | | $ | (13 | ) | | $ | (46 | ) |
| December 31, 2016 | | | (318 | ) | | | 302 | | | | (16 | ) |
| Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP) | |
| (in thousands) | | | | | | | | | |
| | | Recognized in | | | | | | | |
| | | Statement of | | | TBA | | | | |
| | | Operations | | | Securities | | | Futures | |
| Three Months Ended | | (GAAP) | | | Income (Loss) | | | Contracts | |
| December 31, 2019 | | $ | 287 | | | $ | (192 | ) | | $ | 479 | |
| September 30, 2019 | | | (483 | ) | | | (204 | ) | | | (279 | ) |
| June 30, 2019 | | | (3,364 | ) | | | (734 | ) | | | (2,630 | ) |
| March 31, 2019 | | | (2,258 | ) | | | (1,067 | ) | | | (1,191 | ) |
| December 31, 2018 | | | (3,834 | ) | | | (1,213 | ) | | | (2,621 | ) |
| September 30, 2018 | | | 948 | | | | 349 | | | | 599 | |
| June 30, 2018 | | | 870 | | | | 194 | | | | 676 | |
| March 31, 2018 | | | 1,740 | | | | (524 | ) | | | 2,264 | |
| Years Ended | | | | | | | | | | | | |
| December 31, 2019 | | $ | (5,818 | ) | | $ | (2,197 | ) | | $ | (3,621 | ) |
| December 31, 2018 | | | (276 | ) | | | (1,194 | ) | | | 918 | |
| Losses on Derivative Instruments - Attributed to Current Period (Non-GAAP) | |
| (in thousands) | | | | | | | | | |
| | | | | | Junior | | | | |
| | | Repurchase | | | Subordinated | | | | |
| Three Months Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | (170 | ) | | $ | (42 | ) | | $ | (212 | ) |
| September 30, 2017 | | | (162 | ) | | | (40 | ) | | | (202 | ) |
| June 30, 2017 | | | (152 | ) | | | (37 | ) | | | (189 | ) |
| March 31, 2017 | | | (116 | ) | | | (60 | ) | | | (176 | ) |
| December 31, 2016 | | | (122 | ) | | | (57 | ) | | | (179 | ) |
| September 30, 2016 | | | (93 | ) | | | (55 | ) | | | (148 | ) |
| June 30, 2016 | | | (60 | ) | | | (77 | ) | | | (137 | ) |
| March 31, 2016 | | | (45 | ) | | | (80 | ) | | | (125 | ) |
| | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | | | | | Junior | | | | | |
| | | Repurchase | | | Subordinated | | | | | |
| Years Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | (600 | ) | | $ | (179 | ) | | $ | (779 | ) |
| December 31, 2016 | | | (320 | ) | | | (269 | ) | | | (589 | ) |
| Gains (Losses) on Futures Contracts | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | Attributed to Current Period (Non-GAAP) | | | Attributed to Future Periods (Non-GAAP) | | | | |
| | | | | | Junior | | | | | | | | | Junior | | | | | | Statement | |
| | | Repurchase | | | Subordinated | | | | | | Repurchase | | | Subordinated | | | | | | of | |
| Three Months Ended | | Agreements | | | Debt | | | Total | | | Agreements | | | Debt | | | Total | | | Operations | |
| December 31, 2019 | | $ | 510 | | | $ | 56 | | | $ | 566 | | | $ | (50 | ) | | $ | (37 | ) | | $ | (87 | ) | | $ | 479 | |
| September 30, 2019 | | | (124 | ) | | | 61 | | | | (63 | ) | | | (155 | ) | | | (61 | ) | | | (216 | ) | | | (279 | ) |
| June 30, 2019 | | | (226 | ) | | | 43 | | | | (183 | ) | | | (2,215 | ) | | | (232 | ) | | | (2,447 | ) | | | (2,630 | ) |
| March 31, 2019 | | | 5 | | | | 65 | | | | 70 | | | | (976 | ) | | | (285 | ) | | | (1,261 | ) | | | (1,191 | ) |
| December 31, 2018 | | | 133 | | | | 68 | | | | 201 | | | | (2,317 | ) | | | (505 | ) | | | (2,822 | ) | | | (2,621 | ) |
| September 30, 2018 | | | (35 | ) | | | 11 | | | | (24 | ) | | | 513 | | | | 110 | | | | 623 | | | | 599 | |
| June 30, 2018 | | | (108 | ) | | | (19 | ) | | | (127 | ) | | | 642 | | | | 161 | | | | 803 | | | | 676 | |
| March 31, 2018 | | | (153 | ) | | | (33 | ) | | | (186 | ) | | | 2,002 | | | | 448 | | | | 2,450 | | | | 2,264 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 165 | | | $ | 225 | | | $ | 390 | | | $ | (3,396 | ) | | $ | (615 | ) | | $ | (4,011 | ) | | $ | (3,621 | ) |
| December 31, 2018 | | | (163 | ) | | | 27 | | | | (136 | ) | | | 840 | | | | 214 | | | | 1,054 | | | | 918 | |
| Gains (Losses) on Derivative Instruments - Attributed to Future Periods (Non-GAAP) | |
| (in thousands) | | | | | | | | | |
| | | | | | Junior | | | | |
| | | Repurchase | | | Subordinated | | | | |
| Three Months Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | 716 | | | $ | 279 | | | $ | 995 | |
| September 30, 2017 | | | 149 | | | | 34 | | | | 183 | |
| June 30, 2017 | | | (429 | ) | | | (214 | ) | | | (643 | ) |
| March 31, 2017 | | | 131 | | | | 67 | | | | 198 | |
| December 31, 2016 | | | 618 | | | | 1,094 | | | | 1,712 | |
| September 30, 2016 | | | 419 | | | | 237 | | | | 656 | |
| June 30, 2016 | | | (293 | ) | | | (327 | ) | | | (620 | ) |
| March 31, 2016 | | | (742 | ) | | | (433 | ) | | | (1,175 | ) |
| | | | | | | | | | | | | |
| (in thousands) | | | | | | | | | | | | |
| | | | | | | Junior | | | | | |
| | | Repurchase | | | Subordinated | | | | | |
| Years Ended | | Agreements | | | Debt | | | Total | |
| December 31, 2017 | | $ | 567 | | | $ | 166 | | | $ | 733 | |
| December 31, 2016 | | | 2 | | | | 571 | | | | 573 | |
| Economic Net Portfolio Interest Income | |
| (in thousands) | |
| | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | Effect of | | | | | | Interest Income | |
| | | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2017 | | $ | 1,978 | | | $ | 685 | | | $ | (170 | ) | | $ | 855 | | | $ | 1,293 | | | $ | 1,123 | |
| September 30, 2017 | | | 1,514 | | | | 504 | | | | (162 | ) | | | 666 | | | | 1,010 | | | | 848 | |
| June 30, 2017 | | | 1,269 | | | | 324 | | | | (152 | ) | | | 476 | | | | 945 | | | | 793 | |
| March 31, 2017 | | | 1,293 | | | | 283 | | | | (116 | ) | | | 399 | | | | 1,010 | | | | 894 | |
| December 31, 2016 | | | 1,285 | | | | 251 | | | | (122 | ) | | | 373 | | | | 1,034 | | | | 912 | |
| September 30, 2016 | | | 1,108 | | | | 195 | | | | (92 | ) | | | 287 | | | | 913 | | | | 821 | |
| June 30, 2016 | | | 1,025 | | | | 174 | | | | (60 | ) | | | 234 | | | | 851 | | | | 791 | |
| March 31, 2016 | | | 817 | | | | 127 | | | | (45 | ) | | | 172 | | | | 690 | | | | 645 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | |
| | | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | | | Effect of | | | | | | | Interest Income | |
| | | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2017 | | $ | 6,054 | | | $ | 1,796 | | | $ | (600 | ) | | $ | 2,396 | | | $ | 4,258 | | | $ | 3,658 | |
| December 31, 2016 | | | 4,235 | | | | 747 | | | | (319 | ) | | | 1,066 | | | | 3,488 | | | | 3,169 | |
| Economic Net Portfolio Interest Income | |
| (in thousands) | |
| | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | Effect of | | | | | | Interest Income | |
| | | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2019 | | $ | 1,899 | | | $ | 948 | | | $ | 510 | | | $ | 438 | | | $ | 951 | | | $ | 1,461 | |
| September 30, 2019 | | | 1,646 | | | | 1,002 | | | | (124 | ) | | | 1,126 | | | | 644 | | | | 520 | |
| June 30, 2019 | | | 2,134 | | | | 1,340 | | | | (226 | ) | | | 1,566 | | | | 794 | | | | 568 | |
| March 31, 2019 | | | 2,190 | | | | 1,313 | | | | 5 | | | | 1,308 | | | | 877 | | | | 882 | |
| December 31, 2018 | | | 2,227 | | | | 1,234 | | | | 133 | | | | 1,101 | | | | 993 | | | | 1,126 | |
| September 30, 2018 | | | 2,054 | | | | 1,049 | | | | (35 | ) | | | 1,084 | | | | 1,005 | | | | 970 | |
| June 30, 2018 | | | 2,001 | | | | 938 | | | | (108 | ) | | | 1,046 | | | | 1,063 | | | | 955 | |
| March 31, 2018 | | | 2,080 | | | | 809 | | | | (153 | ) | | | 962 | | | | 1,271 | | | | 1,118 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 7,869 | | | $ | 4,603 | | | $ | 165 | | | $ | 4,438 | | | $ | 3,266 | | | $ | 3,431 | |
| December 31, 2018 | | | 8,362 | | | | 4,030 | | | | (163 | ) | | | 4,193 | | | | 4,332 | | | | 4,169 | |
(1) | Reflects the effect of derivative instrument hedges for only the period presented. |
(2) | Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
(3) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
| Economic Net Interest Income | |
| (in thousands) | |
| | | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | | |
| | | Interest Income | | | | | | Effect of | | | | | | Net Interest Income | |
| | | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
| December 31, 2017 | | $ | 1,293 | | | $ | 1,123 | | | $ | 324 | | | $ | (42 | ) | | $ | 366 | | | $ | 969 | | | $ | 757 | |
| September 30, 2017 | | | 1,010 | | | | 848 | | | | 316 | | | | (40 | ) | | | 356 | | | | 694 | | | | 492 | |
| June 30, 2017 | | | 945 | | | | 793 | | | | 306 | | | | (37 | ) | | | 343 | | | | 639 | | | | 450 | |
| March 31, 2017 | | | 1,010 | | | | 894 | | | | 292 | | | | (60 | ) | | | 352 | | | | 718 | | | | 542 | |
| December 31, 2016 | | | 1,034 | | | | 912 | | | | 291 | | | | (57 | ) | | | 348 | | | | 743 | | | | 564 | |
| September 30, 2016 | | | 913 | | | | 821 | | | | 278 | | | | (55 | ) | | | 333 | | | | 635 | | | | 488 | |
| June 30, 2016 | | | 851 | | | | 791 | | | | 276 | | | | (77 | ) | | | 353 | | | | 575 | | | | 438 | |
| March 31, 2016 | | | 690 | | | | 645 | | | | 264 | | | | (80 | ) | | | 344 | | | | 426 | | | | 301 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | |
| | | Net Portfolio | | | Interest Expense on Junior Subordinated Notes | | | | | | | | | |
| | | Interest Income | | | | | | | Effect of | | | | | | | Net Interest Income | |
| | | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
| December 31, 2017 | | $ | 4,258 | | | $ | 3,658 | | | $ | 1,238 | | | $ | (179 | ) | | $ | 1,417 | | | $ | 3,020 | | | $ | 2,241 | |
| December 31, 2016 | | | 3,488 | | | | 3,169 | | | | 1,109 | | | | (269 | ) | | | 1,378 | | | | 2,379 | | | | 1,791 | |
| Economic Net Interest Income | |
| (in thousands) | |
| | | Net Portfolio | | | Interest Expense on Long-Term Debt | | | | | | | |
| | | Interest Income | | | | | | Effect of | | | | | | Net Interest Income | |
| | | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
| December 31, 2019 | | $ | 951 | | | $ | 1,461 | | | $ | 376 | | | $ | 56 | | | $ | 320 | | | $ | 575 | | | $ | 1,141 | |
| September 30, 2019 | | | 644 | | | | 520 | | | | 390 | | | | 61 | | | | 329 | | | | 254 | | | | 191 | |
| June 30, 2019 | | | 794 | | | | 568 | | | | 400 | | | | 43 | | | | 357 | | | | 394 | | | | 211 | |
| March 31, 2019 | | | 877 | | | | 882 | | | | 406 | | | | 65 | | | | 341 | | | | 471 | | | | 541 | |
| December 31, 2018 | | | 993 | | | | 1,126 | | | | 393 | | | | 68 | | | | 325 | | | | 600 | | | | 801 | |
| September 30, 2018 | | | 1,005 | | | | 970 | | | | 388 | | | | 11 | | | | 377 | | | | 617 | | | | 593 | |
| June 30, 2018 | | | 1,063 | | | | 955 | | | | 372 | | | | (19 | ) | | | 391 | | | | 691 | | | | 564 | |
| March 31, 2018 | | | 1,271 | | | | 1,118 | | | | 337 | | | | (33 | ) | | | 370 | | | | 934 | | | | 748 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 3,266 | | | $ | 3,431 | | | $ | 1,572 | | | $ | 225 | | | $ | 1,347 | | | $ | 1,694 | | | $ | 2,084 | |
| December 31, 2018 | | | 4,332 | | | | 4,169 | | | | 1,490 | | | | 27 | | | | 1,463 | | | | 2,842 | | | | 2,706 | |
(1) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
(2) | Reflects the effect of derivative instrument hedges for only the period presented. |
(3) | Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
(4) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. |
Segment Information
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Bimini Capital and Royal Palm. Segment information for the years ended December 31, 20172019 and 20162018 is as follows:
| (in thousands) | | | | | | | | | | |
| | Asset | Investment | | | |
| | Management | Portfolio | Corporate | Eliminations | Total |
| 2019 | | | | | | | | | | |
| Advisory services, external customers | $ | 6,908 | $ | - | $ | - | $ | - | $ | 6,908 |
Advisory services, other operating segments(1) | | 271 | | - | | - | | (271) | | - |
| Interest and dividend income | | - | | 9,327 | | 1 | | - | | 9,328 |
| Interest expense | | - | | (4,603) | | (1,572)(2) | | - | | (6,175) |
| Net revenues | | 7,179 | | 4,724 | | (1,571) | | (271) | | 10,061 |
| Other (expense) income | | - | | 112 | | (715)(3) | | - | | (603) |
Operating expenses(4) | | (2,750) | | (3,690) | | - | | - | | (6,440) |
Intercompany expenses(1) | | - | | (271) | | - | | 271 | | - |
| Income (loss) before income taxes | $ | 4,429 | $ | 875 | $ | (2,286) | $ | - | $ | 3,018 |
| Assets | $ | 1,457 | $ | 263,938 | $ | 14,809 | $ | - | $ | 280,204 |
| | | | | | | | | | | |
| | Asset | Investment | | | | |
| | Management | Portfolio | Corporate | Eliminations | Total |
| 2018 | | | | | | | | | | |
| Advisory services, external customers | $ | 7,771 | $ | - | $ | - | $ | - | $ | 7,771 |
Advisory services, other operating segments(1) | | 251 | | - | | - | | (251) | | - |
| Interest and dividend income | | - | | 9,986 | | 2 | | | | 9,988 |
| Interest expense | | - | | (4,029) | | (1,491)(2) | | | | (5,520) |
| Net revenues | | 8,022 | | 5,957 | | (1,489) | | (251) | | 12,239 |
| Other (expense) income | | - | | (12,794) | | 1,346 (3) | | | | (11,448) |
Operating expenses(4) | | (2,822) | | (3,620) | | - | | | | (6,442) |
Intercompany expenses(1) | | - | | (251) | | - | | 251 | | - |
| Income (loss) before income taxes | $ | 5,200 | $ | (10,708) | $ | (143) | $ | - | $ | (5,651) |
| Assets | $ | 1,488 | $ | 245,866 | $ | 12,046 | $ | - | $ | 259,400 |
| (in thousands) | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2017 | | | | | | | | | | | | | | | |
| Advisory services, external customers | | $ | 7,431 | | | $ | - | | | $ | - | | | $ | - | | | $ | 7,431 | |
Advisory services, other operating segments(1) | | | 207 | | | | - | | | | - | | | | (207 | ) | | | - | |
| Interest and dividend income | | | - | | | | 8,572 | | | | 1 | | | | - | | | | 8,573 | |
| Interest expense | | | - | | | | (1,796 | ) | | | (1,237 | )(2) | | | - | | | | (3,033 | ) |
| Net revenues | | | 7,638 | | | | 6,776 | | | | (1,236 | ) | | | (207 | ) | | | 12,971 | |
| Other income | | | - | | | | (4,306 | ) | | | 634 | (3) | | | - | | | | (3,672 | ) |
Operating expenses(4) | | | (3,016 | ) | | | (3,387 | ) | | | - | | | | - | | | | (6,403 | ) |
Intercompany expenses(1) | | | - | | | | (207 | ) | | | - | | | | 207 | | | | - | |
| Income (loss) before income taxes | | $ | 4,622 | | | $ | (1,124 | ) | | $ | (602 | ) | | $ | - | | | $ | 2,896 | |
| Assets | | $ | 1,632 | | | $ | 267,429 | | | $ | 15,528 | | | $ | - | | | $ | 284,589 | |
| | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2016 | | | | | | | | | | | | | | | |
| Advisory services, external customers | | $ | 5,489 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,489 | |
Advisory services, other operating segments(1) | | | 94 | | | | - | | | | - | | | | (94 | ) | | | - | |
| Interest and dividend income | | | - | | | | 6,576 | | | | 2 | | | | - | | | | 6,578 | |
| Interest expense | | | - | | | | (747 | ) | | | (1,109 | )(2) | | | - | | | | (1,856 | ) |
| Net revenues | | | 5,583 | | | | 5,829 | | | | (1,107 | ) | | | (94 | ) | | | 10,211 | |
| Other income | | | - | | | | (2,675 | ) | | | 2,735 | (3) | | | - | | | | 60 | |
Operating expenses(4) | | | (2,640 | ) | | | (3,103 | ) | | | - | | | | - | | | | (5,743 | ) |
Intercompany expenses(1) | | | - | | | | (94 | ) | | | - | | | | 94 | | | | - | |
| Income (loss) before income taxes | | $ | 2,943 | | | $ | (43 | ) | | $ | 1,628 | | | $ | - | | | $ | 4,528 | |
| Assets | | $ | 1,856 | | | $ | 199,883 | | | $ | 21,131 | | | $ | - | | | $ | 222,870 | |
(1) | Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
(2) | Includes interest on junior subordinated note.long-term debt. |
(3) | Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
(4) | Corporate expenses are allocated based on each segment'ssegment’s proportional share of total revenues. |
Asset Management Segment
Advisory Services Revenue
Advisory services revenue consistconsists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement. We receive a monthly management fee in the amount of:
· | One-twelfth of 1.5% of the first $250 million of the Orchid's equity, as defined in the management agreement, |
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
· | One-twelfth of 1.25% of the Orchid's equity that is greater than $250 million and less than or equal to $500 million, and |
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
· | One-twelfth of 1.00% of the Orchid's equity that is greater than $500 million. |
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses incurred on its behalf and to pay to us an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 20182021 and provides for automatic one-year extension options. Should Orchid terminate the management agreement without cause, it will be obligated to pay to us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.
The following table summarizes the advisory services revenue received from Orchid for the years ended December 31, 20172019 and 20162018 and each quarter during 20172019 and 2016.2018.
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | Average | | Advisory Services | |
| | | Orchid | | | Orchid | | | Management | | | Overhead | | | | |
| Three Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
| December 31, 2017 | | $ | 3,837,575 | | | $ | 459,322 | | | $ | 1,625 | | | $ | 408 | | | $ | 2,033 | |
| September 30, 2017 | | | 3,834,083 | | | | 441,193 | | | | 1,528 | | | | 412 | | | | 1,940 | |
| June 30, 2017 | | | 3,499,922 | | | | 406,395 | | | | 1,400 | | | | 388 | | | | 1,788 | |
| March 31, 2017 | | | 3,142,095 | | | | 371,691 | | | | 1,302 | | | | 368 | | | | 1,670 | |
| December 31, 2016 | | | 2,761,836 | | | | 341,236 | | | | 1,220 | | | | 338 | | | | 1,558 | |
| September 30, 2016 | | | 2,362,377 | | | | 280,421 | | | | 1,052 | | | | 336 | | | | 1,388 | |
| June 30, 2016 | | | 2,100,151 | | | | 251,648 | | | | 945 | | | | 329 | | | | 1,274 | |
| March 31, 2016 | | | 2,067,527 | | | | 266,806 | | | | 971 | | | | 298 | | | | 1,269 | |
| | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | Average | | Advisory Services | |
| | | Orchid | | | Orchid | | | Management | | | Overhead | | | | | |
| Years Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
| December 31, 2017 | | $ | 3,578,419 | | | $ | 419,650 | | | $ | 5,855 | | | $ | 1,576 | | | $ | 7,431 | |
| December 31, 2016 | | | 2,322,973 | | | | 285,028 | | | | 4,188 | | | | 1,301 | | | | 5,489 | |
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | Average | | | Advisory Services | |
| | | Orchid | | | Orchid | | | Management | | | Overhead | | | | |
| Three Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
| December 31, 2019 | | $ | 3,705,920 | | | $ | 414,018 | | | $ | 1,477 | | | $ | 379 | | | $ | 1,856 | |
| September 30, 2019 | | | 3,674,087 | | | | 394,788 | | | | 1,440 | | | | 351 | | | | 1,791 | |
| June 30, 2019 | | | 3,307,885 | | | | 363,961 | | | | 1,326 | | | | 327 | | | | 1,653 | |
| March 31, 2019 | | | 3,051,509 | | | | 363,204 | | | | 1,285 | | | | 323 | | | | 1,608 | |
| December 31, 2018 | | | 3,264,230 | | | | 395,911 | | | | 1,404 | | | | 434 | | | | 1,838 | |
| September 30, 2018 | | | 3,601,776 | | | | 431,962 | | | | 1,482 | | | | 391 | | | | 1,873 | |
| June 30, 2018 | | | 3,717,690 | | | | 469,682 | | | | 1,606 | | | | 361 | | | | 1,967 | |
| March 31, 2018 | | | 3,745,298 | | | | 488,906 | | | | 1,712 | | | | 381 | | | | 2,093 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 3,434,850 | | | $ | 383,993 | | | $ | 5,528 | | | $ | 1,380 | | | $ | 6,908 | |
| December 31, 2018 | | | 3,582,249 | | | | 446,615 | | | | 6,204 | | | | 1,567 | | | | 7,771 | |
Investment Portfolio Segment
Net Portfolio Interest Income
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the year ended December 31, 2017,2019, we generated $4.3$3.3 million of net portfolio interest income, consisting of $6.1$7.9 million of interest income from MBS assets offset by $1.8$4.6 million of interest expense on repurchase liabilities. For the year ended December 31, 2016,2018, we generated $3.5$4.3 million of net portfolio interest income, consisting of $4.2$8.4 million of interest income from MBS assets offset by $0.7$4.0 million of interest expense on repurchase liabilities. The $1.9$0.5 million increasedecrease in interest income for the year ended December 31, 20172019 was due to a 1319 basis point increase("bp") decrease in yields earned on the portfolio, combined with a $43.9$2.9 million increasedecrease in average MBS balances. The $1.0$0.6 million increase in interest expense for the year ended December 31, 20172019 was due to a combination of a $42.3 million increase in average repurchase liabilities and a 51 basis point34 bp increase in cost of funds.funds, partially offset by a $3.5 million decrease in average repurchase liabilities.
Our economic interest expense on repurchase liabilities for the years ended December 31, 20172019 and 20162018 was $2.4$4.4 million and $1.1$4.2 million, respectively, resulting in $3.7$3.4 million and $3.2$4.2 million of economic net portfolio interest income, respectively.
The tables below provide consolidated information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for each quarter in 20172019 and 20162018 and for the years ended December 31, 20172019 and 20162018 on both a GAAP and economic basis.
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | Yield on | | | Average | | | Interest Expense | | | Average Cost of Funds | |
| | | MBS | | | Interest | | | Average | | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Held(1) | | | Income(2) | | | MBS | | | Agreements(1) | | | Basis | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2017 | | $ | 203,841 | | | $ | 1,978 | | | | 3.88 | % | | $ | 193,778 | | | $ | 685 | | | $ | 855 | | | | 1.41 | % | | | 1.77 | % |
| September 30, 2017 | | | 170,237 | | | | 1,514 | | | | 3.56 | % | | | 161,003 | | | | 504 | | | | 666 | | | | 1.25 | % | | | 1.66 | % |
| June 30, 2017 | | | 134,188 | | | | 1,269 | | | | 3.78 | % | | | 126,341 | | | | 324 | | | | 476 | | | | 1.02 | % | | | 1.51 | % |
| March 31, 2017 | | | 128,098 | | | | 1,293 | | | | 4.04 | % | | | 119,938 | | | | 283 | | | | 398 | | | | 0.94 | % | | | 1.33 | % |
| December 31, 2016 | | | 131,952 | | | | 1,285 | | | | 3.89 | % | | | 123,909 | | | | 251 | | | | 373 | | | | 0.81 | % | | | 1.20 | % |
| September 30, 2016 | | | 122,220 | | | | 1,108 | | | | 3.63 | % | | | 114,858 | | | | 195 | | | | 287 | | | | 0.68 | % | | | 1.00 | % |
| June 30, 2016 | | | 110,017 | | | | 1,025 | | | | 3.73 | % | | | 103,259 | | | | 174 | | | | 234 | | | | 0.67 | % | | | 0.91 | % |
| March 31, 2016 | | | 96,592 | | | | 817 | | | | 3.39 | % | | | 90,014 | | | | 127 | | | | 173 | | | | 0.57 | % | | | 0.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | Yield on | | | Average | | | Interest Expense | | | Average Cost of Funds | |
| | | MBS | | | Interest | | | Average | | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Held(1) | | | Income(2) | | | MBS | | | Agreements(1) | | | Basis | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2017 | | $ | 159,091 | | | $ | 6,054 | | | | 3.81 | % | | $ | 150,265 | | | $ | 1,796 | | | $ | 2,395 | | | | 1.20 | % | | | 1.59 | % |
| December 31, 2016 | | | 115,195 | | | | 4,235 | | | | 3.68 | % | | | 108,010 | | | | 747 | | | | 1,067 | | | | 0.69 | % | | | 0.99 | % |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | Yield on | | | Average | | | Interest Expense | | | Average Cost of Funds | |
| | | MBS | | | Interest | | | Average | | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Held(1) | | | Income(2) | | | MBS | | | Agreements(1) | | | Basis | | | Basis(2) | | | Basis | | | Basis(3) | |
| December 31, 2019 | | $ | 190,534 | | | $ | 1,899 | | | | 3.99 | % | | $ | 182,215 | | | $ | 948 | | | $ | 438 | | | | 2.08 | % | | | 0.96 | % |
| September 30, 2019 | | | 187,199 | | | | 1,646 | | | | 3.52 | % | | | 177,566 | | | | 1,002 | | | | 1,126 | | | | 2.26 | % | | | 2.54 | % |
| June 30, 2019 | | | 211,406 | | | | 2,134 | | | | 4.04 | % | | | 199,901 | | | | 1,340 | | | | 1,566 | | | | 2.68 | % | | | 3.13 | % |
| March 31, 2019 | | | 212,033 | | | | 2,190 | | | | 4.13 | % | | | 199,771 | | | | 1,313 | | | | 1,308 | | | | 2.63 | % | | | 2.62 | % |
| December 31, 2018 | | | 212,317 | | | | 2,227 | | | | 4.20 | % | | | 202,069 | | | | 1,234 | | | | 1,101 | | | | 2.44 | % | | | 2.18 | % |
| September 30, 2018 | | | 198,367 | | | | 2,054 | | | | 4.14 | % | | | 189,582 | | | | 1,049 | | | | 1,084 | | | | 2.21 | % | | | 2.29 | % |
| June 30, 2018 | | | 194,677 | | | | 2,001 | | | | 4.11 | % | | | 184,621 | | | | 938 | | | | 1,046 | | | | 2.03 | % | | | 2.27 | % |
| March 31, 2018 | | | 207,261 | | | | 2,080 | | | | 4.01 | % | | | 197,001 | | | | 809 | | | | 962 | | | | 1.64 | % | | | 1.96 | % |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 200,293 | | | $ | 7,869 | | | | 3.93 | % | | $ | 189,863 | | | $ | 4,603 | | | $ | 4,438 | | | | 2.42 | % | | | 2.34 | % |
| December 31, 2018 | | | 203,155 | | | | 8,362 | | | | 4.12 | % | | | 193,318 | | | | 4,030 | | | | 4,193 | | | | 2.08 | % | | | 2.17 | % |
| ($ in thousands) | | | | | | | | | | | | |
| | | Net Portfolio | | | Net Portfolio | |
| | | Interest Income | | | Interest Spread | |
| | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(2) | | | Basis | | | Basis(4) | |
| December 31, 2017 | | $ | 1,293 | | | $ | 1,123 | | | | 2.47 | % | | | 2.11 | % |
| September 30, 2017 | | | 1,010 | | | | 848 | | | | 2.31 | % | | | 1.90 | % |
| June 30, 2017 | | | 945 | | | | 793 | | | | 2.76 | % | | | 2.27 | % |
| March 31, 2017 | | | 1,010 | | | | 894 | | | | 3.10 | % | | | 2.71 | % |
| December 31, 2016 | | | 1,034 | | | | 912 | | | | 3.08 | % | | | 2.69 | % |
| September 30, 2016 | | | 913 | | | | 821 | | | | 2.95 | % | | | 2.63 | % |
| June 30, 2016 | | | 851 | | | | 791 | | | | 3.06 | % | | | 2.82 | % |
| March 31, 2016 | | | 690 | | | | 644 | | | | 2.82 | % | | | 2.62 | % |
| | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | |
| | | Net Portfolio | | | Net Portfolio | |
| | | Interest Income | | | Interest Spread | |
| | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Basis | | | Basis(2) | | | Basis | | | Basis(4) | |
| December 31, 2017 | | $ | 4,258 | | | $ | 3,658 | | | | 2.61 | % | | | 2.22 | % |
| December 31, 2016 | | | 3,488 | | | | 3,168 | | | | 2.99 | % | | | 2.69 | % |
| ($ in thousands) | | | | | | | | | | | | |
| | | Net Portfolio | | | Net Portfolio | |
| | | Interest Income | | | Interest Spread | |
| | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(2) | | | Basis | | | Basis(4) | |
| December 31, 2019 | | $ | 951 | | | $ | 1,461 | | | | 1.91 | % | | | 3.03 | % |
| September 30, 2019 | | | 644 | | | | 520 | | | | 1.26 | % | | | 0.98 | % |
| June 30, 2019 | | | 794 | | | | 568 | | | | 1.36 | % | | | 0.91 | % |
| March 31, 2019 | | | 877 | | | | 882 | | | | 1.50 | % | | | 1.51 | % |
| December 31, 2018 | | | 993 | | | | 1,126 | | | | 1.76 | % | | | 2.02 | % |
| September 30, 2018 | | | 1,005 | | | | 970 | | | | 1.93 | % | | | 1.85 | % |
| June 30, 2018 | | | 1,063 | | | | 955 | | | | 2.08 | % | | | 1.84 | % |
| March 31, 2018 | | | 1,271 | | | | 1,118 | | | | 2.37 | % | | | 2.05 | % |
| Years Ended | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 3,266 | | | $ | 3,431 | | | | 1.51 | % | | | 1.59 | % |
| December 31, 2018 | | | 4,332 | | | | 4,169 | | | | 2.04 | % | | | 1.95 | % |
(1) | Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 4342 and 4443 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presentedpresented. |
(2) | Economic interest expense and economic net interest income presented in the tables above and the tables on page 43 include the effect of derivative instrument hedges for only the period presented. |
(3) | Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS held. |
(4) | Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS. |
Interest Income and Average Earning Asset Yield
Our interest income was $6.1$7.9 million for the year ended December 31, 20172019 and $4.2$8.4 million for year ended December 31, 2016.2018. Average MBS holdings were $159.1$200.3 million and $115.2$203.2 million for the years ended December 31, 20172019 and 2016,2018, respectively. The $1.9$0.5 million increasedecrease in interest income was due to a 13 basis point increase19 bp decrease in yields, combined with a $43.9$2.9 million increasedecrease in average MBS holdings.
The tablestable below presentpresents the consolidated average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and pass-through MBS ("(“PT MBS"MBS”). for the years ended December 31, 2019 and 2018 and each quarter during 2019 and 2018.
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average MBS Held | | | Interest Income | | | Realized Yield on Average MBS | |
| | | PT | | | Structured | | | | | | PT | | | Structured | | | | | | PT | | | Structured | | | | |
| Three Months Ended | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | |
| December 31, 2017 | | $ | 201,165 | | | $ | 2,676 | | | $ | 203,841 | | | $ | 1,955 | | | $ | 23 | | | $ | 1,978 | | | | 3.89 | % | | | 3.55 | % | | | 3.88 | % |
| September 30, 2017 | | | 167,081 | | | | 3,156 | | | | 170,237 | | | | 1,524 | | | | (10 | ) | | | 1,514 | | | | 3.65 | % | | | (1.28 | )% | | | 3.56 | % |
| June 30, 2017 | | | 130,519 | | | | 3,669 | | | | 134,188 | | | | 1,220 | | | | 49 | | | | 1,269 | | | | 3.74 | % | | | 5.33 | % | | | 3.78 | % |
| March 31, 2017 | | | 123,163 | | | | 4,935 | | | | 128,098 | | | | 1,210 | | | | 83 | | | | 1,293 | | | | 3.93 | % | | | 6.67 | % | | | 4.04 | % |
| December 31, 2016 | | | 127,627 | | | | 4,325 | | | | 131,952 | | | | 1,238 | | | | 47 | | | | 1,285 | | | | 3.88 | % | | | 4.32 | % | | | 3.89 | % |
| September 30, 2016 | | | 119,411 | | | | 2,809 | | | | 122,220 | | | | 1,092 | | | | 16 | | | | 1,108 | | | | 3.66 | % | | | 2.19 | % | | | 3.63 | % |
| June 30, 2016 | | | 106,653 | | | | 3,364 | | | | 110,017 | | | | 1,008 | | | | 17 | | | | 1,025 | | | | 3.78 | % | | | 2.05 | % | | | 3.73 | % |
| March 31, 2016 | | | 92,365 | | | | 4,227 | | | | 96,592 | | | | 783 | | | | 34 | | | | 817 | | | | 3.39 | % | | | 3.25 | % | | | 3.39 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average MBS Held | | | Interest Income | | | Realized Yield on Average MBS | |
| | | PT | | | Structured | | | | | | | PT | | | Structured | | | | | | | PT | | | Structured | | | | | |
| Years Ended | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | |
| December 31, 2017 | | $ | 155,482 | | | $ | 3,609 | | | $ | 159,091 | | | $ | 5,909 | | | $ | 145 | | | $ | 6,054 | | | | 3.80 | % | | | 4.01 | % | | | 3.81 | % |
| December 31, 2016 | | | 111,514 | | | | 3,681 | | | | 115,195 | | | | 4,121 | | | | 114 | | | | 4,235 | | | | 3.70 | % | | | 3.09 | % | | | 3.68 | % |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average MBS Held | | | Interest Income | | | Realized Yield on Average MBS | |
| | | PT | | | Structured | | | | | | PT | | | Structured | | | | | | PT | | | Structured | | | | |
| Three Months Ended | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | |
| December 31, 2019 | | $ | 188,884 | | | $ | 1,650 | | | $ | 190,534 | | | $ | 1,870 | | | $ | 29 | | | $ | 1,899 | | | | 3.96 | % | | | 6.90 | % | | | 3.99 | % |
| September 30, 2019 | | | 185,309 | | | | 1,890 | | | | 187,199 | | | | 1,652 | | | | (6 | ) | | | 1,646 | | | | 3.57 | % | | | (1.15 | )% | | | 3.52 | % |
| June 30, 2019 | | | 209,171 | | | | 2,235 | | | | 211,406 | | | | 2,111 | | | | 23 | | | | 2,134 | | | | 4.04 | % | | | 4.01 | % | | | 4.04 | % |
| March 31, 2019 | | | 209,469 | | | | 2,564 | | | | 212,033 | | | | 2,143 | | | | 47 | | | | 2,190 | | | | 4.09 | % | | | 7.42 | % | | | 4.13 | % |
| December 31, 2018 | | | 209,971 | | | | 2,346 | | | | 212,317 | | | | 2,181 | | | | 46 | | | | 2,227 | | | | 4.15 | % | | | 7.85 | % | | | 4.20 | % |
| September 30, 2018 | | | 196,305 | | | | 2,062 | | | | 198,367 | | | | 2,008 | | | | 46 | | | | 2,054 | | | | 4.09 | % | | | 8.94 | % | | | 4.14 | % |
| June 30, 2018 | | | 192,368 | | | | 2,309 | | | | 194,677 | | | | 1,959 | | | | 42 | | | | 2,001 | | | | 4.07 | % | | | 7.16 | % | | | 4.11 | % |
| March 31, 2018 | | | 204,786 | | | | 2,475 | | | | 207,261 | | | | 2,054 | | | | 26 | | | | 2,080 | | | | 4.01 | % | | | 4.29 | % | | | 4.01 | % |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | $ | 198,208 | | | $ | 2,085 | | | $ | 200,293 | | | $ | 7,776 | | | $ | 93 | | | $ | 7,869 | | | | 3.92 | % | | | 4.46 | % | | | 3.93 | % |
| December 31, 2018 | | | 200,858 | | | | 2,297 | | | | 203,155 | | | | 8,202 | | | | 160 | | | | 8,362 | | | | 4.08 | % | | | 6.97 | % | | | 4.12 | % |
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average outstanding repurchase agreements were $150.3$189.9 million and $108.0$193.3 million, generating interest expense of $1.8$4.6 million and $0.7$4.0 million for the years ended December 31, 20172019 and 2016,2018, respectively. Our average cost of funds was 1.20%2.42% and 0.69%2.08% for years ended December 31, 20172019 and 2016,2018, respectively. There was a 51 basis pointan 34 bp increase in the average cost of funds and a $42.3$3.5 million increasedecrease in average outstanding repurchase agreements during the year ended December 31, 20172019 as compared to the year ended December 31, 2016.2018.
Our economic interest expense was $2.4$4.4 million and $1.1$4.2 million for the years ended December 31, 20172019 and 2016,2018, respectively. There was an 60 basis pointa 17 bp increase in the average economic cost of funds to 1.59%2.34% for the year ended December 31, 20172019 from 0.99%2.17% for the previous year. The $1.3$0.2 million increase in economic interest expense was due to the $42.334 bp increase in the average cost of funds noted above, offset by the $3.5 million increasedecrease in average outstanding repurchase agreements during the year ended December 31, 2017, combined with2019 and the negativefavorable performance of our derivative agreements attributed to the current period.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 5 basis points18 bps above average one-month LIBOR and 21 basis points10 bps above average six-month LIBOR for the quarter ended December 31, 2019. Our average economic cost of funds was 94 bps below average one-month LIBOR and 102 bps below average six-month LIBOR for the quarter ended December 31, 2017. Our average economic cost of funds was 41 basis points above average one-month LIBOR and 15 basis points above average six-month LIBOR for the quarter ended December 31, 2017.2019. The average term to maturity of the outstanding repurchase agreements decreased from 4031 days at December 31, 20162018 to 3824 days at December 31, 2017.2019.
The tables below present the consolidated average outstanding balance under all repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for each quarter in 20172019 and 20162018 and for the years ended December 31, 20172019 and 20162018 on both a GAAP and economic basis.
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
| December 31, 2017 | | $ | 193,778 | | | $ | 685 | | | $ | 855 | | | | 1.41 | % | | | 1.77 | % |
| September 30, 2017 | | | 161,003 | | | | 504 | | | | 666 | | | | 1.25 | % | | | 1.66 | % |
| June 30, 2017 | | | 126,341 | | | | 324 | | | | 476 | | | | 1.02 | % | | | 1.51 | % |
| March 31, 2017 | | | 119,938 | | | | 283 | | | | 398 | | | | 0.94 | % | | | 1.33 | % |
| December 31, 2016 | | | 123,909 | | | | 251 | | | | 373 | | | | 0.81 | % | | | 1.20 | % |
| September 30, 2016 | | | 114,858 | | | | 195 | | | | 287 | | | | 0.68 | % | | | 1.00 | % |
| June 30, 2016 | | | 103,259 | | | | 174 | | | | 234 | | | | 0.67 | % | | | 0.91 | % |
| March 31, 2016 | | | 90,014 | | | | 127 | | | | 172 | | | | 0.57 | % | | | 0.77 | % |
| | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
| December 31, 2017 | | $ | 150,265 | | | $ | 1,796 | | | | 2,395 | | | | 1.20 | % | | | 1.59 | % |
| December 31, 2016 | | | 108,010 | | | | 747 | | | | 1,066 | | | | 0.69 | % | | | 0.99 | % |
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
| December 31, 2019 | | $ | 182,215 | | | $ | 948 | | | $ | 438 | | | | 2.08 | % | | | 0.96 | % |
| September 30, 2019 | | | 177,566 | | | | 1,002 | | | | 1,126 | | | | 2.26 | % | | | 2.54 | % |
| June 30, 2019 | | | 199,901 | | | | 1,340 | | | | 1,566 | | | | 2.68 | % | | | 3.13 | % |
| March 31, 2019 | | | 199,771 | | | | 1,313 | | | | 1,308 | | | | 2.63 | % | | | 2.62 | % |
| December 31, 2018 | | | 202,069 | | | | 1,234 | | | | 1,101 | | | | 2.44 | % | | | 2.18 | % |
| September 30, 2018 | | | 189,582 | | | | 1,049 | | | | 1,084 | | | | 2.21 | % | | | 2.29 | % |
| June 30, 2018 | | | 184,621 | | | | 938 | | | | 1,046 | | | | 2.03 | % | | | 2.27 | % |
| March 31, 2018 | | | 197,001 | | | | 809 | | | | 962 | | | | 1.64 | % | | | 1.96 | % |
| | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
| December 31, 2019 | | $ | 189,863 | | | $ | 4,603 | | | | 4,438 | | | | 2.42 | % | | | 2.34 | % |
| December 31, 2018 | | | 193,318 | | | | 4,030 | | | | 4,193 | | | | 2.08 | % | | | 2.17 | % |
| | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Three Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
| December 31, 2017 | | | 1.36 | % | | | 1.62 | % | | | 0.05 | % | | | (0.21 | )% | | | 0.41 | % | | | 0.15 | % |
| September 30, 2017 | | | 1.20 | % | | | 1.45 | % | | | 0.05 | % | | | (0.20 | )% | | | 0.46 | % | | | 0.21 | % |
| June 30, 2017 | | | 1.05 | % | | | 1.43 | % | | | (0.03 | )% | | | (0.41 | )% | | | 0.46 | % | | | 0.08 | % |
| March 31, 2017 | | | 0.82 | % | | | 1.37 | % | | | 0.12 | % | | | (0.43 | )% | | | 0.51 | % | | | (0.04 | )% |
| December 31, 2016 | | | 0.62 | % | | | 1.28 | % | | | 0.19 | % | | | (0.47 | )% | | | 0.58 | % | | | (0.08 | )% |
| September 30, 2016 | | | 0.49 | % | | | 1.09 | % | | | 0.19 | % | | | (0.41 | )% | | | 0.51 | % | | | (0.09 | )% |
| June 30, 2016 | | | 0.44 | % | | | 0.92 | % | | | 0.23 | % | | | (0.25 | )% | | | 0.47 | % | | | (0.01 | )% |
| March 31, 2016 | | | 0.40 | % | | | 0.84 | % | | | 0.17 | % | | | (0.27 | )% | | | 0.37 | % | | | (0.07 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Years Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
| December 31, 2017 | | | 1.11 | % | | | 1.47 | % | | | 0.09 | % | | | (0.27 | )% | | | 0.48 | % | | | 0.12 | % |
| December 31, 2016 | | | 0.49 | % | | | 1.03 | % | | | 0.20 | % | | | (0.34 | )% | | | 0.50 | % | | | (0.04 | )% |
| | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Three Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
| December 31, 2019 | | | 1.90 | % | | | 1.98 | % | | | 0.18 | % | | | 0.10 | % | | | (0.94 | )% | | | (1.02 | )% |
| September 30, 2019 | | | 2.22 | % | | | 2.18 | % | | | 0.04 | % | | | 0.08 | % | | | 0.32 | % | | | 0.36 | % |
| June 30, 2019 | | | 2.45 | % | | | 2.49 | % | | | 0.23 | % | | | 0.19 | % | | | 0.68 | % | | | 0.64 | % |
| March 31, 2019 | | | 2.50 | % | | | 2.77 | % | | | 0.13 | % | | | (0.14 | )% | | | 0.12 | % | | | (0.15 | )% |
| December 31, 2018 | | | 2.39 | % | | | 2.74 | % | | | 0.05 | % | | | (0.30 | )% | | | (0.21 | )% | | | (0.56 | )% |
| September 30, 2018 | | | 2.17 | % | | | 2.55 | % | | | 0.04 | % | | | (0.34 | )% | | | 0.12 | % | | | (0.26 | )% |
| June 30, 2018 | | | 1.99 | % | | | 2.48 | % | | | 0.04 | % | | | (0.45 | )% | | | 0.28 | % | | | (0.21 | )% |
| March 31, 2018 | | | 1.69 | % | | | 2.11 | % | | | (0.05 | )% | | | (0.47 | )% | | | 0.27 | % | | | (0.15 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Years Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
| December 31, 2019 | | | 2.27 | % | | | 2.35 | % | | | 0.15 | % | | | 0.07 | % | | | 0.07 | % | | | (0.01 | )% |
| December 31, 2018 | | | 2.06 | % | | | 2.47 | % | | | 0.02 | % | | | (0.39 | )% | | | 0.11 | % | | | (0.30 | )% |
At both December 31, 20172019 and 2016,2018, we owned 1,520,036 and 1,395,036 shares of Orchid common stock, respectively.stock. Orchid paid total dividends of $1.68$0.96 per share during both 20172019 and 2016.$1.07 per share during 2018. During the years ended December 31, 20172019 and 2016,2018, we received dividends on this common stock investment of approximately $2.5$1.5 million and $2.3$1.6 million, respectively.
Long-Term Debt
Junior Subordinated NotesDebt
Interest expense on our junior subordinated debt securities was approximately $1.2$1.6 million and $1.1$1.5 for the years ended December 31, 20172019 and 2016,2018, respectively. The average rate of interest paid for the year ended December 31, 20172019 was 4.69%5.94% compared to 4.19%5.65% for the year ended December 31, 2016.2018. The junior subordinated debt securities pay interest at a floating rate. The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. As of December 31, 2017,2019, the interest rate was 5.09%5.39%.
Note Payable
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Gains or Losses and Other Income
The table below presents our gains or losses and other income for the years ended December 31, 20172019 and 2016.
2018.
| (in thousands) | | | | | | | | | |
| | | 2017 | | | 2016 | | | Change | |
| Realized (losses) gains on sales of MBS | | $ | (1 | ) | | $ | 180 | | | $ | (181 | ) |
| Unrealized losses on MBS | | | (2,066 | ) | | | (3,786 | ) | | | 1,720 | |
| Total losses on MBS | | | (2,067 | ) | | | (3,606 | ) | | | 1,539 | |
| Losses on derivative instruments | | | (46 | ) | | | (16 | ) | | | (30 | ) |
| Gains on retained interests | | | 645 | | | | 2,425 | | | | (1,780 | ) |
| Unrealized (losses) gains on Orchid Island Capital, Inc. | | | (2,207 | ) | | | 1,256 | | | | (3,463 | ) |
| (in thousands) | | | | | | | | | |
| | | 2019 | | | 2018 | | | Change | |
| Realized gains (losses) on sales of MBS | | $ | 23 | | | $ | (577 | ) | | $ | 600 | |
| Unrealized gains (losses) on MBS | | | 6,338 | | | | (7,307 | ) | | | 13,645 | |
| Total gains (losses) on MBS | | | 6,361 | | | | (7,884 | ) | | | 14,245 | |
| Losses on derivative instruments | | | (5,818 | ) | | | (276 | ) | | | (5,542 | ) |
| Gains on retained interests in securitizations | | | 315 | | | | 1,103 | | | | (788 | ) |
| Unrealized losses on Orchid Island Capital, Inc. common stock | | | (821 | ) | | | (4,393 | ) | | | 3,572 | |
We invest in MBS with the intent to earn net income from the realized yield on those assets over thetheir related funding and hedging costs, and not for purposesthe 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 year ended December 31, 2017,2019, we received proceeds of $1.7$44.0 million from the sales of MBS compared to $73.1$60.4 million for the year ended December 31, 2016.2018.
The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are sensitive to changes in interest rates. The table below presents historical interest rate data as of each quarter end during 20172019 and 2016.
2018.
| | | | | | | | | 15 Year | | | 30 Year | | | Three | |
| | | 5 Year | | | 10 Year | | | Fixed-Rate | | | Fixed-Rate | | | Month | |
| | | Treasury Rate(1) | | | Treasury Rate(1) | | | Mortgage Rate(2) | | | Mortgage Rate(2) | | | Libor(3) | |
| December 31, 2017 | | | 2.21 | % | | | 2.40 | % | | | 3.39 | % | | | 3.95 | % | | | 1.61 | % |
| September 30, 2017 | | | 1.93 | % | | | 2.33 | % | | | 3.11 | % | | | 3.81 | % | | | 1.32 | % |
| June 30, 2017 | | | 1.88 | % | | | 2.30 | % | | | 3.17 | % | | | 3.90 | % | | | 1.26 | % |
| March 31, 2017 | | | 1.93 | % | | | 2.40 | % | | | 3.41 | % | | | 4.20 | % | | | 1.13 | % |
| December 31, 2016 | | | 1.93 | % | | | 2.45 | % | | | 3.43 | % | | | 4.20 | % | | | 0.98 | % |
| September 30, 2016 | | | 1.16 | % | | | 1.61 | % | | | 2.76 | % | | | 3.46 | % | | | 0.85 | % |
| June 30, 2016 | | | 1.01 | % | | | 1.49 | % | | | 2.84 | % | | | 3.57 | % | | | 0.65 | % |
| March 31, 2016 | | | 1.22 | % | | | 1.79 | % | | | 2.97 | % | | | 3.69 | % | | | 0.63 | % |
| | | | | | | | | 15 Year | | | 30 Year | | | Three | |
| | | 5 Year | | | 10 Year | | | Fixed-Rate | | | Fixed-Rate | | | Month | |
| | | Treasury Rate(1) | | | Treasury Rate(1) | | | Mortgage Rate(2) | | | Mortgage Rate(2) | | | Libor(3) | |
| December 31, 2019 | | | 1.69 | % | | | 1.92 | % | | | 3.18 | % | | | 3.72 | % | | | 1.91 | % |
| September 30, 2019 | | | 1.55 | % | | | 1.68 | % | | | 3.12 | % | | | 3.61 | % | | | 2.13 | % |
| June 30, 2019 | | | 1.76 | % | | | 2.00 | % | | | 3.24 | % | | | 3.80 | % | | | 2.40 | % |
| March 31, 2019 | | | 2.24 | % | | | 2.41 | % | | | 3.72 | % | | | 4.27 | % | | | 2.61 | % |
| December 31, 2018 | | | 2.51 | % | | | 2.69 | % | | | 4.09 | % | | | 4.64 | % | | | 2.80 | % |
| September 30, 2018 | | | 2.95 | % | | | 3.06 | % | | | 4.08 | % | | | 4.63 | % | | | 2.40 | % |
| June 30, 2018 | | | 2.73 | % | | | 2.85 | % | | | 4.04 | % | | | 4.57 | % | | | 2.34 | % |
| March 31, 2018 | | | 2.56 | % | | | 2.74 | % | | | 3.91 | % | | | 4.44 | % | | | 2.31 | % |
(1) | Historical 5 Year and 10 Year Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange. |
(2) | Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac'sMac’s Primary Mortgage Market Survey. |
(3) | Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration Ltd. |
The retained interests in securitizations represent the residual net interest spread remaining after payments on the notes issued through the securitization. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve), the discount rate used to determine the present value of the residual cash flows and prepayment and loss estimates on the underlying mortgage loans. During the year ended December 31, 2017, we recorded gains on retained interests of $0.6 million compared to gains of $2.4 million for the year ended December 31, 2016.
For the year ended December 31, 2017,2019, our total operating expenses were approximately $6.4 million compared to approximately $5.7$6.4 million for the year ended December 31, 2016.2018. The table below presents a breakdown of operating expenses for the years ended December 31, 20172019 and 2016.2018.
| (in thousands) | | | | | | | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | Change | | | 2019 | | | 2018 | | | Change | |
| Compensation and benefits | | $ | 3,852 | | | $ | 3,325 | | | $ | 527 | | | $ | 4,116 | | | $ | 4,011 | | | $ | 105 | |
| Legal fees | | | 111 | | | | 210 | | | | (99 | ) | | 148 | | | 93 | | | 55 | |
| Accounting, auditing and other professional fees | | | 344 | | | | 389 | | | | (45 | ) | | 342 | | | 359 | | | (17 | ) |
| Directors' fees and liability insurance | | | 659 | | | | 622 | | | | 37 | | |
| Other G&A expenses | | | 1,437 | | | | 1,198 | | | | 239 | | |
| Directors’ fees and liability insurance | | | 654 | | | 642 | | | 12 | |
| Administrative and other expenses | | | | 1,180 | | | | 1,338 | | | | (158 | ) |
| | | $ | 6,403 | | | $ | 5,744 | | | $ | 659 | | | $ | 6,440 | | | $ | 6,443 | | | $ | (3 | ) |
In 2019, we recorded an income tax benefit of $10.3 million, including a $11.1 million decrease in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2019, of the Company’s ability to utilize tax net operating losses (“NOLs”) to offset future taxable income. During 2019, Orchid raised capital, which is expected to result in an increase in future management fee revenue. Because of this increase in cash flows, and projections for future growth, management has revised its estimated utilization of NOL carryforwards in future periods, resulting in a decrease in the deferred tax valuation asset allowance as of December 31, 2019.
In 2018, we recorded an income tax provision of $21.1 million, including a $22.5 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2018, of the Company’s ability to utilize NOLs to offset future taxable income. During 2018, Orchid’s book value and monthly dividend decreased, which caused decreases in management fee revenue and dividend income on Orchid stock. Because of this decrease in cash flows in 2018, management revised its estimated utilization of NOL carryforwards in future periods, which resulted in an increase in the deferred tax valuation asset allowance recorded in 2018.
Financial Condition:
Mortgage-Backed Securities
As of December 31, 2017,2019, our MBS portfolio consisted of $209.7$217.8 million of agency or government MBS at fair value and had a weighted average coupon of 4.21%4.25%. During the year ended December 31, 2017,2019, we received principal repayments of $12.5$22.7 million compared to $13.1$23.5 million for the year ended December 31, 2016.2018. The average prepayment speeds for the quarters ended December 31, 20172019 and 20162018 were 8.8%15.6% and 11.1%6.6%, respectively.
The following table presents the 3-month constant prepayment rate ("CPR"(“CPR”) experienced on our structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
| | | | | | Structured | | | | |
| | | PT MBS | | | MBS | | | Total | |
| Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
| December 31, 2017 | | | 7.2 | | | | 16.9 | | | | 8.8 | |
| September 30, 2017 | | | 5.2 | | | | 18.8 | | | | 8.3 | |
| June 30, 2017 | | | 5.9 | | | | 20.4 | | | | 9.9 | |
| March 31, 2017 | | | 4.8 | | | | 18.8 | | | | 8.8 | |
| December 31, 2016 | | | 5.5 | | | | 27.3 | | | | 11.1 | |
| September 30, 2016 | | | 9.4 | | | | 19.7 | | | | 13.6 | |
| June 30, 2016 | | | 7.8 | | | | 20.4 | | | | 12.6 | |
| March 31, 2016 | | | 11.8 | | | | 16.6 | | | | 14.3 | |
| | | | | | Structured | | | | |
| | | PT MBS | | | MBS | | | Total | |
| Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
| December 31, 2019 | | | 15.6 | | | | 15.6 | | | | 15.6 | |
| September 30, 2019 | | | 9.5 | | | | 16.2 | | | | 10.5 | |
| June 30, 2019 | | | 9.9 | | | | 14.6 | | | | 10.5 | |
| March 31, 2019 | | | 5.7 | | | | 13.4 | | | | 6.8 | |
| December 31, 2018 | | | 5.5 | | | | 11.7 | | | | 6.6 | |
| September 30, 2018 | | | 8.6 | | | | 13.5 | | | | 9.5 | |
| June 30, 2018 | | | 13.4 | | | | 11.6 | | | | 13.1 | |
| March 31, 2018 | | | 7.2 | | | | 16.8 | | | | 8.6 | |
The following tables summarize certain characteristics of our PT MBS and structured MBS as of December 31, 20172019 and 2016:2018:
| ($ in thousands) | | | | | | |
| | | | | | Weighted | |
| | | | Percentage | | Average | |
| | | | of | Weighted | Maturity | |
| | | Fair | Entire | Average | in | Longest |
| Asset Category | | Value | Portfolio | Coupon | Months | Maturity |
| December 31, 2017 | | | | | | |
| Fixed Rate PT MBS | $ | 207,179 | 98.8% | 4.21% | 321 | 1-Dec-47 |
| Interest-Only Securities | | 1,476 | 0.7% | 3.43% | 229 | 25-Dec-39 |
| Inverse Interest-Only Securities | | 1,037 | 0.5% | 5.01% | 278 | 25-Apr-41 |
| Total Mortgage Assets | $ | 209,692 | 100.0% | 4.21% | 320 | 1-Dec-47 |
| December 31, 2016 | | | | | | |
| Fixed Rate PT MBS | $ | 124,299 | 95.4% | 4.24% | 347 | 1-Oct-46 |
| Interest-Only Securities | | 2,654 | 2.0% | 3.48% | 245 | 25-Dec-39 |
| Inverse Interest-Only Securities | | 3,349 | 2.6% | 5.52% | 325 | 25-Dec-46 |
| Total Mortgage Assets | $ | 130,302 | 100.0% | 4.26% | 344 | 25-Dec-46 |
| ($ in thousands) | | | | | | | | | | | | |
| | | December 31, 2017 | | | December 31, 2016 | |
| | | | | | Percentage of | | | | | | Percentage of | |
| Agency | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | |
| Fannie Mae | | $ | 178,581 | | | | 85.2 | % | | $ | 120,961 | | | | 92.8 | % |
| Freddie Mac | | | 30,896 | | | | 14.7 | % | | | 8,870 | | | | 6.8 | % |
| Ginnie Mae | | | 215 | | | | 0.1 | % | | | 471 | | | | 0.4 | % |
| Total Portfolio | | $ | 209,692 | | | | 100.0 | % | | $ | 130,302 | | | | 100.0 | % |
| | | December 31, 2017 | | | December 31, 2016 | |
| Weighted Average Pass-through Purchase Price | | $ | 109.06 | | | $ | 110.31 | |
| Weighted Average Structured Purchase Price | | $ | 6.02 | | | $ | 6.74 | |
| Weighted Average Pass-through Current Price | | $ | 107.13 | | | $ | 107.54 | |
| Weighted Average Structured Current Price | | $ | 7.06 | | | $ | 10.40 | |
Effective Duration (1) | | | 3.832 | | | | 4.769 | |
| ($ in thousands) | | | | | | |
| | | | | | Weighted | |
| | | | Percentage | | Average | |
| | | | of | Weighted | Maturity | |
| | | Fair | Entire | Average | in | Longest |
| Asset Category | | Value | Portfolio | Coupon | Months | Maturity |
| December 31, 2019 | | | | | | |
| Fixed Rate PT MBS | $ | 216,231 | 99.3% | 4.25% | 316 | 1-Nov-49 |
| Interest-Only Securities | | 1,024 | 0.4% | 3.65% | 281 | 15-Jul-48 |
| Inverse Interest-Only Securities | | 586 | 0.3% | 4.77% | 254 | 25-Apr-41 |
| Total Mortgage Assets | $ | 217,841 | 100.0% | 4.25% | 316 | 1-Nov-49 |
| December 31, 2018 | | | | | | |
| Fixed Rate PT MBS | $ | 209,675 | 98.7% | 4.26% | 327 | 1-Aug-48 |
| Interest-Only Securities | | 2,021 | 1.0% | 3.69% | 293 | 15-Jul-48 |
| Inverse Interest-Only Securities | | 728 | 0.3% | 4.06% | 272 | 25-Apr-41 |
| Total Mortgage Assets | $ | 212,424 | 100.0% | 4.25% | 327 | 1-Aug-48 |
| ($ in thousands) | | | | | | | | | | | | |
| | | December 31, 2019 | | | December 31, 2018 | |
| | | | | | Percentage of | | | | | | Percentage of | |
| Agency | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | |
| Fannie Mae | | $ | 203,321 | | | | 93.3 | % | | $ | 193,437 | | | | 91.1 | % |
| Freddie Mac | | | 14,499 | | | | 6.7 | % | | | 18,881 | | | | 8.9 | % |
| Ginnie Mae | | | 21 | | | | 0.0 | % | | | 106 | | | | 0.0 | % |
| Total Portfolio | | $ | 217,841 | | | | 100.0 | % | | $ | 212,424 | | | | 100.0 | % |
| | | December 31, 2019 | | | December 31, 2018 | |
| Weighted Average Pass-through Purchase Price | | $ | 107.12 | | | $ | 106.81 | |
| Weighted Average Structured Purchase Price | | $ | 6.39 | | | $ | 6.39 | |
| Weighted Average Pass-through Current Price | | $ | 108.77 | | | $ | 103.87 | |
| Weighted Average Structured Current Price | | $ | 6.91 | | | $ | 8.67 | |
Effective Duration (1) | | | 3.196 | | | | 3.935 | |
(1) | Effective duration is the approximate percentage change in price for a 100 basis pointbp change in rates. An effective duration of 3.8323.196 indicates that an interest rate increase of 1.0% would be expected to cause a 3.832%3.196% decrease in the value of the MBS in our investment portfolio at December 31, 2017.2019. An effective duration of 4.7693.935 indicates that an interest rate increase of 1.0% would be expected to cause a 4.769%3.935% decrease in the value of the MBS in our investment portfolio at December 31, 2016.2018. These figures include the structured securities in the portfolio but do include the effect of our funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. |
The following table presents a summary of our portfolio assets acquired during the years ended December 31, 20172019 and 2016.2018.
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2019 | | 2018 | |
| | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | |
| PT MBS | | $ | 95,585 | | | $ | 107.37 | | | | 2.74 | % | | $ | 133,100 | | | $ | 110.31 | | | | 2.42 | % | | $ | 65,781 | | | $ | 108.77 | | | 2.73 | % | | $ | 93,381 | | | $ | 104.67 | | | 3.67 | % |
| Structured MBS | | | - | | | | - | | | | - | | | | 2,993 | | | | 11.43 | | | | 5.15 | % | | | - | | | | - | | | | - | | | | 1,136 | | | | 22.73 | | | | 7.43 | % |
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT MBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages, and loan payoffs in connection with home sales.sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolio will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IO'sIO’s may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIO'sIIO’s similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) cause their price movements - and model duration - to be affected by changes in both prepayments and one month LIBOR - both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying our MBS can alter the timing of the cash flows received by us. As a result, we gauge the interest rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration and effective duration using various third party models or obtain these quotes from third parties. However, empirical results and various third-party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of December 31, 2017,2019, assuming rates instantaneously fall 100 basis points ("bps"),bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency MBS'MBS’ effective duration to movements in interest rates.
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair | | | $ Change in Fair Value | | | % Change in Fair Value | | | Fair | | | $ Change in Fair Value | | | % Change in Fair Value | |
| MBS Portfolio | | Value | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | | | Value | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
| Fixed Rate MBS | | $ | 207,179 | | | $ | 5,989 | | | $ | (10,427 | ) | | $ | (22,982 | ) | | | 2.89 | % | | | (5.03 | )% | | | (11.09 | )% | | $ | 216,230 | | | $ | 5,850 | | | $ | (8,723 | ) | | $ | (19,500 | ) | | 2.71 | % | | (4.03 | )% | | (9.02 | )% |
| Interest-Only MBS | | | 1,476 | | | | (619 | ) | | | 358 | | | | 617 | | | | (41.90 | )% | | | 24.27 | % | | | 41.75 | % | | 1,025 | | | (274 | ) | | 309 | | | 526 | | | (26.80 | )% | | 30.12 | % | | 51.37 | % |
| Inverse Interest-Only MBS | | | 1,037 | | | | (132 | ) | | | (84 | ) | | | (280 | ) | | | (12.76 | )% | | | (8.12 | )% | | | (27.03 | )% | | | 586 | | | | (34 | ) | | | (11 | ) | | | (91 | ) | | | (5.83 | )% | | | (1.82 | )% | | | (15.49 | )% |
| Total MBS Portfolio | | $ | 209,692 | | | $ | 5,238 | | | $ | (10,153 | ) | | $ | (22,645 | ) | | | 2.50 | % | | | (4.84 | )% | | | (10.80 | )% | | $ | 217,841 | | | $ | 5,542 | | | $ | (8,425 | ) | | $ | (19,065 | ) | | | 2.54 | % | | | (3.87 | )% | | | (8.75 | )% |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Notional | | | $ Change in Fair Value | | | % Change in Fair Value | | | Notional | | | $ Change in Fair Value | | | % Change in Fair Value | |
| | | Amount(1) | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | | | Amount(1) | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
| Eurodollar Futures Contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase Agreement Hedges | | $ | 960,000 | | | $ | (1,343 | ) | | $ | 2,400 | | | $ | 4,800 | | | | (0.57 | )% | | | 1.02 | % | | | 2.05 | % | | 100,000 | | | $ | (2,000 | ) | | $ | 2,000 | | | $ | 4,000 | | | (1.02 | )% | | 1.02 | % | | 2.03 | % |
| Junior Subordinated Debt Hedges | | | 416,000 | | | | (582 | ) | | | 1,040 | | | | 2,080 | | | | (0.57 | )% | | | 1.02 | % | | | 2.05 | % | | 19,500 | | | (195 | ) | | 195 | | | 390 | | | (1.02 | )% | | 1.02 | % | | 2.03 | % |
| T-Note Futures Contracts | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase Agreement Hedges | | | 20,000 | | | (1,353 | ) | | 975 | | | 2,071 | | | (1.02 | )% | | 1.02 | % | | 2.03 | % |
| TBA Contracts | | | | 100,000 | | | | (1,150 | ) | | | 2,999 | | | | 8,155 | | | | 1.10 | % | | | (2.88 | )% | | | (7.83 | )% |
| | | $ | 1,376,000 | | | $ | (1,925 | ) | | $ | 3,440 | | | $ | 6,880 | | | | (0.57 | )% | | | 1.02 | % | | | 2.05 | % | | $ | 239,500 | | | $ | (4,698 | ) | | $ | 6,169 | | | $ | 14,616 | | | | (0.47 | )% | | | 0.62 | % | | | 1.46 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Totals | | | | | | $ | 3,313 | | | $ | (6,713 | ) | | $ | (15,765 | ) | | | | | | | | | | | | | | | | | | $ | 844 | | | $ | (2,256 | ) | | $ | (4,449 | ) | | | | | | | | | | | | |
(1) | Represents the total cumulativeaverage contract/notional amount of Eurodollar futures contracts. |
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to the our stockholders.
Repurchase Agreements
As of December 31, 2017,2019, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with fivesix of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company. These borrowings are secured by our MBS and cash.
As of December 31, 2017,2019, we had obligations outstanding under the repurchase agreements of approximately $200.2$210.0 million with a net weighted average borrowing cost of 1.52%1.98%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 163 to 7243 days, with a weighted average maturity of 3824 days. Securing the repurchase agreement obligation as of December 31, 20172019 are MBS with an estimated fair value, including accrued interest, of $210.0$218.5 million and a weighted average maturity of 321338 months, and cash posted as collateral of $2,208,000.$3.8 million. Through March 9, 2018,27, 2020, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 20172019 with maturities through April 2, 2018.
The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 20172019 and 2016.2018.
| ($ in thousands) | |
| | | | | | | | | Difference Between Ending | |
| | | Ending Balance | | | Average Balance | | | Repurchase Agreements and | |
| | | of Repurchase | | | of Repurchase | | | Average Repurchase Agreements | |
| Three Months Ended | | Agreements | | | Agreements | | | Amount | | | Percent | |
| December 31, 2017 | | $ | 200,183 | | | $ | 193,778 | | | $ | 6,405 | | | | 3.31 | % |
| September 30, 2017 | | | 187,374 | | | | 161,003 | | | | 26,371 | | | | 16.38 | %(1) |
| June 30, 2017 | | | 134,633 | | | | 126,341 | | | | 8,292 | | | | 6.56 | % |
| March 31, 2017 | | | 118,049 | | | | 119,938 | | | | (1,889 | ) | | | (1.57 | )% |
| December 31, 2016 | | | 121,828 | | | | 123,909 | | | | (2,081 | ) | | | (1.68 | )% |
| September 30, 2016 | | | 125,991 | | | | 114,858 | | | | 11,133 | | | | 9.69 | % |
| June 30, 2016 | | | 103,725 | | | | 103,259 | | | | 466 | | | | 0.45 | % |
| March 31, 2016 | | | 102,794 | | | | 90,014 | | | | 12,780 | | | | 14.20 | %(2) |
(1) | The higher ending balance relative to the average balance during the quarter ended September 30, 2017 reflects the growth of the portfolio. During the quarter ended September 30, 2017, the Company's investment in PT MBS increased $56.1 million. |
(2) | The higher ending balance relative to the average balance during the quarter ended March 31, 2016 reflects the repositioning of the portfolio. During the quarter ended March 31, 2016, the Company's investment in PT MBS increased $26.2 million. |
| ($ in thousands) | |
| | | Ending | | | Maximum | | | Average | | | Difference Between Ending | |
| | | Balance | | | Balance | | | Balance | | | Repurchase Agreements and | |
| | | of Repurchase | | | of Repurchase | | | of Repurchase | | | Average Repurchase Agreements | |
| Three Months Ended | | Agreements | | | Agreements | | | Agreements | | | Amount | | | Percent | |
| December 31, 2019 | | $ | 209,954 | | | $ | 239,243 | | | $ | 182,215 | | | $ | 27,739 | | | | 15.22 | % |
| September 30, 2019 | | | 154,475 | | | | 200,552 | | | | 177,566 | | | | (23,091 | ) | | | (13.00 | )% |
| June 30, 2019 | | | 200,656 | | | | 200,776 | | | | 199,901 | | | | 755 | | | | 0.38 | % |
| March 31, 2019 | | | 199,146 | | | | 200,113 | | | | 199,771 | | | | (625 | ) | | | (0.31 | )% |
| December 31, 2018 | | | 200,396 | | | | 203,746 | | | | 202,069 | | | | (1,673 | ) | | | (0.83 | )% |
| September 30, 2018 | | | 203,742 | | | | 204,988 | | | | 189,582 | | | | 14,160 | | | | 7.47 | % |
| June 30, 2018 | | | 175,422 | | | | 193,753 | | | | 184,621 | | | | (9,199 | ) | | | (4.98 | )% |
| March 31, 2018 | | | 193,820 | | | | 204,998 | | | | 197,001 | | | | (3,181 | ) | | | (1.61 | )% |
Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead and fulfill margin calls. Our principalprimary immediate sources of liquidity include cash balances, unencumbered assets, the availability to borrow under repurchase agreements, and fees and dividends received from Orchid. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our balance sheetinvestments also generatesgenerate liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio, and from cash flows received from the retained interests and the collection of servicing advances.portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing MBS portfolio, (b) the repayments on borrowings, (c) the payment of overhead and operating expenses, and (d) the payment of other accrued obligations.
Our strategy for hedging our funding costsstrategy typically involves taking short positions in Eurodollar futures, T-Note futures, swaptionsTBAs or other instruments. Since inception we have primarily used short positions in Eurodollar futures. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repurchase transaction basis.
As discussed above, we invest a portion of our capital in structured MBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured MBS strategy has been a core element of the Company'sCompany’s overall investment strategy since 2008. However, we have and may continue to pledge a portion of our structured MBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.
In future periods we expect to continue to finance our activities through repurchase agreements. As of December 31, 2017,2019, we had cash and cash equivalents of $6.1$8.1 million. We generated cash flows of $18.3$30.6 million from principal and interest payments on our MBS portfolio and $1.1 million from retained interests and had average repurchase agreements outstanding of $150.3$189.9 million during the year ended December 31, 2017.2019. In addition, during the year ended December 31, 2017,2019, we received approximately $7.3$6.9 million in management fees and expense reimbursements as manager of Orchid and approximately $2.5$1.5 million in dividends from our investment in Orchid common shares.stock.
In July 2019, we completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of our Class A common stock at a price of $2.00 per share. In order to fund the share-repurchase we sold MBS assets with an approximate fair market at time of sale, including accrued interest, of $44.0 million.
In order to generate additional cash to be invested in our MBS portfolio, on October 30, 2019, we obtained a $680,000 loan secured by a mortgage on the Company’s office property. The loan is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrued at 4.89%, through October 30, 2024. Thereafter, interest accrued based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of five years, plus 3.25%. Net loan proceeds were approximately $651,000. In addition. we are also seeking to sell real property that is not used in the Company’s business. As of December 31, 2019, that property had a carrying value of $450,000. When that property is sold, we intend to invest the net sale proceeds in our MBS portfolio.
The table below summarizes the effect that certain future contractual obligations existing as of December 31, 20172019 will have on our liquidity and cash flows.
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Obligations Maturing | | | Obligations Maturing | |
| | | Within | | | One to Three | | | Three to Five | | | More than Five | | | Total | | | Within | | | One to Three | | | Three to Five | | | More than Five | | | Total | |
| | | Year | | | Years | | | Years | | | Years | | | Total | | | Year | | | Years | | | Years | | | Years | | | Total | |
| Repurchase agreements | | $ | 200,183 | | | $ | - | | | $ | - | | | $ | - | | | $ | 200,183 | | | $ | 209,954 | | | $ | - | | | $ | - | | | $ | - | | | $ | 209,954 | |
Interest expense on repurchase agreements(1) | | | 603 | | | | - | | | | - | | | | - | | | | 603 | | | 847 | | | - | | | - | | | - | | | 847 | |
Junior subordinated notes(2) | | | - | | | | - | | | | - | | | | 26,000 | | | | 26,000 | | | - | | | - | | | - | | | 26,000 | | | 26,000 | |
Interest expense on junior subordinated notes(1) | | | 1,404 | | | | 2,686 | | | | 2,683 | | | | 17,390 | | | | 24,163 | | | 1,488 | | | 2,844 | | | 2,848 | | | 15,585 | | | 22,765 | |
| Settlement obligation | | | 250 | | | | 250 | | | | - | | | | - | | | | 500 | | |
Principal and interest on mortgage loan(1) | | | | 54 | | | | 107 | | | | 107 | | | | 803 | | | | 1,071 | |
| Totals | | $ | 202,440 | | | $ | 2,936 | | | $ | 2,683 | | | $ | 43,390 | | | $ | 251,449 | | | $ | 212,343 | | | $ | 2,951 | | | $ | 2,955 | | | $ | 42,388 | | | $ | 260,637 | |
(1) | Interest expense on repurchase agreements, and junior subordinated notes and mortgage loan are based on current interest rates as of December 31, 20172019 and the remaining term of liabilities existing at that date. |
(2) | The Company holds a common equity interest in Bimini Capital Trust II. The amount presented represents the net cash outlay of the Company. |
Outlook
Orchid Island Capital Inc.
To the extent Orchid is able to increase its capital base over time, we will benefit via increased management fees. In addition, Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid'sOrchid’s pro rata share of overhead as defined in the management agreement. As a stockholder of Orchid, we will also continue to share in distributions, if any, paid by Orchid to its stockholders. Our operating results are also impacted by changes in the market value of our holdings of Orchid common shares, although these market value changes do not impact our cash flows from Orchid.
The independent Board of Directors of Orchid has the ability to terminate the management agreement and thus end our ability to collect management fees and share overhead costs. Should Orchid terminate the management agreement without cause, it will be obligated to pay us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the current automatic renewal term.
Interest Rates and the MBS Market
The fourth quarter of 2017 marked2019 was a reversalperiod of recovery from the third quarter’s turbulence and market sell-off. While August and early September witnessed the depths of the trendsell-off and heightened risk aversion, the turn-around was almost as sudden and dramatic. By the end of 2019, equity markets in placethe U.S. and around the globe were closing at record highs. The S&P 500 increased 31.5% for the first nine months ofyear ended December 31, 2019. There were a few key events that led to the year. The shifts that occurred were numerous. Perhaps the most significant from a long-term perspectiverecovery. First and foremost was the surprise successPhase One trade deal reached by the Trump administration hadand China. The tentative agreement was reached in passing a substantive tax package – The Tax CutsOctober 2019 and Jobs Actsigned in mid-January of 2017 (the "Act"). The significance2020. This agreement was critical in that it ended the escalation in trade tensions between the two countries which were at the heart of the Actmarket turmoil. Escalation of trade tensions between the two countries in early August 2019 triggered the violent sell-off. The trade war has materially impacted global growth, global growth prospects and manufacturing activity in the U.S. Fear was two-fold. Onmounting that the one hand, its passage endedimpact of trade tensions would spread to other sectors of the Trump administration's stringeconomy as well. While there remain substantial tariffs in place and the risk of legislative failures,a re-escalation of trade tensions remain, the truce calmed markets and allowed risk assets to recover. Other developments helped as well. The prospect of a “hard” Brexit, whereby the United Kingdom (“UK”) would leave the European Union (“EU”) without any kind of trade agreement in place, or leave the EU at all, were reduced materially when Prime Minister Boris Johnson won an election on December 12, 2019. As the other, we believeelection was viewed as a de facto second referendum on Bresit, by winning the legislation should be stimulativeelection, and soundly so, the path was cleared for the economy. PassageUK to leave the EU on January 31, 2020. The UK and the EU gave themselves until the end of 2020 to reach a trade agreement. This removed, at least temporarily, another source of market fear. Finally, economic data, especially various measures of manufacturing activity across the globe, appeared to be bottoming out, generating hope that the worst of the Act coincidedglobal slowdown was behind us. Risk sentiment was aided further by an additional 25 bps cut in the Fed Funds rate at the October FOMC meeting.
The recovery in risk sentiment that occurred over the course of the fourth quarter of 2019 brought with continuing strong economic datait increases in interest rates across longer dated U.S. Treasuries, breakeven inflation levels in U.S. Treasury Inflation-Protected Securities (“TIPS”) and, contributed to the "risk on" sentimentterm premium in U.S. Treasuries. The amount of sovereign and other forms of debt trading at negative yields decreased substantially. All of these movements are consistent with an abatement of fear in the markets. The resultfinal element of fear to be addressed in the market was a continuation of the ever-increasingturmoil in the over-night funding (or repo) markets that emerged during September 2019. The Fed took meaningful steps to both inject liquidity into the markets, but also assure the market that it would do so as long as such funding pressures remained.
The positive developments in global markets were also seen in the Agency RMBS markets. When interest rates approached record low levels in early September 2019, prepayment fears increased substantially and Agency RMBS traded at progressively wider spreads to comparable duration U.S. Treasuries and interest rate swaps. On October 22, 2019, the equity markets, particularlycurrent coupon, 30-year, fixed rate Fannie Mae RMBS index reached a spread of 1.0247% above the domestic equity markets, as well as other risk assets10-year U.S. Treasury, the widest such as commodities, investment grade and sub-investment grade debt.
Some of the clouds on the economic horizon that existed atlevel since early 2012. By the end of 2019, this spread was less than 80 bps. The spread tightening was evident in returns for the third quarter of 2017 did not prove to be troubling. The three hurricanes that made landfall inAgency RMBS market for the U.S. in August and September 2017 did not impact economic growth in a material way, and President Trump's selection of the new chairman of the Federal Reserve, Jerome Powell, was perceived as a "status quo" selection by the markets, and not a shift in the hawkish direction.
A second significant event that impacted the markets duringquarter. For the fourth quarter of 2017 actually occurred late in2019, the third quarterAgency RMBS market generated a return of 2017. At the conclusion of the September 2017 meeting of the FOMC, chair Janet Yellen stated that the Fed viewed recent soft inflation data as owing to transitory factors0.7% and that they remained confident that inflation would trend towards their 2% target level over the medium term. This acknowledgement by the Fed that they would look past soft inflation data in the near term, and continue to remove accommodation, forced the market to revisit expectations for additional0.8% above comparable duration interest rate hikes.swaps. For the year, the Agency RMBS sector generated a return of 6.5% and an excess return of 0.2%. While there was a substantial gap inthese returns were impressive, other fixed income sectors did far better, as domestic high-yield debt securities generated returns of 2.6% for the markets pricingquarter and 14.4% for additional Fed rate hikesthe year and domestic investment grade securities generated returns of 1.1% for the extent of hikes implied in the Fed's "dot plot" prior to the September 2017 meeting, this gap closed markedly by the end ofquarter and 14.2% for the year. Fed public comments since the September 2017 meeting, coupled with continued strong data, have reinforced the market's thinking. The Fed's "dot plot" implies three rate hikes in 2018 and current market pricing is over 2.5 hikes, a meaningful closingReturns for various types of the gap that existed in August and early September 2017 when the 10-year US T-Note flirted with breaking below 2%. The yield on the 10-year U.S. T-Note reached 2.406% by December 29, 2017 and approached 3.0% in February 2018.
During the fourth quarter of 2017, inflation data was mixed and year over year figures remained below the Fed's 2% target. The combination of benign inflation readings and a Fed that seems intent on removing accommodation, even more so as strong economic data continuesnon-Agency RMBS were comparable to be released, has caused the yield curve to flatten. This trend has continued into 2018. The market is convinced the Fed will be vigilant in staying ahead of inflation, and therefore longer dated treasuries, that are most sensitive to inflation, have increased in yield far lessslightly better than short term treasuries that are more sensitive to Fed rate increases. The fact the Fed is ahead of their central bank peers at removing accommodation has allowed yield spreads between U.S. rates and sovereign debt rates across Europe and Japan to remain large, helping to keep additional downward pressure on longer term rates in the U.S.Agency RMBS peers.
The mortgage market was impacted by these events in a positive way. The strong "risk on" toneIn keeping with the volatile nature of
2019 and the last several years, the markets
continued to drive spreads availableagain encountered a significant risk-off movement not long after the new year started when a coronavirus outbreak occurred in China. While equity markets in the
various investment grade and sub-investment grade markets tighter. This enabled spreads available in the Agency MBS market to appear relatively attractive and continue to tightenU.S. were not materially impacted initially, over the course of the
quarter. In early January 2018,current quarter the outbreak has evolved into a global pandemic and brought about the quickest bear market in the history of U.S. financial markets. Market turmoil has at least matched what was experienced during the great recession of 2008 and is far from over. Economic activity across the globe has quickly ground to a halt as various efforts to halt the spread of the
30-year, fixed rate conventional mortgage tovirus are put in place. Most if not all markets across the
10-year U.S. T-Note hit its tightest level since early 2013 in early January 2018. This spread has since widened as longer-term rates continue to inch higher, causing extension fears to enter the market – the fear that mortgage cash flows will extend materially as prepayment activity is driven lower by higher prevailing mortgage rates available to borrowers. The flattening of the yield curve tends to hurt fixed income markets generally as spreads on these assets relative to funding levelsglobe are
compressed. However, in the case ofexperiencing severe dislocations, including the Agency MBS
market,market. An intense price war has also erupted in the global oil market. The Federal Reserve, as with all of the world’s central banks and most governments, have taken actions to stem the tide of the economic fallout and threat to the health of their citizens.
As a result, Royal Palm has experienced significant margin call activity from its repurchase agreement counterparties. As of March 26, 2020, we believe this effect is off-set somewhat by the seasonal slow-downhave met all margin calls, but we have disposed of approximately $170.8 million of MBS to generate cash to meet these margin calls and generate additional cash reserves. These sales resulted in prepayment activity that occurs around year end and intorealized losses of approximately $5.7 million which will be charged to operations in the first quarter.quarter of 2020. Going forward, margin call activity may continue to be elevated and we may dispose of additional assets and suffer losses on the disposition of those assets. We also may not have access to repurchase agreement funding to the extent we have in the past. To the extent that the market turmoil adversely affects Orchid Island Capital, Inc., then the amount of management fees we receive through our advisory services segment and potentially the dividends we receive on Orchid stock may be adversely impacted. Also, because we own shares of Orchid common stock, any decline in the market price of that stock would impact the book value of Bimini. As of March 26, 2020, the value of the Company’s Orchid stock investments has decreased $3.3 million from December 31, 2019. In light of these developments, we will re-evaluate our deferred tax asset and corresponding valuation allowance at the end of the first quarter of 2020 and going forward.
Recent Regulatory Developments
In September 2017, the FOMC announced that it would implement a balance between slower prepayment activity,sheet normalization policy by gradually decreasing the Fed’s reinvestment of payments received on U.S. Treasuries and thus mortgage origination levels, and reduced purchasesAgency RMBS. More specifically, principal payments received by the Fed will be critical for Agency MBS performance. The shapereinvested only to the extent they exceed gradually rising caps until the FOMC determines that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively. In October 2017, the FOMC commenced this balance sheet normalization program. At the conclusion of the yieldMarch 2019 FOMC meeting, the Fed said that the FOMC intends to slow the pace of the decline in its holdings of U.S. Treasuries and Agency RMBS over coming quarters provided that the economy and money market conditions evolve about as expected. The Fed specified that the FOMC intends to reduce the run-off of its holdings of U.S. Treasuries by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019, and continue to allow its holdings of Agency RMBS to decline, consistent with the aim of holding primarily U.S. Treasuries in the long run. In October 2019, the Fed began reinvesting principal payments from Agency RMBS or agency debt in U.S. Treasuries, subject to a maximum of $20 billion per month, with any principal payments in excess of that maximum reinvested in Agency RMBS.
On October 11, 2019, the Fed commenced purchases of up to $60 billion of treasury bills per month through the second quarter of 2020. The Fed conducted overnight repo operations of $75 billion, initially, and 2-week term repo operations of at least $35 billion twice a week through February 2020. Their goal is to maintain reserve balances over time at or above the levels that prevailed in early September 2019.With the outbreak of the corona virus mentioned above the Fed has announced additional measures. Treasury purchases will no longer be exclusively bill purchases but will spread across the curve to match the maturity composition of Treasury securities outstanding. Purchases will include zero coupon bills, nominal coupon securities – both fixed and floating – as well as inflation protected securities. The Fed also announced additional repo operations – both overnight and term – as well as increases in existing operations. These changes will remain in effect into the second quarter of 2020 and will be importantadjusted as needed.
In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new SOFR, a rate based on U.S. repo trading. The new benchmark rate will be based on overnight Treasury General Collateral repo rates. The rate-setting process will be managed and published by the Fed and the Treasury’s Office of Financial Research. Many banks believe that it may take four to five years to complete the transition to SOFR, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will likely become the new benchmark for hedges and a range of interest rate investments.
In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the relative performancedevelopment of higher versus lower coupon mortgages,a policy for comprehensive housing finance reform soon. At this time, however, no decisions have been made on any reform plan.
On September 30, 2019, FHFA Director Mark Calabria and U.S. Treasury Secretary Steven Mnuchin announced that they have agreed to allow Fannie Mae and Freddie Mac to retain additional capital. The agreements amend the PSPAs both GSEs entered into with the U.S. Treasury as a flatter yield curve tendscondition for receiving federal assistance in 2008. Since late 2012, the PSPAs have required both Fannie Mae and Freddie Mac to cause lower coupon mortgagessend the net revenue they generate each quarter to out-perform higher coupon mortgages - since higher coupon mortgages are more sensitivethe U.S. Treasury Department as repayment for the assistance they received. This prevented the GSEs from building capital, which would be necessary to prepayment rates and a flatter yield curve usually does not slow prepayment behavior materially.exit conservatorship.
Recent Regulatory DevelopmentsUnder the new PSPAs, Fannie Mae will be able to keep any net revenue it earns until it has accumulated $25 billion in capital, and Freddie Mac will be able to accumulate $20 billion in capital. To compensate the U.S. Treasury for the dividends it would have received absent these modifications, the U.S. Treasury’s liquidation preferences for its Fannie Mae and Freddie Mac preferred stock will gradually increase by the amount of the additional capital reserves.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve. Although the Trump administration has made statements of its intentions to reform housing finance and tax policy, many of these potential policy changes will require congressional action. In addition, the Fed has made statements regarding additional increases to the Federal Funds Rate in 20182020 and beyond.
At its September 2017 meeting, the FOMC agreed to start the program for gradually reducing the Fed's holdings of Agency MBS and U.S. Treasuries, starting in October 2017, as part of its overall approach to monetary policy normalization, by reducing its reinvestment of Agency MBS and U.S. Treasuries held in the System Open Market Account.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
Effects on our Assets
A change in or elimination of the guarantee structure of Agency MBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency MBS may cause us to change our investment strategy to focus on non-Agency MBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency MBS in a number of ways. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency MBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.
If prepayment levels increase, the value of our Agency MBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency MBS, which would shorten the period during which wean investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, weprepayment proceeds may not be able to reinvest prepayment proceedsbe reinvested in similar-yielding assets. Agency MBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency MBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency MBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increase,increases, coupled with higher discount rates, the value of Agency MBS declines. Some of the instruments the Company uses to hedge our Agency MBS assets, such as EurodollarEuro Dollar futures,, swaps, interest rate futures and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency MBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. ForIt is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increase,increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency MBS.
As the economy has rebounded from the financial crisis, the Fed has taken steps to remove the considerable accommodation that was employed to combat the crisis. At the conclusion of its meeting in September 2017, the Fed announced it would implement caps on the amount of Agency MBS assets it would allow to run off- or not be re-invested – starting in October 2017. Previously the Fed re-invested all of the principal repayments it received each month on the Agency MBS assets it had acquired during their quantitative easing programs. By capping the amount they would allow to run off each month, the Fed was effectively limiting the amount it would re-invest. Pursuant to the September 2017 announcement, the cap would eventually reach $20 billion per month by the end of 2018. At the time of the Fed's announcement, its monthly re-investments were approximately $20 billion per month as well, so this implied the Fed would stop, or nearly stop, re-investing its monthly pay-downs by the end of 2018. The purchases each month by the Fed have been a significant source of demand in the Agency MBS market and as it is reduced slowly over the course of 2018 and essentially eliminated beyond 2018, the removal of this source of demand could negatively impact Agency MBS prices. The extent to which this negatively impacts the Agency MBS market will be a function of the level of supply each month – as the supply/demand balance affects the price of any asset – and whether or not another source of demand emerges to replace the Fed.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency MBS with shorter durations, such as short-term fixed and floating rate CMOs. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT MBS, particularly PT MBS backed by fixed-rate mortgages.
If Fannie Mae and Freddie Mac were to modify or end their repurchase programs, our investment portfolio could be negatively impacted.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by market levels of both the Federal Funds Rate and LIBOR. An increase in the Federal Funds Rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency MBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which effectivelyeconomically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The market direction changed appreciably during the fourth quarter of 2017. As we entered 2017,2019 was a period of recovery across financial markets and for global growth prospects. While August and early September witnessed the depths of a sudden and severe market sell-off and heightened risk assetsaversion, the turn-around was also sudden and dramatic. By the end of 2019, equity markets in the U.S. and around the globe were performing very well asclosing at record highs. The S&P 500 increased 31.5% for the year ended December 31, 2019. There were a few key events that led to the recovery. First and foremost was the Phase One trade deal reached by the Trump administration took officeand China. The tentative agreement was reached in lateOctober 2019 and signed in mid-January of 2020. This agreement was critical in that it ended the escalation in trade tensions between the two countries which were at the heart of the market turmoil. Escalation of trade tensions between the two countries in early August 2019 triggered the violent sell-off referenced above. While there remain substantial tariffs in place and the risk of a re-escalation of trade tensions remain, the truce calmed markets and allowed risk assets to recover. Other developments helped as well. The prospect of a “hard” Brexit was reduced materially when Prime Minister Boris Johnson won an election on December 12, 2019. By winning the election, and soundly so, the path was cleared for the UK to leave the EU on January and31, 2020. Economic data, especially various measures of manufacturing activity across the globe, appeared to be very pro-business. The markets looked forward to a roll back of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbishbottoming out, generating hope that the nation's aging roads, highways, bridges and airports. While the administration made bold promises, there was little delivered. Market optimism was quickly replaced with pessimism. Geopolitical events surfaced in April, specifically the Korean peninsula. These events kept the market on edge and induced sporadic flight to quality rallies as headlines hit the market from time to time. Starting in March, incoming inflation data was consistently below expectations. In the caseworst of the core Consumer Price Index ("CPI") measure, the year over year figure moved from 2.3% in January 2017 to 1.7%global slowdown was behind us. Finally, risk sentiment was aided further by May and has not moved back above 1.8% since. The Fed remains convinced these readings are being driven by temporary or transitory phenomenon, and that inflation will reverse and head back towards their 2% target over the medium term. This was a significant development and it marked a clear changean additional 25 bps cut in the bias of the Fed from a dovish to a more hawkish, or aggressive stance. Over the course of the fourth quarter of 2017 and into early 2018, the market has grown to accept this outcome - as reflected in Fed Funds futures pricing.
Late inrate at the fourth quarter of 2017, the Trump administration had its first major legislative success when the Tax Cuts and Jobs Act of 2017 was passed. The legislation was viewed as very pro-growth and it added to the high-level of animal spirits and "risk on" tone in the markets. Risk markets performed very well into year end and incoming economic data was consistently strong. These developments drove the markets to price in a more aggressive Fed going forward. More importantly, the combination of benign inflation readings, coupled with hawkish Fed expectations, caused the yield curve to flatten significantly in 2017, to multi-year lows.
The Agency MBS market has performed well in this environment, resulting in low volatility and tight trading spreads across most comparable asset classes. In early January 2018, current coupon, 30-year fixed rate mortgages traded at their tightest spread to comparable duration treasuries since early 2013. Going forward, the balance between prepayment activity, and thus mortgage origination levels, and reduced purchases by the Fed, will be critical for Agency MBS performance. The shape of the yield curve will also be important for the relative performance of higher versus lower coupon mortgages, as a flatter yield curve tends to cause lower coupon mortgages to out-perform higher coupon mortgages, our core holding. On the other hand, if incoming inflation data were to exceed market expectations, not only would the Fed be very likely to carry out their professed intentions to raise rates three times in 2018 and more so in the years after, but this would also put upward pressure on longer-term rates and volatility, both negatively impacting Agency MBS performance.October FOMC meeting.
The positive developments in global markets were also seen in the Agency RMBS markets. When interest rates approached record low levels in early September 2019, prepayment fears increased substantially and Agency RMBS traded at progressively wider spreads to comparable duration U.S. Treasuries and interest rate swaps. On October 22, 2019, the current coupon, 30-year, fixed rate Fannie Mae RMBS index reached a spread of 1.0247% above the 10-year U.S. Treasury, the widest such level since early 2012. By the end of 2019 this spread was less than 80 bps. The spread tightening was evident in returns for the Agency RMBS market for the quarter. For the fourth quarter of 2019, the Agency RMBS market generated a return of 0.7% and positive 0.8% above comparable duration interest rate swaps. For the year, the Agency RMBS sector generated a return of 6.5% and an excess return of 0.2%. Returns for various types of non-Agency RMBS were comparable to slightly better than their Agency RMBS peers.
The market experienced a significant risk-off movement not long after the new year started when a coronavirus outbreak occurred in China. Over the course of the first quarter of 2020 the outbreak in China evolved into a global pandemic. The speed at which the virus spread forced governments across the globe to take ever more severe steps to slow and contain its spread. These steps are having a severe economic impact, as economic activity in some instances essentially ceases. Financial markets across the globe are experiencing severe dislocations at least equal to what was experienced during the global financial crisis in 2008. On March 12, 2020 equity markets in the U.S. entered a bear market in the fastest such move in the history of U.S. financial markets. The Agency MBS market is included in the list of markets suffering extreme duress.
Critical Accounting PoliciesEstimates
Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our consolidated financial statements. TheseOur consolidated financial statements are prepared in accordance with GAAP. The Company's significant accounting policies are described in Note 1 to the Company's accompanying consolidated financial statements.
GAAP requires the Company'sour management to make some complex and subjective decisions and assessments. The Company'sOur most critical accounting policies involve decisions and assessments which could significantly affect reported assets, and liabilities, as well as reported revenues and expenses. The Company believes that all of the decisions and assessments upon whichManagement has identified its financial statements are based were reasonable at the time made based upon information available to it at that time.
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini Capital, its wholly-owned subsidiaries, Bimini Advisors and Royal Palm. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.most critical accounting estimates:
Mortgage-Backed Securities
Our investments in MBS are accounted for under theat fair value option.value. We acquire our MBS for the purpose of generating long-term returns, and not for the short-term investment of idle capital. Changes in the fair value of securities accounted for under the fair value option are reflected as part of our net income or loss in our consolidated statement of operations, as opposed to a component of other comprehensive income in our consolidated statement of stockholder's equity if they were instead reclassified as available-for-sale securities.operations. We elected to account for all of our MBS under theat fair value option in order to reflect changes in the fair value of our MBS in our consolidated statement of operations, which we believe more appropriately reflects the results of our operations for a particular reporting period. GAAP requires the use of a three-level valuation hierarchy to disclose the classification of fair value measurements used for determining the fair value of our MBS. These levels include:
· | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), |
· | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and |
· | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company- specific data. These unobservable assumptions reflect the Company's own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
Our MBS are valued using Level 2 valuations, and such valuations currently are determined based on independent pricing sources and/or third party broker quotes when available. Because the price estimates may vary, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our positions in MBS determined by either an independent third-party or do so internally. In managing our portfolio, the Company employs the following four-step process at each valuation date to determine the fair value of our MBS.
· | First, the Company obtains fair values from subscription-based independent pricing services. These prices are used by both the Company as well as our repurchase agreement counterparty on a daily basis to establish margin requirements for our borrowings. |
First, the Company obtains fair values from subscription-based independent pricing services.
· | Second, the Company requests non-binding quotes from one to four broker-dealers for certain MBS in order to validate the values obtained by the pricing service. The Company requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested. |
Second, the Company requests non-binding quotes from one to four broker-dealers for certain MBS in order to validate the values obtained by the pricing service. The Company requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested.
· | Third, the Company reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets. |
· | Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with management's market observations, the Company makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent management believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, the Company may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency MBS backed by fixed-rate mortgages, the Company generally uses the quoted or observed market price. For assets such as Agency MBS backed by ARMs or structured Agency MBS, the Company may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained. |
Management believes its
Finally, if the data from the pricing methodologyservices and broker-dealers is not homogenous or if the data obtained is inconsistent with management’s market observations, the Company makes a judgment to bedetermine which price appears the most consistent with observed prices from similar assets and selects that price. To the definitionextent management believes that none of fair value described in FASB ASC 820, Fair Value Measurements.
Investment in Orchid Island Capital, Inc. Common Stock
The Company has elected the fair value optionprices are consistent with observed prices for its investment in Orchid common shares. The change insimilar assets, which is typically the fair value of this investment and dividends received on this investment are reflected in other income in the consolidated statements of operations. We estimate the fair valuecase for only an immaterial portion of our investment in Orchid onportfolio each quarter, the Company may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency MBS backed by fixed-rate mortgages, the Company generally uses the quoted or observed market approach using "Level 1" inputsprice. For assets such as Agency MBS backed by ARMs or structured Agency MBS, the Company may determine the price based on the quoted marketyield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price of Orchid's common stock on the NYSE. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management's view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of the management agreement Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf.
Retained Interests in Securitizations
Retained interests in the subordinated tranches of securities created in securitization transactions were initially recorded at their fair value when issued by Royal Palm. Subsequent adjustments to fair value are reflected in earnings. Quoted market prices for these assets are generally not available, so the Company estimates fair value based on the present value of expected future cash flows using management's best estimates of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.
Derivative Financial Instruments
We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and we may continue to do so in the future. The principal instruments that we have used to date are T-Note and Eurodollar futures contracts and interest rate swaptions, but we may enter into other derivatives in the future.
We have elected not to treat any of our derivative financial instruments as hedges in order to align the accounting treatment of our derivative instruments with the treatment of our portfolio assets under the fair value option election. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be carried at fair value. Changes in fair value are recorded in earnings for each period.
Repurchase Agreements
We finance the acquisition of a significant portion of our MBS through repurchase transactions under master repurchase agreements. Repurchase transactions are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, which due to their short term nature approximate fair value.
Income Recognition
All of our MBS are either PT MBS or structured MBS, including CMOs, IOs, IIOs or POs. Income on PT MBS, POs and CMOs that contain principal balances is based on the stated interest rate of the security. As a result of accounting for our MBS under the fair value option, premium or discount present at the date of purchase is not amortized. For IOs, IIOs and CMOs that do not contain principal balances, income is accrued based on the carrying value and the effective yield. As cash is received it is first applied to accrued interest and then to reduce the carrying value of the security. At each reporting date, the effective yield is adjusted prospectively from the reporting period based on the new estimate of prepayments, current interest rates and current asset prices. The new effective yield is calculated based on the carrying value at the end of the previous reporting period, the new prepayment estimates and the contractual terms of the security. Changes in fair value of all of our MBS during the period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company'sCompany’s evaluation, it is more likely than not that they will not be realized. A majority of the Company'sCompany’s net deferred tax assets, which consist primarily of NOLs, are expected to be realized over an extended number of years. Management'sManagement’s conclusion is supported by the revenuetaxable income projections which include forecasts of management fees, Orchid dividends and net interest income, and the subsequent reinvestment of those amounts into the MBS portfolio over the extended period to carry forward NOLs.portfolio. However, a material change in those estimatesthe taxable income projections could lead management to reassess its valuation allowance conclusions.
The Company's U.S. federal income tax returns for years ended on or after December 31, 2014 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company.
The Company measures, recognizes and presents its uncertain tax positions in accordance with ASC Topic 740, Income Taxes. Under that guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.
Capital Expenditures
At December 31, 2017,2019, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At December 31, 2017,2019, we did not have any off-balance sheet arrangements.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements and Supplementary Data.
Index to Financial Statements
| | | Page | |
| | | | |
| Report of Independent Registered Public Accounting Firm | | | 6160 | |
| Consolidated Balance Sheets | | | 6261 | |
| Consolidated Statements of Operations | | | 6362 | |
| Consolidated Statements of Equity | | | 6463 | |
| Consolidated Statements of Cash Flows | | | 6564 | |
| Notes to Consolidated Financial Statements | | | 6665 | |
Report of Independent Registered Public Accounting Firm
ShareholdersStockholders and Board of Directors
Bimini Capital Management, Inc.
Vero Beach, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bimini Capital Management, Inc. (the "Company"“Company”) and subsidiaries as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, stockholders'stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the "consolidated“consolidated financial statements"statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the two years in the period ended December 31, 20172019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB"(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As more fully described in Note 19 to the financial statements, the Company has been negatively impacted by the outbreak of a novel coronavirus (COVID-19), which was declared a global pandemic by the World Health Organization in March 2020.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2008.
West Palm Beach, Florida
March 9, 201827, 2020
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED BALANCE SHEETS | |
| DECEMBER 31, 2019 and 2018 | |
| | | | | | | |
| | | 2019 | | | 2018 | |
| ASSETS: | | | | | | |
| Mortgage-backed securities, at fair value | | | | | | |
| Pledged to counterparties | | $ | 217,793,209 | | | $ | 212,349,874 | |
| Unpledged | | | 47,744 | | | | 74,318 | |
| Total mortgage-backed securities | | | 217,840,953 | | | | 212,424,192 | |
| Cash and cash equivalents | | | 8,070,067 | | | | 4,947,801 | |
| Restricted cash | | | 4,315,050 | | | | 1,292,687 | |
| Investment in Orchid Island Capital, Inc. common stock, at fair value | | | 8,892,211 | | | | 9,713,030 | |
| Accrued interest receivable | | | 750,875 | | | | 780,535 | |
| Property and equipment, net | | | 2,162,975 | | | | 3,298,067 | |
| Real property held for sale | | | 450,000 | | | | - | |
Deferred tax asset
| | | 33,288,536 | | | | 23,202,821 | |
| Other assets | | | 3,718,281 | | | | 3,740,543 | |
| Total Assets | | $ | 279,488,948 | | | $ | 259,399,676 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| LIABILITIES: | | | | | | | | |
| Repurchase agreements | | $ | 209,954,000 | | | $ | 200,396,000 | |
| Long-term debt | | | 27,481,121 | | | | 26,804,440 | |
| Accrued interest payable | | | 645,302 | | | | 678,262 | |
| Other liabilities | | | 1,431,534 | | | | 2,566,353 | |
| Total Liabilities | | | 239,511,957 | | | | 230,445,055 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares | | | | | | | | |
| designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; | | | | | | | | |
| no shares issued and outstanding as of December 31, 2019 and 2018 | | | - | | | | - | |
| Class A Common stock, $0.001 par value; 98,000,000 shares designated: 11,608,555 | | | | | | | | |
| shares issued and outstanding as of December 31, 2019 and 12,709,269 shares | | | | | | | | |
| issued and outstanding as of December 31, 2018 | | | 11,609 | | | | 12,709 | |
| Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
| issued and outstanding as of December 31, 2019 and 2018 | | | 32 | | | | 32 | |
| Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
| issued and outstanding as of December 31, 2019 and 2018 | | | 32 | | | | 32 | |
| Additional paid-in capital | | | 332,642,758 | | | | 334,919,265 | |
| Accumulated deficit | | | (292,677,440 | ) | | | (305,977,417 | ) |
| Stockholders' Equity | | | 39,976,991 | | | | 28,954,621 | |
| Total Liabilities and Equity | | $ | 279,488,948 | | | $ | 259,399,676 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED BALANCE SHEETS | |
| DECEMBER 31, 2017 and 2016 | |
| | | | | | | |
| | | 2017 | | | 2016 | |
| ASSETS: | | | | | | |
| Mortgage-backed securities, at fair value | | | | | | |
| Pledged to counterparties | | $ | 209,269,791 | | | $ | 129,582,386 | |
| Unpledged | | | 422,341 | | | | 719,603 | |
| Total mortgage-backed securities | | | 209,692,132 | | | | 130,301,989 | |
| Cash and cash equivalents | | | 6,103,250 | | | | 4,429,459 | |
| Restricted cash | | | 2,649,610 | | | | 1,221,978 | |
| Investment in Orchid Island Capital, Inc. common stock, at fair value | | | 14,105,934 | | | | 15,108,240 | |
| Retained interests in securitizations | | | 653,380 | | | | 1,113,736 | |
| Accrued interest receivable | | | 746,121 | | | | 512,760 | |
| Property and equipment, net | | | 3,359,312 | | | | 3,407,040 | |
| Deferred tax assets, net | | | 44,524,584 | | | | 63,833,063 | |
| Other assets | | | 2,754,474 | | | | 2,942,139 | |
| Total Assets | | $ | 284,588,797 | | | $ | 222,870,404 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| LIABILITIES: | | | | | | | | |
| Repurchase agreements | | $ | 200,182,751 | | | $ | 121,827,586 | |
| Junior subordinated notes due to Bimini Capital Trust II | | | 26,804,440 | | | | 26,804,440 | |
| Accrued interest payable | | | 346,444 | | | | 114,199 | |
| Other liabilities | | | 1,562,914 | | | | 1,977,281 | |
| Total Liabilities | | | 228,896,549 | | | | 150,723,506 | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares | | | | | | | | |
| designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; | | | | | | | | |
| no shares issued and outstanding as of December 31, 2017 and 2016 | | | - | | | | - | |
| Class A Common stock, $0.001 par value; 98,000,000 shares designated: 12,660,627 | | | | | | | | |
| shares issued and outstanding as of December 31, 2017 and 12,631,627 shares | | | | | | | | |
| issued and outstanding as of December 31, 2016 | | | 12,661 | | | | 12,632 | |
| Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
| issued and outstanding as of December 31, 2017 and 2016 | | | 32 | | | | 32 | |
| Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
| issued and outstanding as of December 31, 2017 and 2016 | | | 32 | | | | 32 | |
| Additional paid-in capital | | | 334,878,779 | | | | 334,850,838 | |
| Accumulated deficit | | | (279,199,256 | ) | | | (262,716,636 | ) |
| Stockholders' Equity | | | 55,692,248 | | | | 72,146,898 | |
| Total Liabilities and Equity | | $ | 284,588,797 | | | $ | 222,870,404 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| For the Years Ended December 31, 2019 and 2018 | |
| | | | | | | |
| | | 2019 | | | 2018 | |
| Revenues: | | | | | | |
| Advisory services | | $ | 6,907,910 | | | $ | 7,770,761 | |
| Interest income | | | 7,868,940 | | | | 8,361,808 | |
| Dividend income from Orchid Island Capital, Inc. common stock | | | 1,459,235 | | | | 1,626,439 | |
| Total revenues | | | 16,236,085 | | | | 17,759,008 | |
| Interest expense: | | | | | | | | |
| Repurchase agreements | | | (4,602,837 | ) | | | (4,029,766 | ) |
| Long-term debt | | | (1,572,038 | ) | | | (1,490,061 | ) |
| Net revenues | | | 10,061,210 | | | | 12,239,181 | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Unrealized gains (losses) on mortgage-backed securities | | | 6,338,000 | | | | (7,306,786 | ) |
| Realized gains (losses) on mortgage-backed securities | | | 23,078 | | | | (576,521 | ) |
| Unrealized losses on Orchid Island Capital, Inc. common stock | | | (820,819 | ) | | | (4,392,904 | ) |
| Losses on derivative instruments | | | (5,817,825 | ) | | | (276,209 | ) |
| Gains on retained interests in securitizations | | | 314,984 | | | | 1,103,466 | |
| Impairment of real property held for sale | | | (673,438 | ) | | | - | |
| Other income | | | 32,884 | | | | 1,400 | |
| Other expense, net | | | (603,136 | ) | | | (11,447,554 | ) |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Compensation and related benefits | | | 4,115,743 | | | | 4,011,255 | |
| Directors' fees and liability insurance | | | 653,825 | | | | 642,454 | |
| Audit, legal and other professional fees | | | 489,243 | | | | 451,615 | |
| Administrative and other expenses | | | 1,180,898 | | | | 1,337,509 | |
| Total expenses | | | 6,439,709 | | | | 6,442,833 | |
| | | | | | | | | |
| Net income (loss) before income tax (benefit) provision | | | 3,018,365 | | | | (5,651,206 | ) |
| Income tax (benefit) provision | | | (10,281,612 | ) | | | 21,126,955 | |
| | | | | | | | | |
| Net income (loss) | | $ | 13,299,977 | | | $ | (26,778,161 | ) |
| | | | | | | | | |
| Basic and Diluted Net Income (Loss) Per Share of: | | | | | | | | |
| CLASS A COMMON STOCK | | | | | | | | |
| Basic and Diluted | | $ | 1.09 | | | $ | (2.10 | ) |
| CLASS B COMMON STOCK | | | | | | | | |
| Basic and Diluted | | $ | 1.09 | | | $ | (2.10 | ) |
| Weighted Average Shares Outstanding: | | | | | | | | |
| CLASS A COMMON STOCK | | | | | | | | |
| Basic and Diluted | | | 12,178,160 | | | | 12,711,101 | |
| CLASS B COMMON STOCK | | | | | | | | |
| Basic and Diluted | | | 31,938 | | | | 31,938 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC | |
| CONSOLIDATED STATEMENTS OF EQUITY | |
| Years Ended December 31, 2019 and 2018 | |
| | | | | | | | | | | | | | | | |
| | | | | | Stockholders' Equity | | | | |
| | | Common Stock | | | Additional | | | Accumulated | | | | |
| | | Shares | | | Par Value | | | Paid-in Capital | | | Deficit | | | Total | |
| Balances, January 1, 2018 | | | 12,660,627 | | | $ | 12,725 | | | $ | 334,878,779 | | | $ | (279,199,256 | ) | | $ | 55,692,248 | |
| Net loss | | | - | | | | - | | | | - | | | | (26,778,161 | ) | | | (26,778,161 | ) |
| Issuance of Class A common shares pursuant to stock | | | | | | | | | | | | | | | | | | | | |
| based compensation plans | | | 35,000 | | | | 35 | | | | (35 | ) | | | - | | | | - | |
| Class A common shares sold directly to employees | | | 83,332 | | | | 83 | | | | 199,914 | | | | - | | | | 199,997 | |
| Class A common shares repurchased and retired | | | (69,690 | ) | | | (70 | ) | | | (165,353 | ) | | | - | | | | (165,423 | ) |
| Amortization of stock based compensation | | | - | | | | - | | | | 5,960 | | | | - | | | | 5,960 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2018 | | | 12,709,269 | | | | 12,773 | | | | 334,919,265 | | | | (305,977,417 | ) | | | 28,954,621 | |
| Net income | | | - | | | | - | | | | - | | | | 13,299,977 | | | | 13,299,977 | |
| Class A common shares repurchased and retired | | | (1,100,714 | ) | | | (1,100 | ) | | | (2,276,507 | ) | | | - | | | | (2,277,607 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balances, December 31, 2019 | | | 11,608,555 | | | $ | 11,673 | | | $ | 332,642,758 | | | $ | (292,677,440 | ) | | $ | 39,976,991 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| For the Years Ended December 31, 2017 and 2016 | |
| | | | | | | |
| | | 2017 | | | 2016 | |
| Revenues: | | | | | | |
| Advisory services | | $ | 7,431,359 | | | $ | 5,488,691 | |
| Interest income | | | 6,054,381 | | | | 4,235,081 | |
| Dividend income from Orchid Island Capital, Inc. common stock | | | 2,518,660 | | | | 2,343,660 | |
| Total revenues | | | 16,004,400 | | | | 12,067,432 | |
| Interest expense: | | | | | | | | |
| Repurchase agreements | | | (1,795,753 | ) | | | (747,374 | ) |
| Junior subordinated notes | | | (1,237,614 | ) | | | (1,108,610 | ) |
| Net revenues | | | 12,971,033 | | | | 10,211,448 | |
| | | | | | | | | |
| Other (expense) income: | | | | | | | | |
| Unrealized losses on mortgage-backed securities | | | (2,066,256 | ) | | | (3,785,939 | ) |
| Realized (losses) gains on mortgage-backed securities | | | (689 | ) | | | 179,667 | |
| Unrealized (losses) gains on Orchid Island Capital, Inc. common stock | | | (2,206,541 | ) | | | 1,255,533 | |
| Losses on derivative instruments | | | (46,031 | ) | | | (15,638 | ) |
| Gains on retained interests in securitizations | | | 645,221 | | | | 2,425,190 | |
| Other income | | | 1,578 | | | | 1,125 | |
| Total other (expense) income | | | (3,672,718 | ) | | | 59,938 | |
| | | | | | | | | |
| Expenses: | | | | | | | | |
| Compensation and related benefits | | | 3,851,925 | | | | 3,324,955 | |
| Directors' fees and liability insurance | | | 658,752 | | | | 621,873 | |
| Audit, legal and other professional fees | | | 455,167 | | | | 599,243 | |
| Administrative and other expenses | | | 1,436,941 | | | | 1,197,593 | |
| Total expenses | | | 6,402,785 | | | | 5,743,664 | |
| | | | | | | | | |
| Net income before income tax provision | | | 2,895,530 | | | | 4,527,722 | |
| Income tax provision | | | 19,378,150 | | | | 1,141,718 | |
| | | | | | | | | |
| Net (loss) income | | $ | (16,482,620 | ) | | $ | 3,386,004 | |
| | | | | | | | | |
| Basic and Diluted Net (Loss) Income Per Share of: | | | | | | | | |
| CLASS A COMMON STOCK | | | | | | | | |
| Basic and Diluted | | $ | (1.30 | ) | | $ | 0.27 | |
| CLASS B COMMON STOCK | | | | | | | | |
| Basic and Diluted | | $ | (1.30 | ) | | $ | 0.27 | |
| Weighted Average Shares Outstanding: | | | | | | | | |
| CLASS A COMMON STOCK | | | | | | | | |
| Basic and Diluted | | | 12,633,216 | | | | 12,698,122 | |
| CLASS B COMMON STOCK | | | | | | | | |
| Basic and Diluted | | | 31,938 | | | | 31,938 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC | |
| CONSOLIDATED STATEMENTS OF EQUITY | |
| Years Ended December 31, 2017 and 2016 | |
| | | | | | | | | | | | | |
| | | Stockholders' Equity | | | | |
| | | Common | | | Additional | | | Accumulated | | | | |
| | | Stock | | | Paid-in Capital | | | Deficit | | | Total | |
| Balances, January 1, 2016 | | $ | 12,437 | | | $ | 334,630,263 | | | $ | (266,102,640 | ) | | $ | 68,540,060 | |
| Net income | | | - | | | | - | | | | 3,386,004 | | | | 3,386,004 | |
| Issuance of Class A common shares pursuant to stock | | | | | | | | | | | | | | | | |
| based compensation plans | | | 259 | | | | 193,491 | | | | - | | | | 193,750 | |
| Amortization of stock based compensation | | | - | | | | 27,084 | | | | - | | | | 27,084 | |
| | | | | | | | | | | | | | | | | |
| Balances, December 31, 2016 | | | 12,696 | | | | 334,850,838 | | | | (262,716,636 | ) | | | 72,146,898 | |
| Net loss | | | - | | | | - | | | | (16,482,620 | ) | | | (16,482,620 | ) |
| Issuance of Class A common shares pursuant to stock | | | | | | | | | | | | | | | | |
| based compensation plans | | | 29 | | | | (29 | ) | | | - | | | | - | |
| Amortization of stock based compensation | | | - | | | | 27,970 | | | | - | | | | 27,970 | |
| | | | | | | | | | | | | | | | | |
| Balances, December 31, 2017 | | $ | 12,725 | | | $ | 334,878,779 | | | $ | (279,199,256 | ) | | $ | 55,692,248 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| Years Ended December 31, 2019 and 2018 | |
| | | | | | | |
| | | 2019 | | | 2018 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income (loss) | | $ | 13,299,977 | | | $ | (26,778,161 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Stock based compensation and equity plan amortization | | | - | | | | 5,960 | |
| Depreciation | | | 73,057 | | | | 76,637 | |
| Deferred income tax (benefit) provision | | | (10,085,715 | ) | | | 21,321,763 | |
| (Gains) losses on mortgage-backed securities | | | (6,361,078 | ) | | | 7,883,307 | |
| Gains on retained interests in securitizations | | | (314,984 | ) | | | (1,103,466 | ) |
| Impairment of real property held for sale | | | 673,438 | | | | - | |
| Realized losses on forward settling to-be-announced securities | | | 2,196,582 | | | | 1,193,984 | |
| Unrealized losses on Orchid Island Capital, Inc. common stock | | | 820,819 | | | | 4,392,904 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accrued interest receivable | | | 29,660 | | | | (34,414 | ) |
| Other assets | | | (39,141 | ) | | | (986,069 | ) |
| Accrued interest payable | | | (32,960 | ) | | | 331,818 | |
| Other liabilities | | | (255,913 | ) | | | 65,939 | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 3,742 | | | | 6,370,202 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| From mortgage-backed securities investments: | | | | | | | | |
| Purchases | | | (65,780,690 | ) | | | (94,517,053 | ) |
| Sales | | | 43,975,274 | | | | 60,431,192 | |
| Principal repayments | | | 22,749,733 | | | | 23,470,494 | |
| Payments received on retained interests in securitizations | | | 314,984 | | | | 426,414 | |
| Proceeds from termination of retained interests | | | - | | | | 4,968,740 | |
| Costs associated with termination of retained interests | | | - | | | | (3,638,308 | ) |
| Net settlement of forward settling TBA contracts | | | (3,075,488 | ) | | | (256,484 | ) |
| Purchases of property and equipment | | | - | | | | (15,392 | ) |
| NET CASH USED IN INVESTING ACTIVITIES | | | (1,816,187 | ) | | | (9,130,397 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from repurchase agreements | | | 1,200,646,000 | | | | 1,557,896,426 | |
| Principal repayments on repurchase agreements | | | (1,191,088,000 | ) | | | (1,557,683,177 | ) |
| Proceeds from issuance of long-term debt | | | 680,000 | | | | - | |
| Principal repayments on long-term debt | | | (3,319 | ) | | | - | |
| Class A common shares sold directly to employees | | | - | | | | 199,997 | |
| Class A common shares repurchased and retired | | | (2,277,607 | ) | | | (165,423 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 7,957,074 | | | | 247,823 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 6,144,629 | | | | (2,512,372 | ) |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the year | | | 6,240,488 | | | | 8,752,860 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the year | | $ | 12,385,117 | | | $ | 6,240,488 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid (received) during the year for: | | | | | | | | |
| Interest | | $ | 6,207,835 | | | $ | 5,188,009 | |
| Income taxes | | $ | (46,700 | ) | | $ | 955,128 | |
| See Notes to Consolidated Financial Statements | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| Years Ended December 31, 2017 and 2016 | |
| | | | | | | |
| | | 2017 | | | 2016 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net (loss) income | | $ | (16,482,620 | ) | | $ | 3,386,004 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
| Stock based compensation and equity plan amortization | | | 27,970 | | | | 220,834 | |
| Depreciation | | | 77,107 | | | | 85,572 | |
| Deferred income tax provision | | | 19,308,479 | | | | 999,179 | |
| Losses on mortgage-backed securities | | | 2,066,945 | | | | 3,606,272 | |
| Gains on retained interests in securitizations | | | (645,221 | ) | | | (2,425,190 | ) |
| Unrealized losses (gains) on Orchid Island Capital, Inc. common stock | | | 2,206,541 | | | | (1,255,533 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accrued interest receivable | | | (233,361 | ) | | | (161,711 | ) |
| Other assets | | | 187,665 | | | | (240,484 | ) |
| Accrued interest payable | | | 232,245 | | | | 30,242 | |
| Other liabilities | | | (414,367 | ) | | | (556,161 | ) |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 6,331,383 | | | | 3,689,024 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| From mortgage-backed securities investments: | | | | | | | | |
| Purchases | | | (95,585,190 | ) | | | (136,092,749 | ) |
| Sales | | | 1,654,834 | | | | 73,061,443 | |
| Principal repayments | | | 12,473,268 | | | | 13,111,444 | |
| Payments received on retained interests in securitizations | | | 1,105,577 | | | | 2,435,732 | |
| Purchases of Orchid Island Capital, Inc. common stock | | | (1,204,235 | ) | | | (1,859,277 | ) |
| Purchases of property and equipment | | | (29,379 | ) | | | - | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (81,585,125 | ) | | | (49,343,407 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from repurchase agreements | | | 1,028,157,893 | | | | 1,041,580,945 | |
| Principal repayments on repurchase agreements | | | (949,802,728 | ) | | | (996,987,608 | ) |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 78,355,165 | | | | 44,593,337 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | 3,101,423 | | | | (1,061,046 | ) |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the year | | | 5,651,437 | | | | 6,712,483 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the year | | $ | 8,752,860 | | | $ | 5,651,437 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Interest | | $ | 2,801,122 | | | $ | 1,825,742 | |
| Income taxes | | $ | 295,943 | | | $ | 540,627 | |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | | | | | | | | |
| See Notes to Consolidated Financial Statements | |
| | | | | | | | | |
BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Bimini Capital Management, Inc., a Maryland corporation ("(“Bimini Capital"Capital” or the "Company"“Company”) formed in September 2003, is a holding company. The Company'sCompany’s principal operating subsidiaries aresubsidiary is Royal Palm Capital, LLC (formerly known as MortCo TRS, LLC), which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC (formerly known as Bimini Advisors, Inc.) and Royal Palm Capital, LLC (formerly known as MortCo TRS, LLC).
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (aan investment advisor registered investment advisor)with the Securities and Exchange Commission), are collectively referred to as "Bimini Advisors." Bimini Advisors manages a residential mortgage-backed securities ("MBS"(“MBS”) portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services. Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.
Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 810, Consolidation, requires the consolidation of aVariable Interest Entities (VIEs)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 1110 for a description of the accounting used for this VIE.
We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not consolidate these VIEs and we account for our interests in these VIEs as mortgage-backed securities. See Note 3 for additional information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
Basis of Presentation
The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's consolidated financial position, results of operations and cash flows have been included and are of a normal and recurring nature.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include determining the fair values of MBS, investment in Orchid common shares, derivatives and retained interests, and determining the amounts of asset valuation allowances, the impairment for the real property held for sale, and the levelcomputation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period. As described in more detail in Note 15, estimates used for the deferred tax assets and associated asset allowances are numerous and the projection periods extend over the remaining lives of the net operating losses, to 2029 in the case of Royal Palm and 2036 in the case of Bimini. Such estimates can change materially from year to year as market conditions change or Orchid Island Capital grows through the issuance of new equity.
Statement of Comprehensive Income
In accordance with ASC Topic 220, Comprehensive Income, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income. Comprehensive income is the same as net income (loss) for all periods presented.
Segment Reporting
The Company'sCompany’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance. The accounting policies of the operating segments are the same as the Company'sCompany’s accounting policies described in this note with the exception that inter-segment revenues and expenses are included in the presentation of segment results. For further information see Note 18.17.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments. The following table presents the Company'sCompany’s cash, cash equivalents and restricted cash as of December 31, 20172019 and 2016.2018.
| (in thousands) | | | | | | | | | | |
| | 2017 | 2016 | 2019 | | 2018 | |
| Cash and cash equivalents | $ | 6,103,250 | $ | 4,429,459 | | $ | 8,070,067 | | | $ | 4,947,801 | |
| Restricted cash | | 2,649,610 | | 1,221,978 | | | 4,315,050 | | | | 1,292,687 | |
| Total cash, cash equivalents and restricted cash | $ | 8,752,860 | $ | 5,651,437 | | $ | 12,385,117 | | | $ | 6,240,488 | |
The Company maintains cash balances at several banks and, at excess margin with an exchange clearing member. At times, these balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. At December 31, 2017, the Company's cash deposits exceeded federally insured limits by approximately $3.8 million. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The Company limits uninsured balances to only large, well-known banks and derivative counterpartiesexchange clearing members and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are recognized over the period of time in which the service is performed.
Mortgage-Backed Securities
The Company invests primarily in pass-through mortgage pass-through ("PT"backed certificates issued by Freddie Mac, Fannie Mae or Ginnie Mae (“MBS”) certificates,, collateralized mortgage obligations and(“CMOs”), interest-only ("IO"(“IO”) securities and inverse interest-only ("IIO"(“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans. We refer to MBS and CMOs as PT MBS. We refer to IO and IIO securities as structured MBS. The Company has elected to account for its investment in MBS under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management'smanagement’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.
The Company records MBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the MBS balance with an offsetting receivable recorded.
The fairFair value of the Company's investment in MBS is governed by ASC Topic 820, Fair Value Measurement. The definition of fair value in ASC Topic 820 focuses ondefined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third partythird-party broker quotes, when available.
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on MBS in the consolidated statements of operations. For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset'sasset’s carrying value. At each reporting date, the effective yield is adjusted prospectively from thefor future reporting periodperiods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. The amount reported as unrealized gains or losses on mortgage backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period.
Orchid Island Capital, Inc. Common Stock
The Company has elected the fair value option for its investment in Orchid common shares. The change in the fair value of this investment and dividends received on this investment are reflected in the consolidated statements of operations for the year ended December 31, 2017.operations. We estimate the fair value of our investment in Orchid on a market approach using "Level 1"“Level 1” inputs based on the quoted market price of Orchid'sOrchid’s common stock on a national stock exchange. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management'smanagement’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.
Retained Interests in Securitizations
Retained interests in the subordinated tranches of securities created in securitization transactions were initially recorded at their fair value when issued by Royal Palm. SubsequentThese retained interests currently have a recorded fair value of zero, as the prospect of future cash flows being received is very uncertain, but they may generate cash flows in the future. Any cash received from the retained interests is reflected in the consolidated statement of cash flows. Realized gains and subsequent adjustments to fair value are reflected in the consolidated statements of operations. Quoted market prices for these assets are generally not available, so the Company estimates fair value based on the present value of expected future cash flows using management's best estimates of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Treasury Note ("T-Note"(“T-Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities, but the Companyit may enter into other derivatives in the future.
The Company has elected not to treat any of itsaccounts for TBA securities as derivative financial instruments as hedgesinstruments. Gains and losses associated with TBA securities transactions are reported in order to align the accounting treatment of itsgain (loss) on derivative instruments within the treatmentaccompanying consolidated statements of its portfolio assets under the fair value option election. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivativeoperations.
Derivative instruments beare carried at fair value. Changesvalue, and changes in fair value are recorded in the consolidated statements of operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part ofby counterparties to honor their commitments. In addition, the Company may be required to post collateral based on any declines in the market value of the derivatives. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement. To mitigate this risk, the Company uses only well-established commercial banks as counterparties.
ASC Topic 825, Financial Instruments, requires disclosure of theThe fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial statements or in the accompanying notes. MBS, Orchid common stock Eurodollar futures contracts, interest rate swaptions and retained interests in securitization transactionsderivative assets and liabilities are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 1716 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of December 31, 2017 and December 31, 2016, due to the short-term nature of these financial instruments.
It is impractical to estimate the fair value of the Company'sCompany’s junior subordinated notes. Currently, there is a limited market for these types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. InformationFurther information regarding carrying amount and effective interest rate for these instruments is presented in Note 1110 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30 years. Property and equipment is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets.
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accountsRepurchase agreements are accounted for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Share-Based Compensation
The Company follows the provisions of ASC Topic 718, Compensation – Stock Compensation, to account for stock and stock-based awards. For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings over the vesting period based on the fair value of the award. The Company applies a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal. A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate. For transactions with non-employees in which services are performed in exchange for the Company's common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance.
Earnings Per Share
The Company follows the provisions of ASC Topic 260, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents or two (or more) classes of securities that participate in dividend distributions to present both basic and diluted earnings per share ("EPS") on the face of the consolidated statement of operations. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors.Stock. Accordingly, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class B and Class C Common Stock are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.
Income Taxes
For the calendar year ended December 31, 2015, Bimini Capital, Bimini Advisors, Inc. and Royal Palm were separate taxpaying entities for income tax purposes and filed separate Federal income tax returns. Bimini Advisors, Inc. remained a separate tax paying entity through January 31, 2016; on that date, Bimini Advisors, Inc. was reorganized (as Bimini Advisors Holdings, LLC) to be an LLC wholly-owned by Bimini Capital. Beginning with the tax period starting on February 1, 2016, Bimini Capital and Bimini Advisors are combined as a single tax paying entity. Royal Palm continues to be treated as a separate tax paying entity.
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company'sCompany’s evaluation, it is more likely than not that they will not be realized.
The Company'sCompany’s U.S. federal income tax returns for years ended on or after December 31, 20142016 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company.
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For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm and its includable subsidiaries, file as separate tax paying entities.
The Company measures, recognizes and presents its uncertain tax positions in accordance with ASC Topic 740, Income Taxes. Under that guidance, the Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.
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On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "Tax Reform Act") was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. On the same date, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 which specifies, among other things, that reasonable estimates of the income tax effects of the Tax Reform Act should be used, if determinable. The Company has accounted for the effects of the Tax Reform Act using reasonable estimates based on currently available information and its interpretations thereof. This accounting may change due to, among other things, changes in interpretations the Company has made and the issuance of new tax or accounting guidance. GAAP requires that the effects of a change in tax rate on the value of deferred tax assets and deferred tax liabilities be recognized upon enactment. See Note 15 for further details of the impact of the Tax Reform Act on the Company.
Certain prior period amounts have been reclassified to conform to current period presentations.
Recent Accounting Pronouncements
In November 2016, the FASB issued Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows – (Topic 230): Restricted Cash. ASU 2016-18 requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company adopted the ASU beginning with the first quarter of 2017. The prior period consolidated statement of cash flows has been retroactively adjusted to conform to this presentation.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASUAccounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). ASU 2016-13 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019. Early application is permitted2022, for fiscal periods beginning after December 15, 2018.smaller reporting companies. The Company does not believeexpect the adoption of this ASU will have a material impact on its consolidated financial statements.statements as its financial assets are measured at fair value through earnings and Company receivables have not typically experienced credit issues.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which implements a common revenue standard and clarifies the principles used for recognizing revenue. The amendments in the ASU clarify that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2014-09 will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. A significant amount of the Company's revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the terms of a management agreement. As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:
· | One-twelfth of 1.5% of the first $250 million of the Orchid's equity, as defined in the management agreement, |
One-twelfth of 1.5% of the first $250 million of the Orchid’s month-end equity, as defined in the management agreement,
· | One-twelfth of 1.25% of the Orchid's equity that is greater than $250 million and less than or equal to $500 million, and |
One-twelfth of 1.25% of the Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
· | One-twelfth of 1.00% of the Orchid's equity that is greater than $500 million. |
One-twelfth of 1.00% of the Orchid’s month-end equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 201920, 2021 and provides for automatic one-year extension options.options thereafter. Should Orchid terminate the management agreement without cause, it will be obligated to pay to Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.
The following table summarizes the advisory services revenue from Orchid for the years ended December 31, 20172019 and 2016.2018.
| (in thousands) | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Management fee | | $ | 5,855 | | | $ | 4,188 | | | $ | 5,528 | | | $ | 6,204 | |
| Allocated overhead | | | 1,576 | | | | 1,301 | | | | 1,380 | | | | 1,567 | |
| Total | | $ | 7,431 | | | $ | 5,489 | | | $ | 6,908 | | | $ | 7,771 | |
At December 31, 20172019 and 2016,2018, the net amount due from Orchid was approximately $0.8$0.6 million and $0.6$0.7 million, respectively. These amounts are included in "other assets"“other assets” in the consolidated balance sheets. During the years ended December 31, 2017 and 2016, Orchid accrued cash and equity compensation payable to officers and employees of Bimini of $0.6 million and $0.8, respectively. This compensation is not included in the consolidated statements of operations.
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company'sCompany’s MBS portfolio as of December 31, 20172019 and 2016:2018:
| (in thousands) | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Pass-Through MBS: | | | | | | | |
| Fixed-rate Mortgages | | $ | 207,179 | | | $ | 124,299 | | | $ | 216,231 | | | $ | 209,675 | |
| Total Pass-Through MBS | | | 207,179 | | | | 124,299 | | |
| Structured MBS: | | | | | | | | | |
| Interest-Only Securities | | | 1,476 | | | | 2,654 | | | 1,024 | | | 2,021 | |
| Inverse Interest-Only Securities | | | 1,037 | | | | 3,349 | | | | 586 | | | | 728 | |
| Total Structured MBS | | | 2,513 | | | | 6,003 | | |
| Total | | $ | 209,692 | | | $ | 130,302 | | | $ | 217,841 | | | $ | 212,424 | |
The following table summarizes the Company's MBS portfolio as of December 31, 2017 and 2016, according to the contractual maturities of the securities in the portfolio. Actual maturities of MBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.
| (in thousands) | | | | | | |
| | 2017 | | 2016 | |
| Greater than or equal to ten years | | $ | 209,692 | | | $ | 130,302 | |
| Total | | $ | 209,692 | | | $ | 130,302 | |
NOTE 4. RETAINED INTERESTS IN SECURITIZATIONS
The following table summarizes the estimated fair value of the Company's retained interests in asset backed securities as of December 31, 2017 and 2016:
| (in thousands) | | | | | | | |
| Series | Issue Date | | 2017 | | | 2016 | |
| HMAC 2004-2 | May 10, 2004 | | $ | - | | | $ | 143 | |
| HMAC 2004-3 | June 30, 2004 | | | 177 | | | | 364 | |
| HMAC 2004-4 | August 16, 2004 | | | 386 | | | | 463 | |
| HMAC 2004-5 | September 28, 2004 | | | 90 | | | | 144 | |
| Total | | | $ | 653 | | | $ | 1,114 | |
NOTE 5.4. PROPERTY AND EQUIPMENT, NET
The composition of property and equipment at December 31, 20172019 and 20162018 follows:
| (in thousands) | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Land | | $ | 2,247 | | | $ | 2,247 | | | $ | 1,185 | | | $ | 2,247 | |
| Buildings and improvements | | | 1,827 | | | | 1,827 | | | 1,827 | | | 1,827 | |
| Computer equipment and software | | | 165 | | | | 177 | | | 181 | | | 181 | |
| Office furniture and equipment | | | 198 | | | | 180 | | | | 198 | | | | 198 | |
| Total cost | | | 4,437 | | | | 4,431 | | | 3,391 | | | 4,453 | |
| Less accumulated depreciation and amortization | | | 1,078 | | | | 1,024 | | | | 1,228 | | | | 1,155 | |
| Property and equipment, net | | $ | 3,359 | | | $ | 3,407 | | | $ | 2,163 | | | $ | 3,298 | |
Depreciation of property and equipment totaled approximately $77,000$73,000 and $86,000$77,000 for the years ended December 31, 20172019 and 2016,2018, respectively.
-73-In August 2019, the Company transferred one its real estate properties to held for sale to generate additional cash to be invested in the MBS portfolio. The Company expects to complete the sale of this property within one year. The Company transferred the property at fair value, which resulted in an impairment charge of approximately $0.7 million during the year ended December 31, 2019. After the impairment charge, the asset has a carrying value of approximately $0.5 million and is presented separately in the consolidated balance sheets.
The composition of other assets at December 31, 20172019 and 20162018 follows:
| (in thousands) | (in thousands) | | (in thousands) | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Prepaid expenses | | $ | 468 | | | $ | 756 | | | $ | 215 | | | $ | 299 | |
| Refundable income taxes withheld | | | 1,578 | | | 1,430 | |
| Servicing advances | | | 243 | | | | 245 | | | 205 | | | 207 | |
| Servicing sale receivable, including accrued interest | | | 222 | | | | 309 | | | 159 | | | 223 | |
| Investment in Bimini Capital Trust II | | | 804 | | | | 804 | | | 804 | | | 804 | |
| Due from affiliates | | | 797 | | | | 566 | | | 622 | | | 654 | |
| Other | | | 220 | | | | 262 | | | | 135 | | | | 124 | |
| Total other assets | | $ | 2,754 | | | $ | 2,942 | | | $ | 3,718 | | | $ | 3,741 | |
Receivables are carried at their estimated collectible amounts. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the counterparty to make required payments, if any. Management considers the following factors when determining the collectability of specific accounts: past transaction activity, current economic conditions and changes in payment terms. Amounts that the Company determines are no longer collectible are written off. As of December 31, 20172019 and 2016,2018, management determined that no allowance for doubtful accounts was necessary. Collections on amounts previously written off are included in income as received.
NOTE 7.6. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of December 31, 2017,September 30, 2019, the Company had outstanding repurchase agreement obligations of approximately $200.2 million with a net weighted average borrowing rate of 1.52%. These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $210.0 million, and cash pledged to counterparty of approximately $2.2 million. As of December 31, 2016, the Company had outstanding repurchase agreement obligations of approximately $121.8 million with a net weighted average borrowing rate of 0.99%. These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $130.1 million, and cash pledged to counterparty of approximately $0.5 million.
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met all margin call requirements.
As of December 31, 20172019 and December 31, 2016,2018, the Company'sCompany’s repurchase agreements had remaining maturities as summarized below:
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | OVERNIGHT | | | BETWEEN 2 | | | BETWEEN 31 | | | GREATER | | | | | | OVERNIGHT | | | BETWEEN 2 | | | BETWEEN 31 | | | GREATER | | | | |
| | | (1 DAY OR | | | AND | | | AND | | | THAN | | | | | | (1 DAY OR | | | AND | | | AND | | | THAN | | | | |
| | | LESS) | | | 30 DAYS | | | 90 DAYS | | | 90 DAYS | | | TOTAL | | | LESS) | | | 30 DAYS | | | 90 DAYS | | | 90 DAYS | | | TOTAL | |
| December 31, 2017 | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | | | | |
| Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| interest receivable | | $ | - | | | $ | 94,649 | | | $ | 115,350 | | | $ | - | | | $ | 209,999 | | | $ | - | | | $ | 137,992 | | | $ | 80,550 | | | $ | - | | | $ | 218,542 | |
| Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| these securities | | $ | - | | | $ | 90,686 | | | $ | 109,497 | | | $ | - | | | $ | 200,183 | | | $ | - | | | $ | 132,573 | | | $ | 77,381 | | | $ | - | | | $ | 209,954 | |
| Net weighted average borrowing rate | | | - | | | | 1.47 | % | | | 1.56 | % | | | - | | | | 1.52 | % | | | - | | | | 2.02 | % | | | 1.92 | % | | | - | | | | 1.98 | % |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | | | | | | | | | | | | | | | |
| Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| interest receivable | | $ | - | | | $ | 71,565 | | | $ | 41,334 | | | $ | 17,172 | | | $ | 130,071 | | | $ | - | | | $ | 107,876 | | | $ | 105,251 | | | $ | - | | | $ | 213,127 | |
| Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| these securities | | $ | - | | | $ | 66,919 | | | $ | 38,733 | | | $ | 16,176 | | | $ | 121,828 | | | $ | - | | | $ | 101,327 | | | $ | 99,069 | | | $ | - | | | $ | 200,396 | |
| Net weighted average borrowing rate | | | - | | | | 1.01 | % | | | 0.96 | % | | | 0.98 | % | | | 0.99 | % | | | - | | | | 2.56 | % | | | 2.56 | % | | | - | | | | 2.56 | % |
In addition, cash pledged to counterparties as collateral for repurchase agreements was approximately $3.8 million and $0.2 million as of December 31, 2019 and 2018, respectively.
If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any. At December 31, 20172019 and December 31, 2016,2018, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $11.7$11.8 million and $8.4$12.4 million, respectively. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company'sCompany’s equity at December 31, 2017 and 2016.2019. Summary information regarding amounts at risk with individual counterparties greater than 10% of equity at December 31, 2018 is presented in the table below.
| ($ in thousands) | | | | | | | | | |
| | | | | | % of | | | Weighted | |
| | | | | | Stockholders' | | | Average | |
| | | Amount | | | Equity | | | Maturity | |
| Repurchase Agreement Counterparties | | at Risk | | | at Risk | | | (in Days) | |
| December 31, 2018 | | | | | | | | | |
| Mirae Asset Securities (USA) Inc. | | $ | 3,012 | | | | 13.9 | % | | | 17 | |
| ED&F Man Capital Markets Inc. | | | 2,908 | | | | 12.1 | % | | | 40 | |
NOTE 8.7. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding and junior subordinated notes by entering into derivatives and other hedging contracts. To date, the Company has entered into Eurodollar and T-Note futures contracts, but may enter into other contracts in the future. The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.Derivative Assets (Liabilities), at Fair Value
AsThe table below summarizes fair value information about our derivative assets and liabilities as of December 31, 20172019 and 2016, such instruments were comprised entirely of Eurodollar futures contracts. Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company's account on a daily basis and reflected in earnings as they occur. A minimum balance, or "margin", is required to be maintained in the account on a daily basis. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker. This margin represents the collateral the Company has posted for its open positions and is recorded on the consolidated balance sheets as part of restricted cash.2018.
| (in thousands) | | | | | | |
| Derivative Instruments and Related Accounts | Balance Sheet Location | | December 31, 2019 | | | December 31, 2018 | |
| Liabilities | | | | | | |
| TBA Securities | Other liabilities | | $ | 59 | | | $ | 938 | |
| Total derivative liabilities, at fair value | | | $ | 59 | | | $ | 938 | |
| | | | | | | | | | |
| Margin Balances Posted to (from) Counterparties | | | | | | | | | |
| Futures contracts | Restricted cash | | $ | 537 | | | $ | 520 | |
| TBA securities | Restricted cash | | | - | | | | 543 | |
| Total margin balances on derivative contracts | | | $ | 537 | | | $ | 1,063 | |
Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company'sCompany’s cash accounts on a daily basis. A minimum balance, or "margin"“margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company'sCompany’s Eurodollar and T-note futures positions at December 31, 20172019 and December 31, 2016.2018.
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | | |
| | | Repurchase Agreement Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| Eurodollar Futures Contracts (Short Positions) | | | | | | | | | | | | |
| 2020 | | $ | 120,000 | | | | 2.90 | % | | | 1.67 | % | | $ | (1,480 | ) |
| 2021 | | | 80,000 | | | | 2.80 | % | | | 1.57 | % | | | (984 | ) |
| Total / Weighted Average | | $ | 100,000 | | | | 2.86 | % | | | 1.63 | % | | $ | (2,464 | ) |
Treasury Note Futures Contracts (Short Positions)(2) | | | | | | | | | | | | | | | | |
| March 2020 5-year T-Note futures | | | | | | | | | | | | | | | | |
| (Mar 2020 - Mar 2025 Hedge Period) | | $ | 20,000 | | | | 1.96 | % | | | 2.06 | % | | $ | 88 | |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | | |
| | | Junior Subordinated Debt Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2019 | | $ | 19,500 | | | | 1.92 | % | | | 1.68 | % | | $ | (46 | ) |
| Total / Weighted Average | | $ | 19,500 | | | | 1.92 | % | | | 1.68 | % | | $ | (46 | ) |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2018 | | | | | | | | | | | | |
| | | Repurchase Agreement Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2019 | | $ | 125,000 | | | | 2.56 | % | | | 2.67 | % | | $ | 139 | |
| 2020 | | | 150,000 | | | | 2.84 | % | | | 2.49 | % | | | (523 | ) |
| 2021 | | | 100,000 | | | | 2.80 | % | | | 2.46 | % | | | (346 | ) |
| Total / Weighted Average | | $ | 125,000 | | | | 2.74 | % | | | 2.54 | % | | $ | (730 | ) |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2017 | | | | | | | | | | | | |
| | | Repurchase Agreement Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2018 | | $ | 60,000 | | | | 1.90 | % | | | 1.97 | % | | $ | 41 | |
| 2019 | | | 60,000 | | | | 2.32 | % | | | 2.27 | % | | | (31 | ) |
| 2020 | | | 60,000 | | | | 2.60 | % | | | 2.36 | % | | | (145 | ) |
| 2021 | | | 60,000 | | | | 2.80 | % | | | 2.42 | % | | | (230 | ) |
| Total / Weighted Average | | $ | 60,000 | | | | 2.41 | % | | | 2.25 | % | | $ | (365 | ) |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | | | | | | | | | | | | |
| As of December 31, 2018 | | | | | | | | | | | | | |
| | | Junior Subordinated Debt Funding Hedges | | | Junior Subordinated Debt Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2018 | | $ | 26,000 | | | | 1.84 | % | | | 1.97 | % | | $ | 33 | | |
| 2019 | | | 26,000 | | | | 1.63 | % | | | 2.27 | % | | | 166 | | | $ | 26,000 | | | 1.63 | % | | 2.68 | % | | $ | 271 | |
| 2020 | | | 26,000 | | | | 1.95 | % | | | 2.36 | % | | | 107 | | | 26,000 | | | 1.95 | % | | 2.49 | % | | 142 | |
| 2021 | | | 26,000 | | | | 2.22 | % | | | 2.42 | % | | | 51 | | | | 26,000 | | | | 2.22 | % | | | 2.46 | % | | | 61 | |
| Total / Weighted Average | | $ | 26,000 | | | | 1.91 | % | | | 2.25 | % | | $ | 357 | | | $ | 26,000 | | | | 1.93 | % | | | 2.54 | % | | $ | 474 | |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | | |
| | | Repurchase Agreement Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2017 | | $ | 60,000 | | | | 1.32 | % | | | 1.28 | % | | $ | (26 | ) |
| 2018 | | | 60,000 | | | | 1.90 | % | | | 1.82 | % | | | (49 | ) |
| 2019 | | | 60,000 | | | | 2.32 | % | | | 2.21 | % | | | (69 | ) |
| 2020 | | | 60,000 | | | | 2.60 | % | | | 2.45 | % | | | (88 | ) |
| 2021 | | | 60,000 | | | | 2.80 | % | | | 2.64 | % | | | (93 | ) |
| Total / Weighted Average | | $ | 60,000 | | | | 2.19 | % | | | 2.08 | % | | $ | (325 | ) |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | | | | |
| | | Junior Subordinated Debt Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| 2017 | | $ | 26,000 | | | | 1.93 | % | | | 1.28 | % | | $ | (169 | ) |
| 2018 | | | 26,000 | | | | 1.84 | % | | | 1.82 | % | | | (6 | ) |
| 2019 | | | 26,000 | | | | 1.63 | % | | | 2.21 | % | | | 150 | |
| 2020 | | | 26,000 | | | | 1.95 | % | | | 2.45 | % | | | 132 | |
| 2021 | | | 26,000 | | | | 2.22 | % | | | 2.64 | % | | | 110 | |
| Total / Weighted Average | | $ | 26,000 | | | | 1.91 | % | | | 2.08 | % | | $ | 217 | |
(1) | Open equity represents the cumulative gains (losses) recorded on open futures positions from inception. |
(2) | T-Note futures contracts were valued at a price of $118.61 at December 31, 2019. The contract value of the short positions was $23.7 million. |
-76-The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019 and 2018.
| ($ in thousands) | | | | | | |
| | | | Notional | | | | | | Net |
| | | | Amount | | Cost | | Market | | Carrying |
| | | | Long (Short)(1) | | Basis(2) | | Value(3) | | Value(4) |
| December 31, 2019 | | | | | | | | |
| 30-Year TBA Securities: | | | | | | | | |
| | 3.5% | $ | (50,000) | $ | (51,414) | $ | (51,438) | $ | (24) |
| | 4.5% | | (50,000) | | (52,621) | | (52,656) | | (35) |
| | Totals | $ | (100,000) | $ | (104,035) | $ | (104,094) | $ | (59) |
| December 31, 2018 | | | | | | | | |
| 30-Year TBA Securities: | | | | | | | | |
| | 3.0% | $ | (50,000) | $ | (47,844) | $ | (48,782) | $ | (938) |
(1) | Notional amount represents the par value (or principal balance) of the underlying Agency MBS. |
(2) | Cost basis represents the forward price to be paid (received) for the underlying Agency MBS. |
(3) | Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) as of period-end. |
(4) | Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our consolidated balance sheets. |
Losses From Derivative Instruments, Net
The table below presents the effect of the Company'sCompany’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 20172019 and 2016.2018.
| (in thousands) | | | | |
| | | | 2019 | | 2018 |
| Eurodollar futures contracts (short positions) | | | | |
| | Repurchase agreement funding hedges | $ | (2,709) | $ | (82) |
| | Junior subordinated debt funding hedges | | (390) | | 241 |
| T-Note futures contracts (short positions) | | | | |
| | Repurchase agreement funding hedges | | (522) | | 759 |
| Net TBA securities | | (2,197) | | (1,194) |
| Losses on derivative instruments | $ | (5,818) | $ | (276) |
| (in thousands) | | | | | | |
| | | Consolidated | |
| | | 2017 | | | 2016 | |
| Eurodollar futures contracts (short positions) - Repurchase agreement funding hedges | | $ | (32 | ) | | $ | (318 | ) |
| Eurodollar futures contracts (short positions)- Junior subordinated debt funding hedges | | | (14 | ) | | | 302 | |
| Net losses on derivative instruments | | $ | (46 | ) | | $ | (16 | ) |
Credit Risk-Related Contingent Features
The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk in several ways. For instruments which are not centrally cleared on a registered exchange, the Company limits it counterparties to major financial institutions with acceptable credit ratings, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty obtainingrecovering its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company'sCompany’s derivative instruments are included in restricted cash on the consolidated balance sheets. It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
Assets Pledged to Counterparties
The tablestable below summarize oursummarizes Bimini’s assets pledged as collateral under ourits repurchase agreements and derivative agreements as of December 31, 20172019 and 2016.
2018.
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2017 | | | | | | | | | | |
| | | | December 31, 2019 | | | December 31, 2018 | |
| | | Repurchase | | | Derivative | | | | | | Repurchase | | | Derivative | | | | | | Repurchase | | | Derivative | | | | |
| Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | |
| PT MBS - at fair value | | $ | 207,179 | | | $ | - | | | $ | 207,179 | | | $ | 216,231 | | | $ | - | | | $ | 216,231 | | | $ | 209,675 | | | $ | - | | | $ | 209,675 | |
| Structured MBS - at fair value | | | 2,091 | | | | - | | | | 2,091 | | | 1,562 | | | - | | | 1,562 | | | 2,675 | | | - | | | 2,675 | |
| Accrued interest on pledged securities | | | 730 | | | | - | | | | 730 | | | 749 | | | - | | | 749 | | | 777 | | | - | | | 777 | |
| Cash | | | 2,208 | | | | 442 | | | | 2,650 | | | | 3,778 | | | | 537 | | | | 4,315 | | | | 230 | | | | 1,063 | | | | 1,293 | |
| Total | | $ | 212,208 | | | $ | 442 | | | $ | 212,650 | | | $ | 222,320 | | | $ | 537 | | | $ | 222,857 | | | $ | 213,357 | | | $ | 1,063 | | | $ | 214,420 | |
| ($ in thousands) | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | |
| | | Repurchase | | | Derivative | | | | |
| Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | |
| PT MBS - at fair value | | $ | 124,298 | | | $ | - | | | $ | 124,298 | |
| Structured MBS - at fair value | | | 5,284 | | | | - | | | | 5,284 | |
| Accrued interest on pledged securities | | | 489 | | | | - | | | | 489 | |
| Cash | | | 456 | | | | 766 | | | | 1,222 | |
| Total | | $ | 130,527 | | | $ | 766 | | | $ | 131,293 | |
Assets Pledged from Counterparties
The table below summarizes assets pledged to Bimini from counterparties under repurchase agreements as of December 31, 2019 and 2018.
| ($ in thousands) | | | | | | |
| Assets Pledged to Bimini | December 31, 2019 | | December 31, 2018 | |
| Repurchase agreements | | $ | - | | | $ | 371 | |
| Total | | $ | - | | | $ | 371 | |
Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements in the consolidated balance sheets.
NOTE 10.9. OFFSETTING ASSETS AND LIABILITIES
The Company'sCompany’s repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis. The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of December 31, 20172019 and 2016.2018.
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Offsetting of Liabilities | Offsetting of Liabilities | | Offsetting of Liabilities | |
| | | | | | Net Amount | | Gross Amount Not Offset in the | | | | | | | | Net Amount | | Gross Amount Not Offset in the | | | |
| | | | | | of Liabilities | | Consolidated Balance Sheet | | | | | | | | of Liabilities | | Consolidated Balance Sheet | | | |
| | | | Gross Amount | | Presented | | Financial | | | | | | | | Gross Amount | | Presented | | Financial | | | | | |
| | Gross Amount | | Offset in the | | in the | | Instruments | | Cash | | | | Gross Amount | | Offset in the | | in the | | Instruments | | Cash | | | |
| | of Recognized | | Consolidated | | Consolidated | | Posted as | | Posted as | | Net | | of Recognized | | Consolidated | | Consolidated | | Posted as | | Posted as | | Net | |
| | Liabilities | | Balance Sheet | | Balance Sheet | | Collateral | | Collateral | | Amount | | Liabilities | | Balance Sheet | | Balance Sheet | | Collateral | | Collateral | | Amount | |
| December 31, 2017 | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | |
| Repurchase Agreements | | $ | 200,183 | | | $ | - | | | $ | 200,183 | | | $ | (197,975 | ) | | $ | (2,208 | ) | | $ | - | | | $ | 209,954 | | | $ | - | | | $ | 209,954 | | | $ | (206,176 | ) | | $ | (3,778 | ) | | $ | - | |
| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | |
| TBA securities | | | | 59 | | | | - | | | | 59 | | | | - | | | | - | | | | 59 | |
| | | | $ | 210,013 | | | $ | - | | | $ | 210,013 | | | $ | (206,176 | ) | | $ | (3,778 | ) | | $ | 59 | |
| December 31, 2018 | | | | | | | | | | | | | | | | | | | |
| Repurchase Agreements | | $ | 121,828 | | | $ | - | | | $ | 121,828 | | | $ | (121,372 | ) | | $ | (456 | ) | | $ | - | | | $ | 200,396 | | | $ | - | | | $ | 200,396 | | | $ | (200,166 | ) | | $ | (230 | ) | | $ | - | |
| TBA securities | | | | 938 | | | | - | | | | 938 | | | | - | | | | (543 | ) | | | 395 | |
| | | | $ | 201,334 | | | $ | - | | | $ | 201,334 | | | $ | (200,166 | ) | | $ | (773 | ) | | $ | 395 | |
The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.zero. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 98 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.
NOTE 11. TRUST PREFERRED SECURITIES10. LONG-TERM DEBT
Long-term debt at December 31, 2019 and 2018 is summarized as follows:
| (in thousands) | | | | | | |
| | 2019 | | 2018 | |
| Junior subordinated debt | | $ | 26,804 | | | $ | 26,804 | |
| Note payable | | | 677 | | | | - | |
| Total | | $ | 27,481 | | | $ | 26,804 | |
Note Payable
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Junior Subordinated Debt
During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II ("BCTII"(“BCTII”) of which 100% of the common equity is owned by Bimini Capital. It was formed for the purpose of issuing trust preferred capital securities to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital. The debt securities held by BCTII are the sole assets of BCTII.
As of December 31, 20172019 and 2016,2018, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate. As of December 31, 2017,2019, the interest rate was 5.09%5.39%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions and are redeemable at Bimini Capital's option, in whole or in part and without penalty. Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in right of payment to all present and future senior indebtedness.
BCTII is a VIE because the holders of the equity investment at risk do not have adequatesubstantive decision making ability over BCTII'sBCTII’s activities. Since Bimini Capital's investment in BCTII's common equity securities was financed directly by BCTII as a result of its loan of the proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not consolidated the financial statements of BCTII into its consolidated financial statements and this investment is accounted for on the equity method.
The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to BCTII as a liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets). For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.
The table below presents the future scheduled principal payments on the Company’s long-term debt.
| (in thousands) | | | |
| Year Ending December 31, | | Amounts | |
| 2020 | | $ | 21 | |
| 2021 | | | 22 | |
| 2022 | | | 23 | |
| 2023 | | | 24 | |
| 2024 | | | 25 | |
| Thereafter | | | 27,366 | |
| Total | | $ | 27,481 | |
NOTE 12.11. CAPITAL STOCK
Authorized Shares
The total number of shares of capital stock which the Company has the authority to issue is 110,000,000 shares, classified as 100,000,000 shares of common stock, and 10,000,000 shares of preferred stock. The Board of Directors has the authority to classify any unissued shares by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares.
Common Stock
Of the 100,000,000 authorized shares of common stock, 98,000,000 shares were designated as Class A common stock, 1,000,000 shares were designated as Class B common stock and 1,000,000 shares were designated as Class C common stock. Holders of shares of common stock have no sinking fund or redemption rights and have no pre-emptive rights to subscribe for any of the Company'sCompany’s securities. All common shares have a $0.001 par value.
Class A Common Stock
Each outstanding share of Class A common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Holders of shares of Class A common stock are not entitled to cumulate their votes in the election of directors.
Subject to the preferential rights of any other class or series of stock and to the provisions of the Company's charter, as amended, regarding the restrictions on transfer of stock, holders of shares of Class A common stock are entitled to receive dividends on such stock if, as and when authorized and declared by the Board of Directors.
Each outstanding share of Class B common stock entitles the holder to one vote on all matters submitted to a vote of common stockholders, including the election of directors. Holders of shares of Class B common stock are not entitled to cumulate their votes in the election of directors. Holders of shares of Class A common stock and Class B common stock shall vote together as one class in all matters except that any matters which would adversely affect the rights and preferences of Class B common stock as a separate class shall require a separate approval by holders of a majority of the outstanding shares of Class B common stock. Holders of shares of Class B common stock are entitled to receive dividends on each share of Class B common stock in an amount equal to the dividends declared on each share of Class A common stock if, as and when authorized and declared by the Board of Directors.
Each share of Class B common stock shall automatically be converted into one share of Class A common stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A common stock, calculated on a pro forma basis as if conversion of the Class B common stock (or portion thereof to be converted) had occurred, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class B common stock to be converted into Class A common stock in any quarter shall not exceed an amount that will cause the stockholders' equity attributable to the Class A common stock calculated as set forth above to be less than $150.00 per share; provided further, that such conversions shall continue to occur until all shares of Class B common stock have been converted into shares of Class A common stock; and provided further, that the total number of shares of Class A common stock issuable upon conversion of the Class B common stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A common stock.
No dividends will be paid on the Class C common stock. Holders of shares of Class C common stock are not entitled to vote on any matter submitted to a vote of stockholders, including the election of directors, except that any matters that would adversely affect the rights and privileges of the Class C common stock as a separate class shall require the approval of a majority of the Class C common stock.
Each share of Class C common stock shall automatically be converted into one share of Class A common stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A common stock, calculated on a pro forma basis as if conversion of the Class C common stock had occurred and giving effect to the conversion of all of the shares of Class B common stock as of such date, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class C common stock to be converted into Class A common stock shall not exceed an amount that will cause the stockholders' equity attributable to the Class A common stock calculated as set forth above to be less than $150.00 per share; and provided further, that such conversions shall continue to occur until all shares of Class C common stock have been converted into shares of Class A common stock and provided further, that the total number of shares of Class A common stock issuable upon conversion of the Class C common stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A common stock.
There are 10,000,000 authorized shares of preferred stock, with a $0.001 par value per share. The Company's Board of Directors has the authority to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series of preferred stock previously authorized by the Board of Directors. Prior to issuance of shares of each class or series of preferred stock, the Board of Directors is required by the Company'sCompany’s charter to fix the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series.
Classified and Designated Shares
Pursuant to the Company'sCompany’s supplementary amendment of its charter, effective November 3, 2005, and by resolutions adopted on September 29, 2005, the Company'sCompany’s Board of Directors classified and designated 1,800,000 shares of the authorized but unissued preferred stock, $0.001 par value, as Class A Redeemable Preferred Stock and 2,000,000 shares of the authorized but unissued preferred stock as Class B Redeemable Preferred Stock.
The Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock rank equal to each other and shall have the same preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms; provided, however that the redemption provisions of the Class A Redeemable Preferred Stock and the Class B Redeemable Preferred Stock differ. Each outstanding share of Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock shall have one-fifth of a vote on all matters submitted to a vote of stockholders (or such lesser fraction of a vote as would be required to comply with the rules and regulations of the NYSE relating to the Company'sCompany’s right to issue securities without obtaining a stockholder vote). Holders of shares of preferred stock shall vote together with holders of shares of common stock as one class in all matters that would be subject to a vote of stockholders.
The previously outstanding shares of Class A Redeemable Preferred Stock were converted into Class A common stock on April 28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.
In 2015 the Board approved Articles Supplementary to the Company'sCompany’s charter reclassifying and designating 1,800,000 shares of authorized but unissued Class A Redeemable Preferred Stock and 2,000,000 shares of authorized but unissued Class B Redeemable Preferred Stock into undesignated preferred stock, par value $0.001 per share, of the Company ("(“Preferred Stock"Stock”). After giving effect to the reclassification and designation of the shares of Class A Preferred Stock and Class B Preferred Stock, the Company has authority to issue 10,000,000 shares of undesignated Preferred Stock and no shares of Class A Preferred Stock or Class B Preferred Stock. The Articles Supplementary were filed with the State Department of Assessments and Taxation of Maryland (the "SDAT"“SDAT”) and became effective upon filing on December 21, 2015.
In 2015 the Board approved Articles Supplementary to the Company'sCompany’s charter creating a new series of Preferred Stock designated as Series A Junior Preferred Stock, par value $0.001 per share, of the Company (the "Series“Series A Preferred Stock"Stock”). The Articles Supplementary were filed with the SDAT and became effective upon filing on December 21, 2015.
Rights Plan
On December 21, 2015 the Board adopted a rights agreement and declared a distribution of one preferred stock purchase right ("Right"(“Right”) for each outstanding share of the Company'sCompany’s Class A common stock, Class B common stock, and Class C common stock. The distribution was payable to stockholders of record as of the close of business on December 21, 2015.
The Rights. Subject to the terms, provisions and conditions of the Rights Plan, if the Rights become exercisable, each Right would initially represent the right to purchase from the Company one ten-thousandth of a share of Series A Preferred Stock for a purchase price of $4.76, subject to adjustment in accordance with the terms of the Rights Plan (the "Purchase Price"“Purchase Price”). If issued, each fractional share of Series A Preferred Stock would give the stockholder approximately the same distribution, voting and liquidation rights as does one share of the Company'sCompany’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights as a stockholder of the Company, including without limitation any distribution, voting or liquidation rights.
Exercisability. The Rights will generally not be exercisable until the earlier of (i) 10 business days after a public announcement by the Company that a person or group has acquired 4.9% or more of the outstanding Class A common stock without the approval of the Board of Directors (an "Acquiring Person"“Acquiring Person”) and (ii) 10 business days after the commencement of a tender or exchange offer by a person or group for 4.9% or more of the Class A common stock.
The date that the Rights may first become exercisable is referred to as the "Distribution“Distribution Date."” Until the Distribution Date, the Class A common stock, Class B common stock and Class C common stock certificates will represent the Rights and will contain a notation to that effect. Any transfer of shares of Class A common stock, Class B common stock and/or Class C common stock prior to the Distribution Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred other than in connection with the transfer of the underlying shares of Class A common stock, Class B common stock or Class C common stock.
After the Distribution Date and following a determination by the Board that a person is an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right and payment of the Purchase Price, that number of shares of Class A common stock, Class B common stock or Class C common stock, as the case may be, having a market value of two times the Purchase Price (or, at our option, shares of Series A Preferred Stock or other consideration as provided in the Rights Plan).
Exchange. After the Distribution Date and following a determination by the Board that a person or group is an Acquiring Person, the Board may exchange the Rights (other than Rights owned by such an Acquiring Person which will have become void), in whole or in part, at an exchange ratio of one share of Class A common stock, Class B common stock or Class C common stock, as the case may be, or a fractional share of Series A Preferred Stock (or of a share of a similar class or series of the Company'sCompany’s preferred stock having similar Rights, preferences and privileges) of equivalent value, per Right (subject to adjustment).
Expiration. The Rights and the Rights Plan will expire on the earliest of (i) December 21, 2025, (ii) the time at which the Rights are redeemed pursuant to the Rights Plan, (iii) the time at which the Rights are exchanged pursuant to the Rights Plan, (iv) the repeal of Section 382 of the Code or any successor statute if the Board determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, (v) the beginning of a taxable year of the Company to which the Board determines that no applicable tax benefits may be carried forward and (vi) the close of business on June 30, 2016 if approval of the Rights Plan by the Company'sCompany’s stockholders has not been obtained.
Redemption. At any time prior to the time an Acquiring Person becomes such, the Board may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"“Redemption Price”). The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Anti-Dilution Provisions. The Board may adjust the Purchase Price, the number of shares of Series A Preferred Stock or other securities issuable and the number of outstanding Rights to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a forward or reverse stock split or a reclassification of the preferred shares or Class A common stock, Class B common stock or Class C common stock. No adjustments to the Purchase Price of less than 1% will be made.
Anti-Takeover Effects. While this was not the purpose of the Board when adopting the Rights Plan, the Rights will have certain anti-takeover effects. The Rights will cause substantial dilution to any person or group that attempts to acquire the Company without the approval of the Board. As a result, the overall effect of the Rights may be to render more difficult or discourage any attempt to acquire the Company even if such acquisition may be favorable to the interests of the Company'sCompany’s stockholders. Because the Board can redeem the Rights, the Rights should not interfere with a merger or other business combination approved by the Board.
Amendments. Before the Distribution Date, the Board may amend or supplement the Rights Plan without the consent of the holders of the Rights. After the Distribution Date, the Board may amend or supplement the Rights Plan only to cure an ambiguity, to alter time period provisions, to correct inconsistent provisions, or to make any additional changes to the Rights Plan, but only to the extent that those changes do not impair or adversely affect, in any material respect, any Rights holder and do not result in the Rights again becoming redeemable, and no such amendment may cause the Rights again to become redeemable or cause this Rights Plan again to become amendable other than in accordance with the applicable timing of the Rights Plan.
Issuances of Common Stock
The table below presents information related to the Company'sCompany’s Class A Common Stock issued during the years ended December 31, 20172019 and 2016.
2018.
| Shares Issued Related To: | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Incentive plan shares | | | 29,000 | | | | 258,333 | | | - | | | 35,000 | |
| Shares sold directly to employees | | | | - | | | | 83,332 | |
| Total shares of Class A Common Stock issued | | | 29,000 | | | | 258,333 | | | | - | | | | 118,332 | |
On January 12, 2018, Robert Cauley and Hunter Haas each purchased 41,666 shares of the Company's Class A Common Stock at a price of $2.40 per share directly from the Company. These newly issued shares are not reflected in the consolidated balance sheet as of December 31, 2017.
There were no issuances of the Company's Class B Common Stock and Class C Common Stock during the years ended December 31, 20172019 and 2016.2018.
Stock Repurchase Plan
On March 26, 2018, the Board of Directors of Bimini Capital Management, Inc. (the “Company”) approved a Stock Repurchase Plan (“Repurchase Plan”). Pursuant to Repurchase Plan, the Company may purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. Share repurchases may be executed through various means, including, without limitation, open market transactions. The Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan was originally set to expire on November 15, 2018, but it has been extended twice by the Board of Directors, first until November 15, 2019, and then until November 15, 2020. The authorization for the Share Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.
From the inception of the Repurchase Plan through December 31, 2019, the Company repurchased a total of 70,404 shares at an aggregate cost of approximately $166,945, including commissions and fees, for a weighted average price of $2.37 per share.
Tender Offer
In July 2019, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2 million, excluding fees and related expenses, to repurchase 1.1 million shares of Bimini Capital’s Class A common stock at a price of $2.00 per share.
NOTE 13.12. STOCK INCENTIVE PLANS
Bimini Capital
On August 12, 2011, Bimini Capital'sCapital’s shareholders approved the 2011 Long Term Compensation Plan (the "2011 Plan"“2011 Plan”) to assist the Company in recruiting and retaining employees, directors and other service providers by enabling them to participate in the success of Bimini Capital and to associate their interest with those of the Company and its stockholders. The 2011 Plan is intended to permit the grant of stock options, stock appreciation rights ("SARs"(“SARs”), stock awards, performance units and other equity-based and incentive awards. The maximum aggregate number of shares of common stock that may be issued under the 2011 Plan pursuant to the exercise of options and SARs, the grant of stock awards or other equity-based awards and the settlement of incentive awards and performance units is equal to 4,000,000 shares.
Performance Units
Share Awards
During 2016, theThe Compensation Committee of the Board of Directors of Bimini Capital (the "Committee"“Committee”) approved certain performance bonuses for members of management. These bonuses were awarded primarilyhas issued, and may in recognition of service in 2015. The bonuses consisted of cash of approximately $0.5 million and 258,333 fully vested shares of the Company's Class A Common Stock with an approximate value of $0.2 million, or $0.75 per share. The shares were issued under the 2011 Plan. For purposes of these bonuses, shares of the Company's common stock were valued based on the closing price of the Company's Class A Common Stock on January 15, 2016, the bonus date. The expense related to this bonus was accrued at December 31, 2015 and it did not affect the results of operations for the year ended December 31, 2016. There were no share awards during the year ended December 31, 2017.
Performance Units
The Committee mayfuture issue additional, Performance Units under the 2011 Plan to certain officers and employees. "Performance Units"“Performance Units” represent the participant'sparticipant’s right to receive an amount, based on the value of a specified number of shares of common stock, if the terms and conditions prescribed by the Committee are satisfied. The Committee will determine the requirements that must be satisfied before Performance Units are earned, including but not limited to any applicable performance period and performance goals. Performance goals may relate to the Company'sCompany’s financial performance or the participant'sparticipant’s performance or such other criteria determined by the Committee, including goals stated with reference to the performance measures discussed below. If Performance Units are earned, they will be settled in cash, shares of common stock or a combination thereof.
The following table presents the activity related to Performance Units during the years ended December 31, 20172019 and December 31, 2016:
2018:
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| | | | | | Weighted- | | | | | | Weighted- | | | | | | Weighted- | | | | | | Weighted- | |
| | | | | | Average | | | | | | Average | | | | | | Average | | | | | | Average | |
| | | | | | Grant-Date | | | | | | Grant-Date | | | | | | Grant-Date | | | | | | Grant-Date | |
| | | Shares | | | Fair Value | | | Shares | | | Fair Value | | | Shares | | | Fair Value | | | Shares | | | Fair Value | |
| Nonvested, at January 1 | | | 70,000 | | | $ | 1.23 | | | | 77,500 | | | $ | 1.22 | | | - | | | $ | - | | | 41,000 | | | $ | 0.84 | |
| Vested during the period | | | (29,000 | ) | | | 1.78 | | | | - | | | | - | | | - | | | - | | | (35,000 | ) | | 0.84 | |
| Forfeited during the period | | | - | | | | - | | | | (7,500 | ) | | | 1.15 | | | | - | | | | - | | | | (6,000 | ) | | | 0.84 | |
| Nonvested, at December 31 | | | 41,000 | | | $ | 0.84 | | | | 70,000 | | | $ | 1.23 | | | | - | | | $ | - | | | | - | | | $ | - | |
| ($ in thousands) | | | | | | |
| | | 2017 | | | 2016 | |
| Compensation expense recognized during the year | | $ | 28 | | | $ | 27 | |
| Unrecognized compensation expense at year end | | $ | 11 | | | $ | 39 | |
| Weighted-average remaining vesting term (in years) | | | 0.9 | | | | 1.5 | |
| Intrinsic value of unvested shares at year end | | $ | 107 | | | $ | 183 | |
NOTE 14.13. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any significant reported or unreported contingencies at December 31, 2017.2019.
On December 22, 2017,In 2019, the Tax Reform Act was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporateCompany recorded an income tax code by, among other things, loweringbenefit of $10.3 million, including an $11.1 million decrease in the U.S. corporatedeferred tax rate from 35% to 21% effective January 1, 2018. On the same date, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 which specifies, among other things, that reasonable estimatesasset valuation allowance as a result of management’s reassessment, as of December 31, 2019, of the incomeCompany’s ability to utilize tax effectsnet operating losses (“NOLs”) to offset future taxable income. During 2019, Orchid raised capital, which is expected to result in an increase in future management fee revenue. Because of the Tax Reform Act should be used, if determinable. GAAP requires that the impactthis increase in cash flows, and projections for future growth, management has revised its estimated utilization of NOL carryforwards in future periods and tax legislation be recognizedcapital loss carryforwards to offset future capital gains, resulting in a decrease in the period in whichdeferred tax valuation asset allowance at December 31, 2019.
In 2018, the law was enacted. The Company recorded an income tax provision of $19.4$21.1 million, forincluding a $22.5 million increase in the year endeddeferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2017, including a charge2018, of $25.9 million duethe Company’s ability to a remeasurementutilize NOLs to offset future taxable income. During 2018, Orchid’s book value and monthly dividend decreased, which caused decreases in management fee revenue and dividend income on Orchid stock. Because of this decrease in cash flows in 2018, management revised its estimated utilization of NOL carryforwards in future periods, which resulted in an increase in the deferred tax assets and liabilities resulting from the tax rate reduction. The year 2017 tax provision represents the Company's current best estimate based on management's current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.valuation asset allowance recorded in 2018.
The income tax (benefit) provision included in the consolidated statements of operations consists of the following for the years ended December 31, 20172019 and 2016:2018:
| (in thousands) | | | | | | |
| | | 2019 | | | 2018 | |
| Current | | $ | (196 | ) | | $ | (195 | ) |
| Deferred | | | (10,086 | ) | | | 21,322 | |
| Income tax (benefit) provision, net | | $ | (10,282 | ) | | $ | 21,127 | |
| (in thousands) | | | | | | |
| | | 2017 | | | 2016 | |
| Current | | $ | 70 | | | $ | 143 | |
| Deferred | | | 19,308 | | | | 999 | |
| Income tax provision | | $ | 19,378 | | | $ | 1,142 | |
The net income tax provision differs from the amount computed by applying the federal income tax statutory rate of 3521 percent on income or loss before income tax expense. A reconciliation of income tax at the statutory rate to income tax provision for the years ended December 31, 20172019 and 20162018 is presented in the table below.
| (in thousands) | | | | | | |
| | | 2017 | | | 2016 | |
| Federal tax based on statutory rate applicable for each year | | $ | 984 | | | $ | 1,539 | |
| State income tax | | | 157 | | | | 245 | |
| Reduction of deferred tax asset due to enacted decrease in future tax rates | | | 25,852 | | | | - | |
| Reduction of deferred tax asset valuation allowance | | | (7,628 | ) | | | (780 | ) |
| Other | | | 13 | | | | 138 | |
| Income tax provision | | $ | 19,378 | | | $ | 1,142 | |
| (in thousands) | | | | | | |
| | | 2019 | | | 2018 | |
| Federal tax (benefit) based on statutory rate applicable for each year | | $ | 634 | | | $ | (1,187 | ) |
| State income tax (benefit) | | | 164 | | | | (311 | ) |
| (Decrease) increase of deferred tax asset valuation allowance | | | (11,109 | ) | | | 22,512 | |
| Other | | | 29
| | | | 113 | |
| Income tax (benefit) provision | | $ | (10,282 | ) | | $ | 21,127 | |
Deferred tax assets consisted of the following as of December 31, 20172019 and 2016:2018:
| (in thousands) | (in thousands) | | (in thousands) | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Deferred tax assets: | | | | | | | | | | | | |
| Net operating loss carryforwards | | $ | 59,691 | | | $ | 96,500 | | | $ | 58,250 | | | $ | 58,737 | |
| Orchid Island Capital, Inc. common stock | | | 2,349 | | | | 3,291 | | | 3,338 | | | 3,318 | |
| MBS | | | 1,038 | | | | 1,425 | | | (377 | ) | | 1,976 | |
| Capital loss carryforwards | | | 1,743 | | | 875 | |
| Management agreement | | | 813 | | | | 1,267 | | | 813 | | | 813 | |
| Tax hedges | | | 49 | | | | 366 | | |
| Accrued expenses | | | 148 | | | | 330 | | |
| Other | | | 661 | | | | 697 | | | | 1,148 | | | | 219 | |
| | | | 64,749 | | | | 103,876 | | | 64,915 | | | 65,938 | |
| Valuation allowance | | | (20,224 | ) | | | (40,043 | ) | | | (31,626 | ) | | | (42,735 | ) |
| Net deferred tax assets | | $ | 44,525 | | | $ | 63,833 | | | $ | 33,289 | | | $ | 23,203 | |
As of December 31, 20172019 and 2016,2018, Bimini Capital had tax capital loss carryforwards of approximately $0.3$0.1 million and $0.3 million, respectively, which can be used to offset future realized tax capital gains. The capital loss carryforwards will begin to expire in 2019.at December 31, 2020, if they are unused. In addition, as of December 31, 20172019 and 2016,2018, Bimini Capital had estimated federal NOL carryforwards of approximately $19.1$19.0 million and $19.3$18.8 million, respectively, and estimated Florida NOL carryforwards of $18.5$18.4 million and $18.6$18.1 million, respectively. The NOL carryforwards can be used to offset future taxable income and will begin to expire in 2028.2030.
As of December 31, 2017,2019 and 2018, Royal Palm had tax capital loss carryforwards of approximately $0.1$6.8 million and $3.2 million, respectively, which can be used to offset future realized tax capital gains. The capital loss carryforwards will begin to expire in 2022. In addition, as of December 31, 2017,2019, Royal Palm had estimated federal NOL carryforwards of approximately $253.5$248.1 million and estimated available Florida NOLs of approximately $26.0$20.7 million. As of December 31, 2016,2018, Royal Palm had estimated federal NOL carryforwards of approximately $257.0$250.2 million and estimated available Florida NOLsNOL carryforwards of approximately $29.5$22.8 million. These NOLs can be used to offset future taxable income and will begin to expire in 2025.
In connection with Orchid'sOrchid’s 2013 IPO, Bimini Advisors paid for, and expensed for GAAP purposes, certain offering costs totaling approximately $3.2 million. For tax purposes, these offering costs created an intangible asset related to the management agreement with a tax basis of $3.2 million. The deferred tax asset related to the intangible asset at December 31, 20172019 and 20162018 totaled approximately$0.8approximately $0.8 million and $1.3$0.8 million, respectively.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The valuation allowance relates primarily tois based on management’s estimated projections of future taxable income, and the projected ability to utilize the separate NOL carryforwards of Bimini Capital and Royal Palm to offset that projected taxable income before the NOLs expire. Management has undertaken tax planning strategies in an effort to maximize the potential for future periodsNOL utilization, including the restructuring of certain subsidiaries and is based on management's estimated projectionsassets of future taxable income.the Company. With respect to the utilization of NOL carryforwards at Bimini,taxable income projections, management must estimate the dividends the Company will receiveto be received on its Orchid share holdings as well as the management fees and overhead sharing payments it will receive from Orchid. With respect to the MBS portfolio, at Royal Palm, management makes estimates of various metrics such as the yields on the assets it will acquire, its future funding and interest costs, future prepayment speeds and net interest margin, among others. Management mustEstimates are also estimatemade for other assets and expenses. Changes in the dividends it will receivetaxable income projections have a direct impact on its Orchid sharesthe amount of the valuation allowance, and the cash flows it will receive on the retained interests.impact in any reporting period may be significant. Utilization of the NOLs is based on these estimates and the assumptions that management will be able to reinvest retained earnings in order to grow the MBS portfolio going forward and that market value will not be eroded due to adverse market conditions or hedging inefficiencies. These estimates and assumptions may change from year to year to the extent Orchid grows,Orchid’s book value changes, thus increasingchanging projected management fees and overhead sharing payments, and/or market conditions, changeincluding changes in interest rates, such that estimates with respect to the portfolio metrics warrant revisions.
Royal Palm holds residual interests in various real estate mortgage investment conduits ("REMICs"(“REMICs”), some of which generate excess inclusion income ("EII"(“EII”), a type of taxable income pursuant to specific provisions of the Code. During 2010 (as part of the filing of its 2009 tax returns), Royal Palm reached a tax filing position related to the EII taxable income that was different from what was reported in previous periods, and included a notice of inconsistent treatment in its tax returns. Royal Palm continues to file its tax returns following its 2009 tax filing position, and it continues to include a notice of inconsistent treatment in each return. During 2018, the Company completed a transaction whereby certain securitizations associated with its REMIC positions were terminated by exercising the Company’s optional early termination rights. However, the tax filing position which began in 2009 will continue with respect to the remaining securitizations.
The Company does not believe it has any unrecognized tax benefits included in its consolidated financial statements. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations.
NOTE 16.15. EARNINGS PER SHARE
Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. Following the provisions of FASB ASC 260, theThe Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at December 31, 20172019 and 2016.2018.
Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at December 31, 20172019 and 2016.2018.
The Company hashad dividend eligible stock incentive plan shares that were outstandingissued during the yearsyear ended December 31, 2017 and 2016.2018. The basic and diluted per share computations include these unvested incentive plan shares only if there is income available to Class A common stock, as they have dividend participation rights. The stock incentive plan shares have no contractual obligation to share in losses. Since there is no such obligation, the incentive plan shares would not be included in the basic and diluted EPS computations when no income is available to Class A common stock even though they are considered participating securities.
The table below reconciles the numerators and denominators of the basic and diluted EPS.
| (in thousands, except per-share information) | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Basic and diluted EPS per Class A common share: | | | | | | | | | | | | |
| (Loss) income attributable to Class A common shares: | | | | | | | |
| Income (loss) attributable to Class A common shares: | | | | | | | |
| Basic and diluted | | $ | (16,441 | ) | | $ | 3,378 | | | $ | 13,265 | | | $ | (26,711 | ) |
| Weighted average common shares: | | | | | | | | | | | | | | |
| Class A common shares outstanding at the balance sheet date | | | 12,661 | | | | 12,632 | | | 11,609 | | | 12,709 | |
| Unvested dividend-eligible share based compensation | | | | | | | | | |
| outstanding at the balance sheet date | | | - | | | | 70 | | |
| Effect of weighting | | | (28 | ) | | | (4 | ) | | | 569 | | | | 2 | |
| Weighted average shares-basic and diluted | | | 12,633 | | | | 12,698 | | | 12,178 | | | 12,711 | |
| (Loss) income per Class A common share: | | | | | | | | | |
| Income (loss) per Class A common share: | | | | | | | |
| Basic and diluted | | $ | (1.30 | ) | | $ | 0.27 | | | $ | 1.09 | | | $ | (2.10 | ) |
| (in thousands, except per-share information) | | | | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Basic and diluted EPS per Class B common share: | | | | | | | | | | | | |
| (Loss) income attributable to Class B common shares: | | | | | | | |
| Income (loss) attributable to Class B common shares: | | | | | | | |
| Basic and diluted | | $ | (42 | ) | | $ | 8 | | | $ | 35 | | | $ | (67 | ) |
| Weighted average common shares: | | | | | | | | | | | | | | |
| Class B common shares outstanding at the balance sheet date | | | 32 | | | | 32 | | | 32 | | | 32 | |
| Effect of weighting | | | - | | | | - | | | | - | | | | - | |
| Weighted average shares-basic and diluted | | | 32 | | | | 32 | | | | 32 | | | | 32 | |
| (Loss) income per Class B common share: | | | | | | | | | |
| Income (loss) per Class B common share: | | | | | | | |
| Basic and diluted | | $ | (1.30 | ) | | $ | 0.27 | | | $ | 1.09 | | | $ | (2.10 | ) |
NOTE 17.16. FAIR VALUE
Authoritative accounting literature establishes a framework for using fairFair value to measure assets and liabilities and defines fair value asis the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:
· | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), |
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),
· | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and |
· | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company's own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
The Company's MBS are valued using Level 2 valuations, and such valuations are determined bywhere the Companyvaluation is based on independentquoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing sources and/the asset or third-party broker quotes, when available. Becauseliability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the price estimates may vary,use of market prices of assets or liabilities that are not directly comparable to the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of its MBS positions determined by either an independent third-partysubject asset or could do so internally.liability.
MBS, Orchid common stock, retained interests and futures contractsTBA securities were all recorded at fair value on a recurring basis during 20172019 and 2016.2018. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets. Fair value measurements for the retained interests are generated by a model that requires management to make a significant number of assumptions.assumptions, and this model resulted in a value of zero at both December 31, 2019 and 2018.
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The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets, spread pricing techniques (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and the volatility). The appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 20172019 and 2016:2018:
| (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Quoted Prices | | | | | | | | | | | | Quoted Prices | | | | | | | |
| | | | | | in Active | | | Significant | | | | | | | | | in Active | | | Significant | | | | |
| | | | | | Markets for | | | Other | | | Significant | | | | | | Markets for | | | Other | | | Significant | |
| | | | | | Identical | | | Observable | | | Unobservable | | | | | | Identical | | | Observable | | | Unobservable | |
| | | Fair Value | | | Assets | | | Inputs | | | Inputs | | | Fair Value | | | Assets | | | Inputs | | | Inputs | |
| | | Measurements | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Measurements | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| December 31, 2017 | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 209,692 | | | $ | - | | | $ | 209,692 | | | $ | - | | | $ | 217,841 | | | $ | - | | | $ | 217,841 | | | $ | - | |
| Orchid Island Capital, Inc. common stock | | | 14,106 | | | | 14,106 | | | | - | | | | - | | | 8,892 | | | 8,892 | | | - | | | - | |
| Retained interests | | | 653 | | | | - | | | | - | | | | 653 | | |
| December 31, 2016 | | | | | | | | | | | | | | | | | |
| TBA securities | | | | (59 | ) | | | - | | | | (59 | ) | | | - | |
| December 31, 2018 | | | | | | | | | | | | | | | | | |
| Mortgage-backed securities | | $ | 130,302 | | | $ | - | | | $ | 130,302 | | | $ | - | | | $ | 212,424 | | | $ | - | | | $ | 212,424 | | | $ | - | |
| Orchid Island Capital, Inc. common stock | | | 15,108 | | | | 15,108 | | | | - | | | | - | | | 9,713 | | | 9,713 | | | - | | | - | |
| Retained interests | | | 1,114 | | | | - | | | | - | | | | 1,114 | | |
| TBA securities | | | | (938 | ) | | | - | | | | (938 | ) | | | - | |
The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 20172019 and 2016:2018:
| (in thousands) | | | | | | | | | | | | |
| | | Retained Interests | | | Retained Interests | |
| | | 2017 | | | 2016 | | | 2019 | | | 2018 | |
| Balances, January 1 | | $ | 1,114 | | | $ | 1,124 | | | $ | - | | | $ | 653 | |
| Gain included in earnings | | | 645 | | | | 2,425 | | | 315 | | | 1,103 | |
| Collections | | | (1,106 | ) | | | (2,435 | ) | | | (315 | ) | | | (1,756 | ) |
| Balances, December 31 | | $ | 653 | | | $ | 1,114 | | | $ | - | | | $ | - | |
During the years ended December 31, 20172019 and 2016,2018, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
OurDuring the year ended December 31, 2018, the Company exercised its optional early termination rights with respect to certain securitizations and received net distributions of approximately $1.4 million. That distribution, along with the cash flow of approximately $0.4 million received prior to the exercise, resulted in a gain of $1.1 million for the year that was recorded in gains on retained interests are valued basedin securitizations on a discounted cash flow approach. These values are sensitive to changes in unobservable inputs, including: estimated prepayment speeds, default rates and loss severity, weighted-average life, and discount rates. Significant increases or decreases in anythe Consolidated Statements of these inputs may result in significantly different fair value measurements.Operations.
The following table summarizes the significant quantitative information about our level 3 fair value measurements as of December 31, 2017.
Retained interest fair value ($ in thousands) | | | $ | 653 |
| | | CPR Range | | |
| Prepayment Assumption | | (Weighted Average) | | |
| Constant Prepayment Rate | | 10% (10%) | | |
| | | Severity Range | | |
| Default Assumptions | Probability of Default | (Weighted Average) | | Range Of Loss Timing |
| Real Estate Owned | 100% | 22.7% | | Next 10 Months |
| Loans in Foreclosure | 100% | 22.7% | | Month 4 - 13 |
| Loans 90 Day Delinquent | 100% | 45% | | Month 11-28 |
| Loans 60 Day Delinquent | 85% | 45% | | Month 11-28 |
| Loans 30 Day Delinquent | 75% | 45% | | Month 11-28 |
| Current Loans | 3.3% | 45% | | Month 29 and Beyond |
| | | Remaining Life Range | | Discount Rate Range |
| Cash Flow Recognition | Valuation Technique | (Weighted Average) | | (Weighted Average) |
| Nominal Cash Flows | Discounted Cash Flow | 11.5 - 14.5 (12.1) | | 27.50% (27.50%) |
| Discounted Cash Flows | Discounted Cash Flow | 1.0 - 3.3 (2.4) | | 27.50% (27.50%) |
NOTE 18.17. SEGMENT INFORMATION
The Company'sCompany’s operations are classified into two principal reportable segments; the asset management segment and the investment portfolio segment.
The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid. Total revenue received under this management agreement for the years ended December 31, 20172019 and 2016,2018, were approximately $7.4$6.9 million and $5.5$7.8 million, respectively, accounting for approximately 46%43% and 45%44% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted by Bimini Capital and Royal Palm. The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.
Segment information for the years ended December 31, 20172019 and 20162018 is as follows:
| (in thousands) | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2019 | | | | | | | | | | | | | | | |
| Advisory services, external customers | | $ | 6,908 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,908 | |
Advisory services, other operating segments(1) | | | 271 | | | | - | | | | - | | | | (271 | ) | | | - | |
| Interest and dividend income | | | - | | | | 9,327 | | | | 1 | | | | - | | | | 9,328 | |
| Interest expense | | | - | | | | (4,603 | ) | | | (1,572 | )(2) | | | - | | | | (6,175 | ) |
| Net revenues | | | 7,179 | | | | 4,724 | | | | (1,571 | ) | | | (271 | ) | | | 10,061 | |
| Other (expense) income | | | - | | | | 112 | | | | (715 | )(3) | | | - | | | | (603 | ) |
Operating expenses(4) | | | (2,750 | ) | | | (3,690 | ) | | | - | | | | - | | | | (6,440 | ) |
Intercompany expenses(1) | | | - | | | | (271 | ) | | | - | | | | 271 | | | | - | |
| Income (loss) before income taxes | | $ | 4,429 | | | $ | 875 | | | $ | (2,286 | ) | | $ | - | | | $ | 3,018 | |
| Assets | | $ | 1,457 | | | $ | 263,938 | | | $ | 14,809 | | | $ | - | | | $ | 280,204 | |
-89-
| (in thousands) | | | | | | | | | | |
| | Asset | Investment | | | |
| | Management | Portfolio | Corporate | Eliminations | Total |
| 2017 | | | | | | | | | | |
| Advisory services, external customers | $ | 7,431 | $ | - | $ | - | $ | - | $ | 7,431 |
Advisory services, other operating segments(1) | | 207 | | - | | - | | (207) | | - |
| Interest and dividend income | | - | | 8,572 | | 1 | | - | | 8,573 |
| Interest expense | | - | | (1,796) | | (1,237)(2) | | - | | (3,033) |
| Net revenues | | 7,638 | | 6,776 | | (1,236) | | (207) | | 12,971 |
| Other income | | - | | (4,306) | | 634 (3) | | - | | (3,672) |
Operating expenses(4) | | (3,016) | | (3,387) | | - | | - | | (6,403) |
Intercompany expenses(1) | | - | | (207) | | - | | 207 | | - |
| Income (loss) before income taxes | $ | 4,622 | $ | (1,124) | $ | (602) | $ | - | $ | 2,896 |
| Assets | $ | 1,632 | $ | 267,429 | $ | 15,528 | $ | - | $ | 284,589 |
| | | | | | | | | | | |
| | Asset | Investment | | | |
| | Management | Portfolio | Corporate | Eliminations | Total |
| 2016 | | | | | | | | | | |
| Advisory services, external customers | $ | 5,489 | $ | - | $ | - | $ | - | $ | 5,489 |
Advisory services, other operating segments(1) | | 94 | | - | | - | | (94) | | - |
| Interest and dividend income | | - | | 6,576 | | 2 | | - | | 6,578 |
| Interest expense | | - | | (747) | | (1,109)(2) | | - | | (1,856) |
| Net revenues | | 5,583 | | 5,829 | | (1,107) | | (94) | | 10,211 |
| Other income | | - | | (2,675) | | 2,735 (3) | | - | | 60 |
Operating expenses(4) | | (2,640) | | (3,103) | | - | | - | | (5,743) |
Intercompany expenses(1) | | - | | (94) | | - | | 94 | | - |
| Income (loss) before income taxes | $ | 2,943 | $ | (43) | $ | 1,628 | $ | - | $ | 4,528 |
| Assets | $ | 1,856 | $ | 199,883 | $ | 21,131 | $ | - | $ | 222,870 |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2018 | | | | | | | | | | | | | | | |
| Advisory services, external customers | | $ | 7,771 | | | $ | - | | | $ | - | | | $ | - | | | $ | 7,771 | |
Advisory services, other operating segments(1) | | | 251 | | | | - | | | | - | | | | (251 | ) | | | - | |
| Interest and dividend income | | | - | | | | 9,986 | | | | 2 | | | | - | | | | 9,988 | |
| Interest expense | | | - | | | | (4,029 | ) | | | (1,491 | )(2) | | | - | | | | (5,520 | ) |
| Net revenues | | | 8,022 | | | | 5,957 | | | | (1,489 | ) | | | (251 | ) | | | 12,239 | |
| Other (expense) income | | | - | | | | (12,794 | ) | | | 1,346 | (3) | | | - | | | | (11,448 | ) |
Operating expenses(4) | | | (2,822 | ) | | | (3,620 | ) | | | - | | | | - | | | | (6,442 | ) |
Intercompany expenses(1) | | | - | | | | (251 | ) | | | - | | | | 251 | | | | - | |
| Income (loss) before income taxes | | $ | 5,200 | | | $ | (10,708 | ) | | $ | (143 | ) | | $ | - | | | $ | (5,651 | ) |
| Assets | | $ | 1,488 | | | $ | 245,866 | | | $ | 12,046 | | | $ | - | | | $ | 259,400 | |
(1) | Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
(2) | Includes interest on junior subordinated note.long-term debt. |
(3) | Includes gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
(4) | Corporate expenses are allocated based on each segment'ssegment’s proportional share of total revenues. |
NOTE 19.18. RELATED PARTY TRANSACTIONS
Other Relationships with Orchid
At both December 31, 20172019 and 2016,2018, the Company owned 1,520,036 and 1,395,036 shares of Orchid common stock, respectively, representing approximately 2.9%2.4% and 4.2%3.1% of Orchid'sOrchid’s outstanding common stock.stock, on such dates. During the years ended December 31, 20172019 and 2016,2018, the Company received dividends on this common stock investment of approximately $2.5$1.5 million and $2.3$1.6 million, respectively.
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation from Orchid, and owns shares of common stock of Orchid. Also, Hunter Haas, our Chief Financial Officer, Chief Investment Officer and Treasurer, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid'sOrchid’s Board of Directors, receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our independent directors, each own shares of common stock of Orchid.
NOTE 19. SUBSEQUENT EVENTS
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We cannot, reasonably estimate the length or severity of this pandemic and its ultimate effect on the markets. As of the date of this filing, this global pandemic has had a significant impact on financial markets and economic activity, in addition to the health of hundreds of thousands of people across the globe. Interest rates have significantly declined, establishing new all-time low yields across the US Treasury maturity curve. There are concerns in the MBS markets that there may be elevated levels of prepayment activity. The typical smooth operation of financial markets has become erratic recently, prompting significant policy responses from the Federal Reserve (“Fed”), as well as central banks across the globe. The Federal government is working on a substantial fiscal stimulus package and it is expected to be signed into law. While all markets have been affected, performance appears to have been highly correlated with the risk or credit profile of the asset in question. High-risk assets generally have performed poorly relative to low risk assets during this recent period of market volatility. However, the Agency MBS market has been impacted by the broader market turmoil as well.
As a result, Royal Palm has experienced significant margin call activity from its repurchase agreement counterparties. As of March 26, 2020, we have met all margin calls, but we have disposed of approximately $170.8 million of MBS to generate cash to meet these margin calls and generate additional cash reserves. These sales resulted in realized losses of approximately $5.7 million which will be charged to operations in the first quarter of 2020. Going forward, margin call activity may continue to be elevated and we may dispose of additional assets and suffer losses on the disposition of those assets. We also may not have access to repurchase agreement funding to the extent we have in the past. To the extent that the market turmoil adversely affects Orchid Island Capital, Inc., then the amount of management fees we receive through our advisory services segment and potentially the dividends we receive on Orchid stock may be adversely impacted. Also, because we own shares of Orchid common stock, any decline in the value of that stock price would impact the book value of Bimini. As of March 26, 2020, the value of the Company’s Orchid stock investments has decreased $3.3 million from December 31, 2019. In light of these developments, we will re-evaluate our deferred tax asset and corresponding valuation allowance at the end of the first quarter of 2020 and going forward.
These developments and their effect on the world’s economy and health will likely continue to play out over the balance of the year, and maybe beyond. At this time, it is too early to tell what the ultimate effect will be on economic activity across the globe and the markets the Company operates in – Agency MBS. Accordingly, the effect on the Company’s consolidated financial position, results of operations and cash flows in 2020 is too uncertain to determine.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We had no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or practices or financial statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the "evaluation date"“evaluation date”), the Company carried out an evaluation, under the supervision and with the participation of the Company'sCompany’s management, including the Company'sCompany’s Chief Executive Officer ("(“the CEO"CEO”) and Chief Financial Officer ("(“the CFO"CFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act.Act of 1934 (the “Exchange Act”). Based on this evaluation, the CEO and CFO concluded that the Company'sCompany’s disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company and its subsidiaries is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC'sSEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company'sCompany’s internal control over financial reporting that occurred during the Company'sCompany’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting. In response to the COVID-19 pandemic, Company employees have begun working from home beginning on March 23, 2020. Management has taken measures to ensure that the Company’s internal control over financial reporting are unchanged during this period.
Management'sManagement’s Report of Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, the Company'sCompany’s principal executive and principal financial officers and effected by the Company'sCompany’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
· | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
· | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
· | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial statements. |
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of consolidated financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company'sCompany’s management assessed the effectiveness of the Company'sCompany’s internal control over financial reporting as of December 31, 2017.2019. In making this assessment, the Company'sCompany’s management used criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management'smanagement’s assessment, the Company'sCompany’s management believes that, as of December 31, 2017,2019, the Company'sCompany’s internal control over financial reporting was effective based on those criteria.
ITEM 9B. OTHER INFORMATION.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Company's 2018Company’s 2020 Annual Meeting of Stockholders, which the Company expects to file with the U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after December 31, 20172019 (the "Proxy Statement").
ITEM 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.
ITEM 12. Security Ownership Ofof Certain Beneficial Owners Andand Management Andand Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to the Proxy Statement and to Part II, Item 5 of this Form 10-K.
ITEM 13. Certain Relationships Andand Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.
ITEM 14. Principal Accountant Fees Andand Services.
The information required by this Item 14 is incorporated herein by reference to the Proxy Statement.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules.
| a. | Financial Statements. The consolidated financial statements of the Company, together with the report of Independent Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form 10-K and are incorporated herein by reference. |
The following information is filed as part of this Form 10-K:
| | Page |
| | |
| Report of Independent Registered Public Accounting Firm | 6160 |
| Consolidated Balance Sheets | 61 |
| Consolidated Statements of Operations | 62 |
Consolidated Statements of OperationsEquity | 63 |
Consolidated Statements of Equity | 64 |
| Consolidated Statements of Cash Flows | 6564 |
| Notes to Consolidated Financial Statements | 6665 |
b.Financial Statement Schedules.| b. | Financial Statement Schedules. |
Not applicable.
Exhibit No
| * | * Management compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K. |
| *** | *** Furnished herewith |
| **** | **** Submitted electronically herewith. |
ITEM 16. Form 10-K Summary.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BIMINI CAPITAL MANAGEMENT, INC.
Date:March 9, 201827, 2020 | | By: | /s/ Robert E. Cauley | |
| | | | Robert E. Cauley Chairman and Chief Executive Officer |
Date:March 9, 201827, 2020 | | By: | /s/ G. Hunter Haas, IV | |
| | | | G. Hunter Haas, IV President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 9, 2018.27, 2020.
Signature | | Capacity |
| | | |
/s/ Robert E. Cauley | | |
Robert E. Cauley | | Director, Chairman of the Board and Chief Executive Officer |
| | | |
/s/ G. Hunter Haas, IV | | |
G. Hunter Haas, IV | | President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
| | | |
/s/ Robert J. Dwyer | | |
Robert J. Dwyer | | Director |
| | | |
/s/ Frank E. Jaumot | | |
Frank E. Jaumot | | Director |
-96--97-
