UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 20172021
☐
TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number: 001-32171
:
 001-32171 Bimini Capital Management, Inc. (Exact name of registrant as specified in its charter) Maryland 72-1571637 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
(
)
231-1400
(Registrant'sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Class A Common Stock, $0.001 par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
☐
Noý
☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes
☐
Noý
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Indicate bycheck markwhether theregistrant (1) hasfiled allreports requiredto befiled bySection 13 or15(d) ofthe SecuritiesExchange Actof
1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file suchreports), and (2) has been subject to such
filing requirements for the past 90 days.
Yesý
☒
No
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Indicate by checkmark whether the registranthas submitted electronically and posted on its corporate Web site, if any, everyInteractive Data File requiredto be submitted and posted pursuantto Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant wasrequired to submit and post such
files).
Yesý
☒
No
☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ýIndicate by check mark whether the registrant is alarge accelerated filer,an accelerated filer, anon-accelerated filer, or asmaller reporting company or
an emerging growth company.See the definitions of "large “largeaccelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"
company” in Rule 12b‑212b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer ☐Non-accelerated
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Non-accelerated filer ☐
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Smaller Reporting Company ýreporting company
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Emerging growth company
☐
If an emerging growth company,indicate by check mark if the registrant haselected not to use the extended transition periodfor complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
☐
Indicate by checkmark whether theregistrant has fileda report on andattestation to itsmanagement's assessment ofthe effectiveness ofits internal
control overfinancial reportingunder Section404(b) ofthe Sarbanes-OxleyAct (15U.S.C. 7262(b))by theregistered publicaccounting firmthat
prepared or issued its audit report.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes☐ No ý
☐
No
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State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2017:2021:
Title of each Class
Shares held by non-affiliates
Aggregate market value held
by non-affiliates
Class A Common Stock, $0.001 par value
7,457,553
$
13,000,000
| Title of each Class | Shares held by non-affiliates | Aggregate market value held by non-affiliates | ||||||
| Class A Common Stock, $0.001 par value | 8,673,781 | $ | 24,300,000 | (a) | ||||
| Class B Common Stock, $0.001 par value | 20,760 | $ | 1,000 | (b) | ||||
| Class C Common Stock, $0.001 par value | 31,938 | $ | 1,500 | (b) | ||||
Class B Common Stock, $0.001 par value
20,760
$
1,000
(b)
Class C Common Stock, $0.001 par value
31,938
$
1,500
(b)
(a) The aggregate market value was calculated by using the last sale price of the Class A Common Stock as of June 30, 2017.2021.
(b)
The market value of the Class B and Class C Common Stock is an estimate based on their initial purchase price.
Indicate the number of shares outstanding of each of the Registrant'sRegistrant’s classes of common stock, as of the latest practicable date:
Title of each Class Latest Practicable Date Shares Outstanding Class A Common Stock, $0.001 par value March 11, 2022 10,531,772 Class B Common Stock, $0.001 par value March 11, 2022 31,938 Class C Common Stock, $0.001 par value March 11, 2022 31,938 | |||||
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant'sRegistrant’s definitiveProxy Statement forits 20182022 AnnualMeeting of Stockholdersof the Registrantare incorporated byreference
into Part III of this Annual Report on Form 10‑K.10-K (this “Report”).
BIMINI CAPITAL MANAGEMENT, INC.
INDEX
PART I
ITEM 1. Business
1
ITEM 1A.Risk Factors
10
ITEM 1B.UnresolvedStaff Comments
33
ITEM 2. Properties
33
ITEM 3. LegalProceedings
33
ITEM 4. MineSafety Disclosures
34
PART II
ITEM 5. Marketfor Registrant'sCommon Equity,Related StockholderMatters andIssuer Purchasesof Equity
Securities
35
ITEM 6. [Reserved]
36
ITEM 7. Management'sDiscussionand Analysisof FinancialConditionand Resultsof Operations
37
ITEM 7A.Quantitativeand QualitativeDisclosuresAbout MarketRisk
61
ITEM 8. FinancialStatementsand SupplementaryData
62
ITEM 9. Changesin and DisagreementsWith Accountantson Accountingand FinancialDisclosure
89
ITEM 9A.Controlsand Procedures
89
ITEM 9B.Other Information
90
ITEM 9C.DisclosureRegardingForeign Jurisdictionsthe PreventInspections
90
PART III
ITEM 10.Directors,ExecutiveOfficers andCorporateGovernance
91
ITEM 11. ExecutiveCompensation
91
ITEM 12.SecurityOwnershipof CertainBeneficialOwners andManagementand RelatedStockholderMatters
91
ITEM 13.Certain Relationshipsand RelatedTransactions,and DirectorIndependence
91
ITEM 14.PrincipalAccountantFees andServices
91
PART IV
ITEM 15.Exhibits andFinancialStatementSchedules
92
ITEM 16.Form 10-KSummary
93
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this annual reportReport that are subject to risks anduncertainties. These forward-looking statements
include information about possible or assumed future results of our business, financialcondition, liquidity, results of operations, plans
and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "intend," "should," "may," "plans," "projects," "will," “believe,” “expect,” “anticipate,” “estimate,”“intend,” “should,” “may,” “plans,” “projects,” “will,”
or similar expressions, or the negative of these words, we intend to identifyforward-looking statements. Statements regarding the
following subjects are forward-looking by their nature:
●
| our business and investment strategy; |
●
market trends;
●
our understanding of our competition and our ability to compete effectively;
●
our ability to quantify risk based on historical experience;
●
our ability to forecast our tax attributes, which are based upon various factsand assumptions, and our ability to protect and
use our NOLs to offset future taxable income, including whether our shareholder rights planwill be effective in preventing an
ownership change that would significantly limit our ability to utilize such NOLs;
●
the impact of possible future changes in tax laws or tax rates;
●
our ability to maintain our exemption from the obligation to register under the InvestmentCompany Act of 1940, as amended
(the “Investment Company Act”);
●
the effect of actual or proposed actions of the U.S. Federal Reserve (the “Fed”), the FederalHousing Finance Agency (the
“FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury with respect to monetary policy or interest
rates;
●
the ongoing effect of the coronavirus (COVID-19) pandemic and the potential future outbreakof other highly infectious or
contagious diseases on the Agency MBS market and on our results of futureoperations, financial position, and liquidity;
●
geo-political events, such as the crisis in Ukraine, government responsesto such events and the related impact on the
economy both nationally and internationally;
●
expected capital expenditures;
●
the impact of technology on our operations and business, and
●
the eventual phase-out of the London Interbank Offered Rate (“LIBOR”) index, transition fromLIBOR to an alternative
reference rate and the impact on our LIBOR sensitive assets, liabilities andfunding hedges
The forward-looking statements are based on our beliefs, assumptionsand expectations of our future performance, taking into
account all information currently available to us. You should not place undue reliance on these forward-looking statements.These
beliefs, assumptions and expectations can change as a result of many possibleevents or factors, not all of which are known to us.
Some of these factors are described under the caption ''Risk Factors''‘‘Risk Factors’’ in this Annual Report on Form 10-K and any subsequentQuarterly Reports on Form
10-Q.If a change occurs, our business, financial condition, liquidity and resultsof operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statementspeaks only as of the date on which it is made. New risks
and uncertainties arise from time to time, and it is impossible for us to predictthose events or how they may affect us. Except as
required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether asa result of
new information, future events or otherwise.
- 1 -
PART I
ITEM 1. BUSINESS
Overview
Bimini Capital Management, Inc., a Maryland corporation ("(“Bimini Capital" Capital”and, collectively with its subsidiaries, the "Company," "we"“Company,”
“we”, "us"“us” or "our"“our”) is a specialty finance company that operates in twobusiness segments: investing in mortgage-backed securities ("MBS"
(“MBS”) and Orchid Island Capital, Inc. (“Orchid”) common stock in our ownportfolio, and serving as the external manager of Orchid Island Capital, Inc. ("Orchid")
which also invests in MBS.In both cases, the principal and interest payments of these MBSare guaranteed by the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation, ("Mae, Freddie Mac")
Mac or the Government National Mortgage Association ("(“Ginnie Mae"Mae” and,collectively with Fannie Mae and Freddie Mac, "GSEs"“GSEs”) and
are backed primarily by single-family residential mortgage loans. We refer to these types ofMBS as Agency“Agency MBS.” The investment
strategy focuses on, and the portfolios consist of, two categories of AgencyMBS: (i) traditional pass-through Agency MBS, such as
mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”)issued by the GSEs and (ii) structured Agency
MBS, such as collateralized mortgage obligations ("CMOs"), interest only securities ("IOs"(“IOs”), inverse interest only securities ("IIOs"(“IIOs”) and principal only securities ("POs"(“POs”), among other
types of structured Agency MBS. The Company'sCompany’s operations are classified into two principal reportablesegments: the asset
management segment and the investment portfolio segment.
The investment portfolio segment includes the investment activities conductedat Bimini Capital and itsCapital’s wholly-owned subsidiary, Royal
Palm Capital, LLC ("(“Royal Palm"Palm”). The investment portfolio segment receives revenuein the form of interest and dividend income on its
investments. The investment portfolio is internally managed by Bimini Capital's wholly-owned subsidiary, Bimini Advisors Holdings, LLC ("Bimini Advisors) pursuant to the terms of a management agreement.
References to the general management of the Company'sCompany’s portfolio of MBS referto the operations of Bimini Capital and Royal Palm.
The Company, through Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC (“Bimini Advisors”), serves as the
external manager of Orchid and from this arrangement the Company receives managementfees and expense reimbursements.The
asset management segment includes these investment advisory servicesprovided by Bimini Advisors to Orchid.
Management of Orchid
Orchid is externally managed and advised by our wholly-owned subsidiary, Bimini Advisors, and its MBS investment team
pursuant to the terms of a management agreement.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 Advisorsprovides 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'sOrchid’s board of directors,of which a majority of the members are independent, and is onlypermitted to
perform such functionsdelegated by Orchid'sOrchid’s Board.
●
●
-1-
Bimini Advisors receives a monthly management fee in the amount of:
●
● One-twelfth of 1.00% of the Orchid’s equity that is greater than $500 million. |
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurredon its behalf.In addition, Bimini Advisors
allocates to Orchid its pro rata portion of certain overhead costs as set forth in themanagement agreement.Should Orchid terminate
the management agreement without cause, it shall pay to Bimini Advisors a terminationfee equal to three times the average annual
management fee, as defined in the management agreement, before or on thelast day of the initial term or automatic renewal term.
The Investment and Capital Allocation Strategy
Investment Strategy
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With respect to our own portfolio, the business objective is to provide attractiverisk-adjusted total returns to our investors over the long
term through a combination of capital appreciation.appreciation and interest income. We intend to achievethis objective by investing in and
strategically allocating capital between pass-through Agency MBS and structured AgencyMBS. We seek to generate income from (i)
the net interest margin on the leveraged pass-through Agency MBS portfolioand the leveraged portion of the structured Agency MBS
portfolio, and (ii) the interest income we generate from the unleveraged portionof the structured Agency MBS portfolio. We also seek to
minimize the volatility of both the net asset value of, and income from, the portfoliothrough a process which emphasizes capital
allocation, asset selection, liquidity and active interest rate risk management. In addition,we also hold an investment, and earn
dividends, on Orchid common stock.
We fund the pass-through Agency MBS and certain of the structured Agency MBS such as fixed and floating rate tranches of CMOs and POs, throughrepurchase agreements. However, we
generally do not employ leverage on the structured Agency MBS that haveno principal balance, such as IOs and IIOs.IIOs, because those
securities contain structural leverage. We may pledge a portion of these assets to increasethe cash balance, but we do not intend to
invest the cash derived from pledging the assets. Otherwise, we do not use leverage in these instances because the securities contain structural leverage.
The target asset categories and principal assets in which we intend to investare as follows:
Pass-through Agency MBS
We invest in pass-through securities, which are securities secured by residential real propertyin which payments of both interest and
principal on the securities are generally made monthly. In effect, these securities pass through the monthly payments made by the
individual borrowers on the mortgage loans that underlie the securities, netof fees paid to the loan servicer orand the guarantor of the
securities. Pass-through certificates can be divided into various categoriesbased on the characteristics of the underlying mortgages,
such as the term or whether the interest rate is fixed or variable.
security.
●
IOs
-3-
which are prepayments, coupon interest rate (i.e. “LIBOR”),and term interest rates. Prepayments on the underlying pool of
mortgages reduce the stream of interest payments, making IIOs highly sensitive toprepayment rates. The coupon on IIOs is
payments on the underlying pool of mortgages. The coupon on the floatingrate CMO is also based on 30-day LIBOR.
●
capital allocated to this portfolio;
●
investing in certain structured Agency MBS, such as IOs and IIOs, generally on anunleveraged basis in order to (i) increase
-4-
- 5 -
The payment of principal and interest on mortgage pass-through securitiesissued by Ginnie Mae, but not the market value, is
guaranteed by the full faith and credit of the federal government. Payment of principaland interest on mortgage pass-through
certificates issued by Fannie Mae and Freddie Mac, but not the market value,is guaranteed by the respective agency issuing the security.
security.
A key feature of most mortgage loans is the ability of the borrower to repayprincipal earlier than scheduled. This is called a
prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, foreclosure or foreclosure.accelerated amortizationby
the borrower. Prepayments result in a return of principal to pass-through certificate holders. This may resultin a lower or higher rate of
return upon reinvestment of principal. This is generally referred to as prepaymentuncertainty. If a security purchased at a premium
prepays at a higher-than-expected rate, then the value of the premium wouldbe eroded at a faster-than-expected rate. Similarly, if a
discount mortgage prepays at a lower-than-expected rate, the amortization towardspar would be accumulated at a slower-than-expectedslower-than-
expected rate. The possibility of these undesirable effects is sometimes referred to as "prepayment “prepaymentrisk."”
-2-
In general, declining interest rates tend to increase prepayments, andrising interest rates tend to slow prepayments. Like other fixed-incomefixed-
income securities, when interest rates rise, the value of Agency MBS generally declines.The rate of prepayments on underlying
mortgages will affect the price and volatility of Agency MBS and may shorten or extendthe effective maturity of the security beyond
what was anticipated at the time of purchase. If interest rates rise, our holdingsof Agency MBS may experience reduced spreads over
our funding costs if the borrowers of the underlying mortgages pay off their mortgageslater than anticipated. This is generally referred
to as "extension"“extension” risk.
The mortgage loans underlying pass-through certificates can generally be classifiedinto the following three categories:
- 3 - ● Fixed-Rate Mortgages . Fixed-rate mortgages are those where the borrower pays an interest rate thatis constant throughout the term of the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also market interest rates change, there can be a divergence between the interest rate onthe loan and current market interest rates over time. This in turn can make fixed-rate mortgages price-sensitive to marketfluctuations in interest rates. In general, the longer the remaining term on the mortgage loan, the greater the pricesensitivity to movements in interest rates and, therefore, the likelihood for greater price variability. ● ARMs . ARMs are mortgages for which the borrower pays an interest rate that variesover the term of the loan. The interest rate usually resets based on market interest rates, although the adjustment ofsuch an interest rate may be subject to certain limitations. Traditionally, interest rate resets occur at regular intervals (for example, once per year). We refer to such ARMs as “traditional” ARMs. Because the interest rates on ARMs fluctuate based on marketconditions, ARMs tend to have interest rates that do not deviate from current market rates by a large amount. This in turncan mean that ARMs have less price sensitivity to interest rates and, consequently, are less likely to experience significant price volatility. ● Hybrid Adjustable-Rate Mortgages . Hybrid ARMs have a fixed-rate for the first few years of the loan, oftenthree, five, seven or ten years, and thereafter reset periodically like a traditional ARM. Effectively, such mortgages are hybrids, combining the features of a pure fixed-rate mortgage and a traditional ARM. Hybrid ARMs haveprice sensitivity to interest rates similar to that of a fixed-rate mortgage during the period when the interest rate is fixedand similar to that of an ARM when the interest rate is in its periodic reset stage. However, because many hybrid ARMs are structured with a relatively shortinitial time span during which the interest rate is fixed, even during that segment of its existence,the price sensitivity may be high. Collateralized Mortgage Obligation MBS CMOs are a type of MBS the principal and interest of which are paid, in mostcases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by pools of mortgagepass-through securities issued directly by or under the auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structuredinto multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal onlyafter the first class has been retired. Generally,fixed-rate MBS are used to collateralize CMOs. However, the CMO tranches need not all have fixed-rate coupons. Some CMO tranches have floating rate coupons that adjust based on market interest rates, subject to somelimitations. Such tranches, often called “CMO floaters,” can have relatively low price sensitivity to interest rates. |
Structured Agency MBS
We also invest in structured Agency MBS, which include CMOs, IOs, IIOs and POs. Thepayment of principal and interest, as
appropriate, on structured Agency MBS issued by Ginnie Mae, but not the marketvalue, is guaranteed by the full faith and credit of the
federal government. Payment of principal and interest, as appropriate, on structuredAgency MBS issued by Fannie Mae and Freddie
Mac, but not the market value, is guaranteed by the respective agencyissuing the security. The types of structured Agency MBS in
which we invest are described below.
●
| . IOs represent the stream of interest payments on a pool of mortgages,either fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim to any principal payments. The value of IOs dependsprimarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgagesreduce the stream of interest payments going forward, hence IOs are highly sensitive to prepayment rates. IOs arealso sensitive to changes in interest rates. An increase in interest rates has a tendency to reduce prepayments, which increasesthe expected absolute amount of future interest payments. ● IIOs . IIOs represent the stream of interest payments on a pool of mortgages thatunderlie MBS, either fixed-rate mortgages or hybrid ARMs. Holders of IIOs have no claim to any principal payments. Thevalue of IIOs depends primarily on three factors, |
- 4 -
which are prepayments, coupon interest rate (i.e. “LIBOR”),and term interest rates. Prepayments on the underlying pool of
mortgages reduce the stream of interest payments, making IIOs highly sensitive toprepayment rates. The coupon on IIOs is
payments on the underlying pool of mortgages. The coupon on the floatingrate CMO is also based on 30-day LIBOR.
Typically,the coupon on the floating rate CMO and the IIO, when combined, equalthe coupon on the pool of underlying
mortgages. The coupon on the pool of underlying mortgages typically representsa cap or ceiling on the combined coupons of
the floating rate CMO and the IIO. Accordingly, when the value of 30-day LIBOR increases, the coupon of the floating rate
CMO will increase and the coupon on the IIO will decrease. When the value of 30-day LIBORfalls, the opposite is true.
Accordingly, the value of IIOs are sensitive to the level of 30-day LIBOR and expectations by market participants of future
movements in the level of 30-day LIBOR. IIOs are also sensitive to changes ininterest rates. An increase in interest rates
reduces the present value of future interest payments on a pool of mortgages.On the other hand, an increase in interest rates
has a tendency to reduce prepayments, which increases the expected absolute amountof future interest payments.
●
POs
. POs represent the stream of principal payments on a pool of mortgages.Holders of POs have no claim to any interest
payments, although the ultimate amount of principal to be received over timeis known, equaling the principal balance of the
underlying pool of mortgages. The timing of the receipt of the principal paymentsis not known. The value of POs depends
primarily on two factors, which are prepayments and interest rates.Prepayments on the underlying pool of mortgages
accelerate the stream of principal repayments, making POs highly sensitive tothe rate at which the mortgages in the pool are
prepaid. POs are also sensitive to changes in interest rates. An increase ininterest rates reduces the present value of future
principal payments on a pool of mortgages. Further, an increase in interest rates has a tendency to reduce prepayments,
which decelerates, or pushes further out in time, the ultimate receipt of the principalpayments. The opposite is true when
interest rates decline.
Mortgage REIT Common Stock
We also maintain an investment in the common stock of Orchid.Because Orchid is a mortgage REIT that invests primarily in assets
similar assets ofto those in which the Company invests,we consider this investment as a proxy for our overall investment strategy.We do not
currently invest in other REIT common stock, but may dosubject to certain limitations weare not prohibited from doing so in the future.
Our investment strategy consists of the following components:
●
be unencumbered or, when encumbered, the cash from such borrowings may be retained and (iii) diversify portfoliointerest rate risk due to the different interest rate sensitivity these securities have compared to pass-throughAgency MBS; ● investing in Agency MBS in order to minimize credit risk; ● investing in REIT common stock, including Orchid; ● investing in assets that will cause us to maintain our exclusion from regulationas an investment company under the Investment Company Act. |
Our management team makes investment decisions based on various factors,including, but not limited to, relative value, expected
cash yield, supply and demand, costs of hedging, costs of financing, liquidity requirements,expected future interest rate volatility and
the overall shape of the U.S. Treasury and interest rate swap yield curves. We do not attribute any particular quantitativesignificance to
any of these factors, and the weight we give to these factors depends onmarket conditions and economic trends.
Over time, we will modify our investment strategy as market conditionschange to seek to maximize the returns from our investment
portfolio.We believe that this strategy will enable us to provide attractive long-term returnsto our stockholders.
common stock typically fluctuates with Orchid’s book value, which is affected by the samefactors that affect our MBS investments,
●
our pass-through securities have a longer duration, we will allocate morecapital to the structured security portfolio or hedges
-5-
Capital Allocation Strategy
The percentage of capital invested in each of our two asset categories willvary and will be managed in an effort to maintain the level of
income generated by the combined portfolios, the stability of that incomestream and the stability of the value of the combined
portfolios. Typically, pass-through Agency MBS and structured Agency MBS exhibit materially different sensitivities to movements in
interest rates. Declines in the value of one portfolio may be offset by appreciationin the other, although we cannot assure you that this
will be the case. Additionally, we will seek to maintain adequate liquidity as we allocate capital. The value of our investment in Orchid
common stock typically fluctuates with Orchid’s book value, which is affected by the samefactors that affect our MBS investments,
We allocate our capital to assist our interest rate risk management efforts. The unleveraged portfolio does notrequire unencumbered
cash or cash equivalents to be maintained in anticipation of possible margin calls. To the extent more capital is deployed in the
unleveraged portfolio, our liquidity needs will generally be less.
During periods of rising interest rates, refinancing opportunities available to borrowers typicallydecrease because borrowers are not
able to refinance their current mortgage loans with new mortgage loans at lower interestrates. In such instances, securities that are
highly sensitive to refinancing activity, such as IOs and IIOs, typically increase in value. Our capital allocation strategy allows us to
redeploy our capital into such securities when and if we believe interest rates will behigher in the future, thereby allowing us to hold
securities the value of which we believe is likely to increase as interest rates rise.Also, by being able to re-allocate capital into
structured Agency MBS, such as IOs, during periods of rising interest rates, we maybe able to offset the likely decline in the value of
our pass-through Agency MBS, which are negatively impacted by rising interestrates.
Financing Strategy
We borrow against our pass-through Agency MBS and certain of our structured AgencyMBS using short-term repurchase agreements.
A repurchase (or "repo") agreement transaction acts as a financing arrangement underwhich we effectively pledge our investment
securities as collateral to secure a loan. Our borrowings currently consistthrough repurchase transactionsare generally short-term and have maturities
ranging from one day to one year but may have maturities up to five or moreyears. Our financing rates are typically impacted by the
U.S. Federal Funds rate and other short-term benchmark rates and liquidityin the Agency MBS repo and other short-term funding
markets.The terms of short-termour master repurchase agreements. agreements generally conform tothe terms in the standard master repurchase
agreement as published by the Securities Industry and Financial Markets Association("SIFMA") as to repayment, margin requirements
and the segregation of all securities sold under the repurchase transaction. Inaddition, each lender may require that we include
supplemental terms and conditions to the standard master repurchase agreementto address such matters as additional margin
maintenance requirements, cross default and other provisions. The specific provisionsmay differ for each lender and certain terms may
not be determined until we engage in individual repurchase transactions.
We may use other sources of leverage, such as secured or unsecured debt or issuancesof preferred stock. We do not have a policy
limiting the amount of leverage we may incur. However, we generally expect that the ratio of our total liabilities compared to our equity,
which we refer to as our leverage ratio, will not exceed 12 to 1 and will generally beless than 1210 to 1. Our amount of leverage may vary
depending on market conditions and other factors that we deem relevant.
We allocate our capital between two sub-portfolios. The pass-through Agency MBS portfoliowill be leveraged generally through
repurchase agreement funding. The structured Agency MBS portfolio generallywill not be leveraged. The leverage ratio is calculated
by dividing our total liabilities by total stockholders'stockholders’ equity at the end of each period.The amount of leverage typically will be a function
of the capital allocated to the pass-through Agency MBS portfolio and the amountof haircuts required by our lenders on our
borrowings. When the capital allocation to the pass-through Agency MBSportfolio is high, we expect that the leverage ratio will be high since
- 6 -
because more capital is being explicitly leveraged and less capital is un-leveraged.If the haircuts required by our lenders on our
borrowings are higher, all else being equal, our leverage will be lower sincebecause our lenders will lend less against thevalue of the capital
deployed to the pass-through Agency MBS portfolio. The allocation of capitalbetween the two portfolios will be a function of several
factors:
●
| The relative durations of the respective portfolios — We generally seek to have a combinedhedged duration at or near zero. If |
● The relative attractiveness of pass-through securities versus structured securities — To the extent we believe the expected returns of one type of security are higher than the other, we will allocate more capital to the more attractivesecurities, subject to the caveat that its combined duration remains at or near zero and subject tomaintaining our qualification for exemption under the Investment Company Act. ● Liquidity — We seek to maintain adequate cash and unencumbered securities relativeto our repurchase agreement borrowings well in excess of anticipated price or prepayment related margincalls from our lenders. To the extent we feel price or prepayment related margin calls will be higher/lower, we will typically allocate less/more capital to the pass-throughAgency MBS portfolio. Our pass-through Agency MBS portfolio likely will beour only source of price or prepayment related margin calls because we generally will not apply leverage to our structured AgencyMBS portfolio. From time to time we may pledge a portion of our structured securities and retain the cash derived so it can be usedto enhance our liquidity. |
Risk Management
A futurescontractis a legallybinding agreementto buy orsell a financialinstrumentin a designatedfuture monthat a priceagreed uponat
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We may purchase a portion of our Agency MBS through forward settling transactions, including "to-be-announced" ("TBA") securities transactions. We account for TBA securities as derivative instruments if either theinstruments. Gains and losses associatedwith TBA securities do not settletransactions are reported in
operations.
We invest in Agency MBS and Orchid common stock to mitigate credit risk. Additionally, our Agency MBS, as well as Orchid’s, are
backed by a diversified base of mortgage loans to mitigate geographic, loan originatorand other types of concentration risks.
Interest Rate Risk Management
We believe that the risk of adverse interest rate movements represents the most significantrisk to the value of our portfolio. This risk
arises because (i) the interest rate indices used to calculate the interest rateson the mortgages underlying our assets may be different
from the interest rate indices used to calculate the interest rates on the relatedborrowings, and (ii) interest rate movements affecting
our borrowings may not be reasonably correlated with interest rate movementsaffecting our assets. We attempt to mitigate our interest
rate risk by using the techniques described below:
Agency MBS Backed by ARMs
. We seek to minimize the differences between interest rate indices and interest rate adjustment periods
of our Agency MBS backed by ARMs and related borrowings. At the time of funding,we typically align (i) the underlying interest rate
index used to calculate interest rates for our Agency MBS backed by ARMsand the related borrowings and (ii) the interest rate
adjustment periods for our Agency MBS backed by ARMs and the interestrate adjustment periods for our related borrowings. As our
borrowings mature or are renewed, we may adjust the index used to calculateinterest expense, the duration of the reset periods and
the maturities of our borrowings.
Agency MBS Backed by Fixed-Rate Mortgages
. As interest rates rise, our borrowing costs increase; however, the income on our
Agency MBS backed by fixed-rate mortgages remains unchanged. We may seek to limit increasesto our borrowing costs through the
use of interest rate swap or cap agreements, options, put or call agreements,futures contracts, forward rate agreements or similar
financial instruments to effectivelyeconomically convert our floating-rate borrowings into fixed-rateborrowings.
Agency MBS Backed by Hybrid ARMs
. During the fixed-rate period of our Agency MBS backed by hybrid ARMs,the security is similar
to Agency MBS backed by fixed-rate mortgages. During this period, wemay employ the same hedging strategy that we employ for our
Agency MBS backed by fixed-rate mortgages. Once our Agency MBS backedby hybrid ARMs convert to floating rate securities, we
may employ the same hedging strategy as we employ for our Agency MBSbacked by ARMs.
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Derivative Instruments.
We may enter into derivative instruments to economically hedge against the possibilitythat rising rates may
adversely impact the valuecost of our repurchase agreement liabilities.The principalinstrumentsthat theCompany hasused to dateare
Eurodollar,Fed Fundsand TreasuryNote ("T-Note"(“T-Note”)futures contractsand optionsto enterinto interestrate swaps ("(“interestrate swaptions"
swaptions”), and “to-be-announced”(“TBA”)securitiestransactions,but we mayenter intoother transactions derivativesin the future.
A futurescontractis a legallybinding agreementto buy orsell a financialinstrumentin a designatedfuture monthat a priceagreed uponat
the initiationof the contractby the buyerand seller.A futurescontractdiffers froman optionin that anoption givesone of the
counterpartiesa right,but not theobligation,to buy orsell, whilea futurescontractrepresentsan obligationof both counterpartiesto buy or
sell a financialinstrumentat a specifiedprice.
Interest rate swaptions provide us the option to enter into an interest rate swap agreementfor a predetermined notional amount, stated
term and pay and receive interest rates in the future. We may enter into swaption agreementsthat 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 receivefixed
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 wecannot assure you that this will be the case.
gain (loss) on derivative instruments in the shortest period accompanying consolidated statementsof time possible or if we cannot assert that it is probable at the inception of the TBA transaction, and throughout its term, that we will take physical delivery of the Agency MBS for a long position, or make delivery of the Agency MBS for a short position, upon settlement of the trade.
operations.
Prepayment Risk Management
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 thecoupon rate of
a mortgage, mortgage prepayments are likely to decrease.
When prepayment rates increase, we may not be able to reinvest the money receivedfrom 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 contingenton 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 onthe underlying mortgage loan. Because the returns on
POs decrease the longer it takes the principal payments on the underlyingloans to be paid, a decrease in prepayment rates could
decrease our returns on these securities.
Prepayment risk also affects our hedging activities
. When an Agency MBS backed by a fixed-rate mortgage or hybrid ARMis acquired
with borrowings, we may cap or fix our borrowing costs for a period closeto the anticipated average life of the fixed-rate portion of the
related Agency MBS. If prepayment rates are different than our projections, the term of therelated hedging instrument may not match
the fixed-rate portion of the security, which could cause us to incur losses.
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 areless likely to be prepaid. For example, we invest in Agency
MBS backed by mortgages (i) with loan balances low enough such that aborrower would likely have little incentive to refinance, (ii)
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extended to borrowers with credit histories weak enough to not be eligible torefinance their mortgage loans, (iii) that are newly
originated fixed-rate or hybrid ARMs or (iv) that have interest rates low enoughsuch 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 morelikely 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 investin those tranches as a means of hedging against increases in
prepayment rates.
Liquidity Management Strategy
-7-
●
Deploying capital from our leveraged Agency MBS portfolio to our unleveragedAgency MBS portfolio;
●
Investing in Agency MBS backed by mortgages that we believe are less likely to beprepaid to decrease the risk of excessive
margin calls when monthly prepayments are announced. Prepayments aredeclared, and the market value of the related
security declines, before the receipt of the related cash flows. Prepayment declarationsgive rise to a temporary collateral
deficiency and generally result in margin calls by lenders;
Because of our use of leverage, we manage liquidity to meet our lenders'lenders’ margincalls by maintaining cash balances or unencumbered
assets well in excess of anticipated margin calls; and making margin callson our lenders when we have an excess of collateral
pledged against our borrowings.
We also attempt to minimize the number of margin calls we receive by:
●
deficiency and generally result in margin calls by lenders;
●
Investing in REIT common stock; and
●
Reducing our overall amount of leverage.
To theextent we are unable to adequately manage our interest rate exposure andare subjected to substantial margin calls, we may be
forced to sell assets at an inopportune time which in turn could impair our liquidityand reduce our borrowing capacity and book value.
Investment Company Act Exemption
provide a variety of benefit programs including a 401(k) plan and health, dentaland other insurance. We believe our relationship with-8-
our employees is excellent.
-9-
- 10 -
Summary of Risk Factors
We operate our business so that we are exempt from registration under the Investment CompanyAct. We rely on the exemption
provided by Section 3(c)(5)(C) of the Investment Company Act, which appliesto companies in the business of purchasing or otherwise
acquiring mortgages and other liens on, and interests in, real estate. In order torely on the exemption provided by Section 3(c)(5)(C),
we must maintain at least 55% of our assets in qualifying real estate assets. Forthe purposes of this test, structured Agency MBS are
non-qualifying real estate assets. We monitor our portfolio periodically and prior to eachinvestment 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 werefer to as qualifying real estate assets, and so that at
least 80% of the assets we own consist of real estate-related assets, includingour qualifying real estate assets.
We treat whole-pool pass-through Agency MBS as qualifying real estate assets based onno-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-throughAgency MBS to ensure we
maintain our exemption from registration under the Investment Company Act. Atpresent, we generally do not expect that our
investments in structured Agency MBS will constitute qualifying real estateassets, but will constitute real estate-related assets for
purposes of the Investment Company Act.
Employees and Human Capital Resources
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As of December 31, 2017,2021, we had 8 full-time employees.salaried employees,none of whom are subject to a collective bargaining agreement. We
provide a variety of benefit programs including a 401(k) plan and health, dentaland other insurance. We believe our relationship with
our employees is excellent.
Competition
Our net income depends on our ability to acquire Agency MBS for our portfolio atfavorable spreads over our borrowing costs. Our net
income also depends on our ability to execute the same investmentstrategy for the Orchid portfolio, for which we receive management
fees and expense reimbursement payments. When we invest in Agency MBSand 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 FederalReserve Bank and other governmental entities
or government sponsored entities. Many of these investors have greater financial resourcesand access to lower costs of capital than
we do. The existence of these competitive entities, as well as the possibility of additionalentities forming in the future, may increase the
competition for the acquisition of mortgage related securities, resulting in higherprices and lower yields on assets.
Available Information
Our investor relations website is www.biminicapital.com.
https://ir.biminicapital.com
.We make available on the website under "Financial Information/"Financials/SEC filings," free of
charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, ourcurrent reports on Form 8-K and any other reports (including
(including any amendments to such reports) as soon as reasonably practicableafter 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. Report.In addition, all of our filed reports can be obtained at the SEC's
SEC’s website at http://www.sec.gov.
ITEM 1A.RISK FACTORS.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our commonstock speculative or risky. This summary does
not address all of the risks that we face. Additional discussion of the risks summarizedin this risk factor summary, and other risks that
we face, can be found below under the heading “Risk Factors” and shouldbe carefully considered, together with other information in
this Report and our other filings with the SEC, before making an investmentdecision regarding our common stock.
●
Increases in interest rates may negatively affect the value of our investments and increasethe cost of our borrowings, which could
result in reduced earnings or losses.
●
An increase in interest rates may also cause a decrease in the volume ofnewly issued, or investor demand for, Agency MBS,
which could materially adversely affect our ability to acquire assets that satisfy our investmentobjectives and our business,
financial condition and results of operations.
●
Interest rate mismatches between our Agency MBS and our borrowings mayreduce our net interest margin during periods of
changing interest rates, which could materially adversely affect our business, financial conditionand results of operations.
●
Although structured Agency MBS are generally subject to the same risks asour pass-through Agency MBS, certain types of risks
may be enhanced depending on the type of structured Agency MBS in whichwe invest.
●
Differences in the stated maturity of our fixed rate assets, or in the timing of interestrate adjustments on our adjustable-rate
assets, and our borrowings may adversely affect our profitability.
●
New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac,on the one hand, and the federal
government, on the other, which could adversely affect the price of, or our ability to invest in and finance Agency MBS.
●
Purchases and sales of Agency MBS by the Fed may adversely affect the price and returnassociated with Agency MBS
●
Changes in the levels of prepayments on the mortgages underlying our Agency MBSmight decrease net interest income or result
in a net loss, which could materially adversely affect our business, financial condition andresults of operations.
●
Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS may reduceour net interest margin during periods of
rising interest rates, which could materially adversely affect our business, financial conditionand results of operations.
●
Failure to procure adequate repurchase agreement financing, or to renewor replace existing repurchase agreement financing as it
matures, could materially adversely affect our business, financial condition and results of operations.
●
Adverse market developments could cause our lenders to require us to pledgeadditional assets as collateral. If our assets were
insufficient to meet these collateral requirements, we might be compelled to liquidate particularassets at inopportune times and at
unfavorable prices, which could materially adversely affect our business, financial conditionand results of operations and our
ability to pay distributions to our stockholders.
●
Hedging against interest rate exposure may not completely insulate us frominterest rate risk and could materially adversely affect
our business, financial condition and results of operations.
●
Our use of leverage could materially adversely affect our business, financial conditionand results of operations.
●
We rely on analytical models and other data to analyze potential asset acquisition and dispositionopportunities 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 notin line with our strategy.
●
Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periodsof time
and may differ from the values that would have been used if a ready market for these assetsexisted. As a result, the values of
some of our assets are uncertain.
●
If our lenders default on their obligations to resell the Agency MBS back to us at theend of the repurchase transaction term, or if
the value of the Agency MBS has declined by the end of the repurchase transactionterm 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.
●
We have issued long-term debt to fund our operations which can increase the volatility ofour earnings and stockholders’ equity.
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●
Clearing facilities or exchanges upon which some of our hedging instrumentsare traded may increase margin requirements on our
hedging instruments in the event of adverse economic developments.
●
We depend primarily on two individuals to operate our business, and the loss of oneor both of such persons could materially
adversely affect our 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.
●
Loss of our exemption from regulation under the Investment Company Act wouldnegatively affect the value of shares of our
common stock.
●
Failure to obtain and maintain an exemption from being regulated as a commoditypool operator could subject us to additional
regulation and compliance requirements and may result in fines and other penaltieswhich could materially adversely affect our
business and financial condition.
●
Our ownership limitations and certain other provisions of applicable lawand our charter and bylaws may restrict business
combination opportunities that would otherwise be favorable to our stockholders.
●
The termination of our management agreement with Orchid could significantlyreduce our revenues.
●
We cannot predict the effect that government policies, laws and plans adopted in responseto the COVID-19 pandemic and the
global recessionary economic conditions will have on us.
●
Our investment in Orchid Island Capital, Inc. or other mortgage REIT commonstock may fluctuate in value which may materially
adversely affect our business, financial condition and results of operations.
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 makingan investment decision regarding our common stock. Our
business, financial condition or results of operations could be harmed by anyof these risks. Similarly, these risks could cause the
market price of our common stock to decline and you might lose all or partof your investment. Our forward-looking statements in this annual report
Report are subject to the following risks and uncertainties. Our actual resultscould 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 increasethe cost of our borrowings, which could
result in reduced earnings or losses.
Under a normal yield curve, market conditions,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. WhileFannie 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 investmentsmay 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 substantialrisk 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 theduration
and weighted average life of the investments would increase. We could realize a lossif the securities were sold. At the same time, an
increase in short-term interest rates would increase the amount of interestowed 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. Althoughrare 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 ofthe U.S. economy and the Federal Reserve's recent increase andpotential future
increases in short-term interest rates, there can be no guarantee thatthe 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, financialposition and results of operations.
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An increase in interest rates may also cause a decrease in the volume ofnewly issued, or investor demand for, Agency MBS,
which could materially adversely affect our ability to acquire assets that satisfy our investmentobjectives and our business,
financial condition and results of operations.
Rising interest rates generally reduce the demand for consumer credit, includingmortgage loans, due to the higher cost of
borrowing. A reduction in the volume of mortgage loans may affect the volumeof Agency MBS available to us, which could affect our
ability to acquire assets that satisfy our investment objectives. Rising interest ratesmay also cause Agency MBS that were issued prior
to an interest rate increase to provide yields that exceed prevailing market interestrates. 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 borrowingcosts, our ability to satisfy our
investment objectives and to generate income, our business, financialcondition and results of operations.
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We cannot predict the impact, if any, on our earnings or cash available for distributions to our stockholders, to the extent we make any,The implementation of the proposed restructuring of the Federal Housing Finance Agency (the "FHFA"), Fannie Mae, Freddie MacSingle Security Initiative may adversely affect our results and Ginnie Mae to align the standards and practices of these entities.financialcondition.
On February 21, 2012, the FHFA released its Strategic Plan for Enterprise Conservatorships, which set forth three objectives for the next phase of the Fannie Mae and Freddie Mac conservatorships: (i) build a new infrastructure for the secondary mortgage market, (ii) gradually contract Fannie Mae and Freddie Mac's presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. On October 4, 2012, the FHFA released its white paper entitled Building a New Infrastructure for the Secondary Mortgage Market, which proposes a new Fannie Mae and Freddie Mac infrastructure built around two principles.
-11-
First, replace Fannie Mae and Freddie Mac's current infrastructures with a common infrastructure that efficiently aligns the standards and practices of the two entities, beginning with overlapping core functions such as issuance, master servicing, bond administration, collateral management and data integration. The 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, 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 CSPSingle Security Initiative is a key goal of FHFA's 2014 Strategic Plan for the Conservatorshipsjoint initiative of Fannie Mae and FreddieMac which details(the “Enterprises”), under the organizational structure of Common Securitization Solutions, LLC, a joint venture company that was established by Fannie Mae and Freddie Mac to lead the work on this project. In December 2016, the FHFA announced that Release 1direction of the CSP was successfully implemented on November 21, 2016. This means that Freddie Mac now uses
The FHFA recognizes challenges faced in these formative stages which may or may not be surmountable, such as the absence of meaningful secondary mortgage market mechanisms beyondmonth than Fannie Mae and UMBS,meaning that legacy Freddie Mac positions
The reductionFreddie Mac positions in the pace of purchasesmarket and in our portfolio will likely decrease overtime as those securities are converted to UMBS or
MBS.
particularly its tangible equity, is relatively small.
Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial marketscan result in a
risks.
affected.
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operations could be materially adversely affected.
The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in thoseof any of our third-party service providers could
Computer malware, ransomware, viruses, and computer hacking andphishing attacks have become more prevalent in the
operations.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuantto which LIBOR is determined may adversely-20-
No assurance can be given thataffect the actions taken by a new administrationvalue of the U.S. Governmentfinancial obligations to be held or issued by us that are linked to LIBOR.
Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Maecertificates are directly guaranteed by the U.S.
In addition, the Company’s ability to dispose of the common stock investment becauseselling investments in Orchid’s common
-21-
Interest rate mismatches between our Agency MBS and our borrowings mayreduce our net interest margin during periods of
changing interest rates, which could materially adversely affect our business, financial conditionand 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 varyover 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. Duringperiods of rising short-term interest
rates, the income we earn on these securities will not change (with respect to AgencyMBS backed by fixed-rate mortgage loans) or will
not increase at the same rate (with respect to Agency MBS backed by ARMsand 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 AgencyMBS are generally subject to the
same risks as our pass-through Agency MBS, certain types of risks may beenhanced depending on the type of structured Agency
MBS in which we invest.
The structured Agency MBS in which we invest are securitizations (i) issuedby Fannie Mae, Freddie Mac or Ginnie Mae, (ii)
collateralized by Agency MBS and (iii) divided into various tranches that have differentcharacteristics (such as different maturities or
different coupon payments).These securities may carry greater risk than an investment in pass-through AgencyMBS. For example,
certain types of structured Agency MBS, such as IOs, IIOs and POs, are moresensitive to prepayment risks than pass-through Agency
MBS. If we were to invest in structured Agency MBS that were more sensitive to prepaymentrisks relative to other types of structured
Agency MBS or pass-through Agency MBS, we may increase our portfolio-wide prepaymentrisk.
Differences in the stated maturity of our fixed rate assets, or in the timing of interest rate adjustmentson 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 withlong-term maturities. In
addition, we may have adjustable rate assets with interest rates that varyover 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 oftenreferred to as the "yield curve." Ordinarily, short-term
interest rates are lower than longer-term interest rates. If short-term interest rates risedisproportionately relative to longer-term interest
rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidlythan the interest income earned on our assets.
Because our investments generally bear interest at longer-term rates than we pay onour borrowings, a flattening of the yield curve
would tend to decrease our net interest income and the market valueof our investment portfolio. Additionally, to the extent cash flows
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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 decreaseour 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.
FHFA, the CSP for data acceptance, issuance support,Enterprises’ regulator and bond administration activities relatedconservator, to current single-class, fixed-rate,develop a common, single mortgage-backed securities. The FHFA continues to reviewsecurity issued by the Enterprises.
On June 3, 2019, with the implementation of Release 2 which involves issuance byof the commonsecuritization 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 Macpools 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 providesto lenders to pool their loans with Freddie Mac instead of 2019. Second, establish an operating framework
Fannie Mae, and pave the way for future GSE reform by allowing new entrantsto enter the MBS guarantee market.
The current float of Gold Participation Certificates (“Gold PCs”) issued byFreddie 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 pools with the worst prepayment characteristics are delivered intonew 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 securitieswith pools
from the better performing GSE.By bifurcating the TBA deliverable, liquidity in the TBA market could be negativelyimpacted.
Our liquidity is typically reduced each month when we receive margin calls relatedto factor changes, and typically increased
each month when we receive payment of principal and interest on FannieMae and Freddie Mac that is consistent with housing finance reform progress that encouragessecurities. Legacy Freddie Mac
securities pay principal and accommodates increased participation of private capitalinterest earlier in assuming credit risk associated with the secondary mortgage market.
reduce the period of time between meeting factor-related margin calls 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 effectsreceivingprincipal and interest. The percentage of the enactment will have on our book value, earnings or cash.legacy
paid off.
Purchases and sales of Agency MBS by the Fed may adversely affect the price and returnassociated with Agency RMBS.
MBS.
The Federal Reserve (the "Fed") ownsFed owned approximately $1.7$2.6 trillion of Agency MBS as of December 31, 2017. The Fed's former2021. Although the Fed’s Agency RMBS holdings
nearly doubled as a result of its COVID-19 policy wasresponse, growing from $1.4 trillionin March of 2020 to reinvest principal payments from its holdings$2.6 trillion in December of Agency MBS into new Agency MBS purchases. During its
2021, the minutes of the FOMC meeting in September 2017,December of 2021 indicate that the Fed likelyintends to begin reducing its Agency RMBS
holdings shortly after it begins to raise the federal funds rate.On January 26, 2022, the FOMC directed the Open Market Trading Desk (the "Desk") at the Fed Bankreaffirmed its intention to phase out its
net asset purchases by early March of New York 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,2022 and Agency MBS only to the extent that such payments exceed gradually rising caps. The Fed also announced at the September 2017 meetingindicated that it would soon be reducing its holdings of Treasury bonds and mortgage-backed securities, starting in October 2017.
appropriate to begin raising the federal funds rate.
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appropriate to begin raising the federal funds rate.
While we cannotit is very difficult to predict the impact of these actions by the Fed portfolio runoff on the prices and liquidityof 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, returns on Agency
MBS 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 AgencyMBS might decrease net interest income or result in a
net loss, which could materially adversely affect our business, financial condition and resultsof 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 ratesrise. 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. Withrespect to PTpass-through Agency MBS,
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faster-than-expected prepayments could also materially adversely affect our business,financial condition and results of operations in
various ways, including, the following:
Agency MBS. |
When we acquire structured Agency MBS, we anticipate that the underlyingmortgages will prepay at a projected rate, generating
an expected yield. When the prepayment rates on the mortgages underlying ourstructured Agency MBS are higher than expected, our
returns on those securities may be materially adversely affected. For example, thevalue of our IOs and IIOs are extremely sensitive to
prepayments because holders of these securities do not have the right to receiveany principal payments on the underlying mortgages.
Therefore, if the mortgage loans underlying our IOs and IIOs are prepaid, suchsecurities 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 riskagainst other risks and the potential returns of each
investment. No strategy can completely insulate us from prepayment or othersuch risks.
A decrease in prepayment rates on the mortgages underlying our AgencyMBS might decrease net interest income or result in a
net loss, which could materially adversely affect our business, financial condition and resultsof operations.
Certain of our structured Agency MBS may be adversely affected by a decrease inprepayment rates. For example, because POs
are similar to zero-coupon bonds, our expected returns on such securities willbe contingent on our receiving the principal payments of
the underlying mortgage loans at expected intervals that assume a certainprepayment 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 conditionand results of operations.
While we seek to minimize prepayment risk, we must balance prepayment riskagainst other risks and the potential returns of each
investment. No strategy can completely insulate us from prepayment or othersuch risks.
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Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS mayreduce our net interest margin during periods of
rising interest rates, whichcould materially adversely affect our business, financial condition and resultsof operations.
ARMs and hybrid ARMs are typically subject to periodic and lifetime interest ratecaps. Periodic interest rate caps limit the amount
an interest rate can increase during any given period. Lifetime interest ratecaps 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 whilecaps could limit the interest we earn on the ARMs and hybrid
ARMs backing our Agency MBS. This problem is magnified for ARMs andhybrid ARMs that are not fully indexed because such
periodic interest rate caps prevent the coupon on the security from fullyreaching the specified rate in one reset. Further, some ARMs
and hybrid ARMs may be subject to periodic payment caps that result in a portionof the interest being deferred and added to the
principal outstanding. As a result, we may receive less cash incomeon Agency MBS backed by ARMs and hybrid ARMs than
necessary to pay interest on our related borrowings. Interest rate caps on AgencyMBS backed by ARMs and hybrid ARMs could
reduce our net interest margin if interest rates were to increase beyond the levelof 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 thatany, or sufficient,
repurchase agreement financing will be available to us in the future on terms that areacceptable to us. Any decline in the value of
Agency MBS, or perceived market uncertainty about their value, wouldmake it more difficult for us to obtain financing on favorable
terms or at all, or maintain our compliance with the terms of any financing arrangementsalready in place. We may be unable to
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diversify the credit risk associated with our lenders. In the event that wecannot obtain sufficient funding on acceptable terms, our
business, financial condition and results of operations.operations may be adversely affected.
-14-
relatively small.
●
●
available interest rate hedging may not correspond directly with the interest rate riskfor which protection is sought;
●
the duration of the hedge may not match the duration of the related liability;
Furthermore, because we intend to rely primarily on short-term borrowings to fundour acquisition of Agency MBS, our ability to
achieve our investment objective objectiveswill depend not only on our ability to borrow money in sufficient amounts and onfavorable terms, but
also on our ability to renew or replace on a continuous basis our maturing short-termborrowings. If we are not able to renew or replace
maturing borrowings, we will have to sell some or all of our assets, possibly underadverse market conditions. In addition, if the
regulatory capital requirements imposed on our lenders change, they may be requiredto significantly increase the cost of the financing
that they provide to us. Our lenders also may revise their eligibility requirementsfor the types of assets they are willing to finance or the
terms of such financings, based on, among other factors, the regulatory environment andtheir management of perceived risk.
Adverse market developments could cause our lenders to require us to pledgeadditional assets as collateral. If our assets were
insufficient to meet these collateral requirements, we might be compelled to liquidate particularassets at inopportune times and at
unfavorable prices, which could materially adversely affect our business, financial conditionand results of operations.
Adverse market developments, including a sharp or prolonged risein interest rates, a change in prepayment rates or increasing
market concern about the value or liquidity of one or more types of AgencyMBS, might reduce the market value of our portfolio, which
might cause our lenders to initiate margin calls. A margin call means that thelender requires us to pledge additional collateral to re-establishre-
establish the ratio of the value of the collateral to the amount of the borrowing. Thespecific collateral value to borrowing ratio that
would trigger a margin call is not set in the master repurchase agreements and notdetermined until we engage in a repurchase
transaction under these agreements. Our fixed-rate Agency MBS generally are moresusceptible to margin calls as increases in
interest rates tend to more negatively affect the market value of fixed-rate securities. If weare unable to satisfy margin calls, our
lenders may foreclose on our collateral. The threat or occurrence of a margincall could force us to sell, either directly or through a
foreclosure, our Agency MBS under adverse market conditions. Because of thesignificant leverage we expect to have, we may incur
substantial losses upon the threat or occurrence of a margin call, which could materiallyadversely affect our business, financial
condition and results of operations. This risk is magnified given that the Company’s equitycapital, particularly its tangible equity, is
Hedging against interest rate exposure may not completely insulate us frominterest 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 ourportfolio. 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. Ourhedging activity will vary in scope based on the level and
volatility of interest rates and principal prepayments, the type of Agency MBS wehold and other changing market conditions. Hedging
may fail to protect or could adversely affect us because, among other things:
●
| ● certain types of hedges may expose us to risk of loss beyond the feepaid to initiate the hedge; ● the credit quality of the counterparty on the hedge may be downgraded tosuch 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. |
There are no perfect hedging strategies, and interest rate hedging may fail to protectus 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
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benefit of any offsetting hedging activities. The derivative financial instruments weselect may not have the effect of reducing our
interest rate risk. The nature and timing of hedging transactions may influencethe effectiveness of these strategies. Poorly designed
strategies or improperly executed transactions could actually increase our riskand losses. In addition, hedging activities could result in
losses if the event against which we hedge does not occur. These risks are magnified given that the Company’s equity capital,
particularly its tangible equity, is relatively small.
Because of the foregoing risks, our hedging activity could materially adversely affectour business, financial condition and results
of operations.
Our use of certain hedging techniques may expose us to counterparty risks.
To theextent 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, theremay 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 asignificant loss.
Our use of leverage could materially adversely affect our business, financial condition and results of operations.
-15-
We calculate our leverage ratio by dividing our total liabilities by total equity at the end of each period.Under normal market
For example, if a counterparty underswap exchange utilized in an interest rate swaptionswap agreement thatwe enter into as part of our hedging strategy
cannot perform under the terms of the interest rate swaptionswap agreement, wemay 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 ifthe 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, wecould also incur a loss for the premium paid for that swaption.
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 10 to 1, althoughat times our borrowings may be above or below this
level. We incur this indebtedness by borrowing against a substantial portion of the marketvalue of our pass-through Agency MBS and
a portion of our structured Agency MBS. Our total indebtedness, however, is not expressly limited by our policiesand 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 ofleverage that
we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender’smargin requirements from
our income and, to the extent we cannot, we might be forced to liquidate some of ourAgency MBS at unfavorable prices. Our use of
leverage could materially adversely affect our business, financial condition and resultsof operations. For example, our borrowings are
secured by our pass-through Agency MBS and a portion of our structured AgencyMBS under repurchase agreements. A decline in the
market value of the pass-through Agency MBS or structured Agency MBS used to securethese debt obligations could limit our ability
to borrow or result in lenders requiring us to pledge additional collateral tosecure our borrowings. In that situation, we could be
required to sell Agency MBS under adverse market conditions in order to obtainthe additional collateral required by the lender. If these
sales are made at prices lower than the carrying value of the Agency MBS, we would experiencelosses. If we experience losses as a
result of our use of leverage, such losses could materially adversely affect our business, resultsof operations and financial condition.
It may be uneconomical to "roll" our TBA dollar roll transactions or we may beunable 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 AgencyMBS 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 beforethe 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 byentering into an offsetting position (referred to as
- 17 -
a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similarTBA contract for a later settlement
date, collectively referred to as a "dollar roll." The Agency MBS purchased for a forwardsettlement 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 earnedfrom 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, TBA 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 negativecarry income whereby the Agency MBS
purchased for a forward settlement date under the TBA contract are priced at a premiumto 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 bythe Fed
could adversely impact the dollar roll market. Under such conditions, it maybe uneconomical to roll our TBA positions prior to the
settlement date and we could have to take physical delivery of the underlyingsecurities 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 IncomeClearing 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 abovethe levels
established by the MBSD. Negative carry income on TBA dollar roll transactionsor failure to procure adequate financing to settle our
obligations or meet margin calls under our TBA contracts could result indefaults or force us to sell assets under adverse market
conditions and adversely affect our financial condition and results of operations.
Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial marketscan result in a
significant contraction in liquidity for mortgages and mortgage-related assets, whichmay adversely affect the value of the assets in
which we invest.
Our results of operations are materially affected by conditions in the markets for mortgagesand mortgage-related assets,
including Agency RMBS, as well as the broader financial markets and theeconomy generally.
Significant adverse changes in financial market conditions can result in adeleveraging of the global financial system and the
forced sale of large quantities of mortgage-related and other financial assets.Concerns over economic recession, geopolitical issues
including events such as the COVID-19 pandemic, the military conflict between Ukraineand Russia, policy priorities of a new U.S.
presidential administration, trade wars, unemployment, the availability and costof financing, the mortgage market and a declining real
estate market or prolonged government shutdown may contribute to increasedvolatility and diminished expectations for the economy
and markets.
Increased volatility and deterioration in the markets for mortgages and mortgage-relatedassets as well as the broader financial
markets may adversely affect the performance and market value of our Agency RMBS andour investment in Orchid common stock.If
these conditions exist, institutions from which we seek financing for our investmentsmay tighten their lending standards, increase
margin calls or become insolvent, which could make it more difficult for us to obtainfinancing on favorable terms or at all.Our
profitability and financial condition may be adversely affected if we are unable to obtain cost-effective financingfor our investments.
The Russian invasion of Ukraine has created market volatility and economic uncertaintythat may have an adverse effect on our
results of operations, financial condition and the value of our stock.
A significant geo-political development is unfolding in the Ukraine.Russia invaded Ukraine on February 24, 2022, and since then
Russian military activity has escalated rapidly.The United States and several NATO allies have imposed significant economic
sanctions that are likely to cripple the Russian economy and currency, the Ruble. These events have created significantmarket
volatility and growing economic uncertainty.Should the situation deteriorate further and military action lead toa protracted war, there
would likely be a material adverse economic impact on Europe and thereforeindirectly in the U.S., potentially slowing economic activity
and possibly lessening the need for the Fed to remove monetary policyas aggressively as expected otherwise.The risk of Russian
cyber-attacks may also create market volatility and economic uncertainty.It is believed that Russian cyber-attacks of the Ukrainian
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government infrastructure have already occurred, and cyber-attacks could potentially spreadto a broader network of countries and
networks.These events may have an adverse effect on our results of operations, financial condition andthe value of our common
stock.
Our forward settling transactions, including TBA transactions, subject us tocertain risks, including price risks and counterparty risks.
risks.
We purchase a substantial portionsome of our Agency MBS through forward settling transactions, includingTBAs. In a forward settling transaction,
we enter into a forward purchase agreement with a counterparty to purchaseeither (i) an identified Agency MBS, or (ii) a TBA, or to-be-issued,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 transactioncounterparty 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.
affected.
We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunitiesand 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 notin 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 connectionwith our asset management activities. If our models and
data prove to be incorrect, misleading or incomplete, any decisions made inreliance thereon could expose us to potential risks.
Our reliance on models and data may induce us to purchase certain assetsat 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. Theuse of predictive models has inherent risks. For
example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, thepredictive models used by
us may differ substantially from those models used by other market participants, resulting invaluations based on these predictive
models that may be substantially higher or lower for certain assets than actualmarket prices. Furthermore, because predictive models
are usually constructed based on historical data supplied by third parties, the successof relying on such models may depend heavily
on the accuracy and reliability of the supplied historical data, and, in the case ofpredicting performance in scenarios with little or no
historical precedent (such as extreme broad-based declines in home prices, or deepeconomic recessions or depressions), such
models must employ greater degrees of extrapolation and are thereforemore speculative and less reliable.
All valuation models rely on correct market datainput. 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 whosevalues are particularly sensitive to various factors. If
our market data inputs are incorrect or our model prices differ substantially from market prices, ourbusiness, 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 assetsexisted. 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 isbased on valuations provided by third-party dealers and
pricing services, we can and do value assets based upon our judgment, andsuch valuations may differ from those provided by third-partythird-
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 accommodationand
without special compensation, and so they may disclaim any and all liability forany direct, incidental or consequential damages arising
- 19 -
out of any inaccuracy or incompleteness in valuations, including any act of negligenceor breach of any warranty. Depending on the
complexity and illiquidity of an asset, valuations of the same asset can vary substantiallyfrom one dealer or pricing service to another.
The valuation process during times of market distress can be particularly difficult and unpredictableand during such time the disparity
of valuations provided by third-party dealers can widen.
-17-
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.
-18-
Our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materiallyadversely affected if our fair value determinations of
these assets were materially higher than the values that would exist if a readymarket 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, financialcondition and results of operations.
Agency MBS generally experience periods of illiquidity. Such conditions are more likely to occur for structured AgencyMBS
because such securities are generally traded in markets much less liquid thanthe PTpass-through Agency MBS market. As a result, we
may be unable to dispose of our Agency MBS at advantageous times and pricesor in a timely manner. The lack of liquidity might result
from the absence of a willing buyer or an established market for these assets aswell as legal or contractual restrictions on resale. The
illiquidity of Agency MBS could materially adversely affect our business, financial conditionand results of operations.
Our use of repurchase agreements may give our lenders greater rights inthe 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 treatmentunder the bankruptcy code, giving our lenders the
ability to avoid the automatic stay provisions of the bankruptcy code and totake possession of and liquidate our collateral under the
repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreementsunder the
bankruptcy code may make it difficult for us to recover our pledged assets in the event thatany of our lenders files for bankruptcy.
Thus, the use of repurchase agreements exposes our pledged assets to risk in theevent of a bankruptcy filing by either our lenders or
us. In addition, if the lender is a broker or dealer subject to the Securities InvestorProtection Act of 1970, or an insured depository
institution subject to the Federal Deposit Insurance Act, our ability to exerciseour 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 AgencyMBS back to us at the end of the
repurchase term,or if the value of the Agency MBS has declined by the end of the repurchasetransaction term or if we default on
our obligations under the repurchase transaction, we will lose money on thesetransactions, 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 thefinancial institution under one of our master
repurchase agreements in exchange for cash, and our counterparty is obligatedto 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 daysor 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. “haircut.”Many financial institutions from which we may
obtain repurchase agreement financing have increased their haircuts in the past andmay do so again in the future. If these haircuts are
increased, we will be required to post additional cash or securities as collateral forour Agency MBS. If our counterparty defaults on its
obligation to resell the securities to us, we would incur a loss on the transactionequal to the amount of the haircut (assuming there was
no change in the value of the securities). We would also lose money on a repurchasetransaction if the value of the underlying
securities had declined as of the end of the transaction term, as we would haveto repurchase the securities for their initial value but
would receive securities worth less than that amount. Any losses we incur on ourrepurchase 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, thecounterparty can terminate the transaction and cease
entering into any other repurchase transactions with us. In that case, we wouldlikely need to establish a replacement repurchase
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facility with another financial institution in order to continue to leverageour portfolio and carry out our investment strategy. There is no
assurance we would be able to establish a suitable replacement facility onacceptable terms or at all.
We have issued long-term debt to fund our operations which can increase the volatility of ourearnings and stockholders'stockholders’ equity.
In October 2005, Bimini Capital completed a private offering of trust preferred securitiesof Bimini Capital Trust II, of which $26.8
million are still outstanding.The Company must pay interest on these junior subordinated notes on a quarterlybasis 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 capitalbase.Therefore, for purposes of all
disclosure in this report concerning our capital or leverage, the Company considersboth 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 thefair value option and, therefore, will report MBS on
our financial statements at fair value with unrealized gains and losses includedin 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 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 instrumentsare 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 consequencesor which create market uncertainty, clearing
facilities or exchanges upon which some of our hedging instruments, such asT-Note, Fed Funds and Eurodollar and Treasury Note 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 requirementsfor 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.
-19-
Report.
Our Board of Directors has the authority to change our investment strategyor 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.Report. A changein 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.
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 incomelargely depends on our ability to acquire
Agency MBS at favorable spreads over our borrowing costs. In acquiring AgencyMBS, 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-sponsoredgovernment-
sponsored entities, many of which have greater financial, technical, marketing andother resources than we do. Some competitors may
have a lower cost of funds and access to funding sources that may not be availableto 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, whichcould allow them to consider a wider variety of
- 21 -
investments. Furthermore, competition for investments in Agency MBS maylead the price of such investments to increase, which may
further limit our ability to generate desired returns. As a result, we maynot be able to acquire sufficient Agency MBS at favorable
spreads over our borrowing costs, which would materially adversely affect ourbusiness, financial condition and results of operations.
The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in thoseof any of our third-party service providers could
negatively impact our business by causing a disruption to our operations, acompromise or corruption of our confidential
information or damage to our business relationships or reputation, all of whichcould 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. Morespecifically, a cyber-incident is an intentional attack or
an unintentional event that can include gaining unauthorized access to systemsto disrupt operations, corrupt data, or steal confidential
information. As our reliance on technology has increased, so have the risks posedto our systems, both internal and those we have
outsourced. The primary risks that could directly result from the occurrenceof a cyber-incident include operational interruption and
private data exposure. We have implemented processes, procedures and controls to helpmitigate these risks, but these measures, as
well as our focus on mitigating the risk of a cyber-incident, do not guarantee thatour 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 thatallow us to monitor, value, buy, sell, finance
and hedge our investments. These systems are operated by third partiesand, as a result, we have limited ability to ensure their
continued operation. In the event of a systems failure or interruption, we will have limitedability to affect the timing and success of
systems restoration. Any failure or interruption of our systems could causedelays or other problems in our securities trading activities,
including Agency MBS trading activities, which could have a material adverseeffect on our business, financial condition and results of
operations.
Computer malware, ransomware, viruses, and computer hacking andphishing attacks have become more prevalent in the
financial services industry and may occur on our or certain of our third party serviceproviders' systems in the future. We rely heavily on
our financial, accounting and other data processing systems. Although we havenot detected a breach to date, financial services
institutions have reported breaches of their systems, some of which havebeen significant. During the COVID-19 pandemic, a portion of
our employees worked remotely until June 2021,which has caused us to rely more on virtual communication and mayincrease our
exposure to cybersecurity risks. Even with all reasonable security efforts, not every breachcan be prevented or even detected. It is
possible that we, or certain of our third-party service providers have experiencedan undetected breach, and it is likely that other
financial institutions have experienced more breaches than have been detectedand reported. There is no assurance that we, or certain
of the third parties that facilitate our business activities, have not or will not experiencea breach. It is difficult to determine what, if any,
negative impact may directly result from any specific interruption or cyber-attacks orsecurity breaches of our networks or systems (or
the networks or systems of certain third parties that facilitate our business activities)or any failure to maintain performance, reliability
and security of our or our certain third-party service providers' technical infrastructure,but such computer malware, ransomware,
viruses, and computer hacking and phishing attacks may negatively affect our operations.
We depend primarily on two individuals to operate our business, and the loss of one or bothof 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 wehave entered into contracts and compensation arrangements with
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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.
operations.
If we issue debt securities, our operations may be restricted and wewill be exposed to additional risk.
If we decide to issue debt securities in the future, it is likely that such securitieswill 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 favorablethan those of our Class A Common Stock. We, and
indirectly our stockholders, will bear the cost of issuing and servicing suchsecurities. Holders of debt securities may be granted specific
rights, including but not limited to, the right to hold a perfected securityinterest in certain of our assets, the right to accelerate payments
due under the indenture, rights to restrict dividend payments, and rightsto 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.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuantto which LIBOR is determined may adversely
LIBOR and other indices which are deemed “benchmarks” are the subjectof national, international, and other regulatory guidance
and proposals for reform. Some of these reforms are already effective while others arestill to be implemented. These reforms may
cause such benchmarks to perform differently than in the purposepast, or have other consequenceswhich cannot be predicted. In particular,
regulators and law enforcement agencies in the U.K. and elsewhere are conductingcriminal and civil investigations into whether the
banks that contributed information to the British Bankers’ Association (“BBA”)in connection with the daily calculation of seekingLIBOR may
have been under-reporting or otherwise manipulating or attempting to stimulatemanipulate LIBOR.A number of BBA member banks have
entered into settlements with their regulators and law enforcement agencies withrespect to this alleged manipulation of LIBOR. Actions
by the economy will achieve their intended effectregulators or will benefit our business, and further, governmentlaw 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 market developments could adversely affect us.the
establishment of alternative reference rates.
establishment of alternative reference rates.
The incoming administrationdevelopment 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 interestalternative reference 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.is complex.
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, a committee was formed in 2014 to study the
process and develop an alternative reference rate. The Alternative ReferenceRate 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 Basel III standards several years ago. The final package of Basel III reforms was approvedtransition from LIBOR to SOFR. SOFR is published daily at 8:00 a.m. Eastern Time by the G20 leadersNY FederalReserve Bank for the
previous business day’s trades. However, since SOFR is an overnight rate and many forms of loans or instruments usedfor hedging
have much longer terms, there is a need for a term structure for the new referencerate. Various central banks, including the Fed, and
the ARRC,are in November 2010. In January 2013, the Basel Committee agreedprocess of developing term rates to delay implementationsupport cash markets that currently use LIBOR.Examples of the Basel III standardscash market
would be floating rate notes, syndicated 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 allbilateral corporate loans, securitizations,secured funding transactions and various
mortgage and consumer loans – including many of the Basel III standards. These new standards, includingsecurities the Supplementary Leverage Ratio imposed Company ownsfrom 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 productsor assets of the Company and hedge instruments.
The process for determining term rates by both ARRC and ISDA is not finalizedat this time.
On December 31, 2021 the one week and two month USD LIBORtenors phased out, and on June 30, 2023 all other USD LIBOR
tenors will phase out. On November 30, 2020. the United States Federal Reserve Board,concurrently issued a statement advising banks to
stop new USD LIBOR issuances by the Federal Deposit Insurance Corporation end of 2021,and on October 20, 2021, the Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System, Federal Deposit Insurance Corporation,Consumer Financial Protection Bureau (the
“CFPB”) and National Credit Union Administration advised banks that enteringinto new contracts that use LIBOR as a reference rate
after December 31, 2021 would create safety and soundness risks.In light of these recent announcements, the future of LIBOR at this
time is uncertain and any changes in the methods by which LIBOR is determinedor regulatory activity related to LIBOR’s phaseout
could cause LIBOR to perform differently than in the past or cease to exist. Although regulatorsand IBA have clarified that the recent
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announcements should not be read to say that LIBOR has ceased orwill cease, in the event LIBOR does cease to exist, the risks
associated with the transition to an alternative reference rate will be fully phasedacceleratedand magnified.
As of December 31, 2020, Fannie Mae and Freddie Mac stopped issuing most LIBOR-indexedproducts and stopped purchasing
LIBOR-based loans. On August 3, 2020, Fannie Mae started accepting whole loan andMBS deliveries of ARMs indexed to SOFR, and
Freddie Mac announced that it priced its first SOFR linked offering on October 16, 2020. OnOctober 19, 2021, Fannie Mae priced its
first credit risk transfer transaction linked to SOFR, and on January 19, 2022it priced its first multifamily real estate mortgage
investment conduit using SOFR.
More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” asa result of
international, national or other proposals for reform or other initiatives or investigations,or any further uncertainty in by 2019, will require banksrelation to hold more capital, predominantly inthe
timing and manner of implementation of such changes, could have a material adverseeffect on the formvalue of common equity, than underand return on any
securities based on or linked to a “benchmark.”
New laws may be passed affecting the current capital framework. These increased bank capital requirements may constrainrelationship between Fannie Mae and Freddie Mac,on the one hand, and the federal
government, on the other, which could adversely affect the price of, or our ability to obtain attractive future financingsinvest in and increasefinance, Agency RMBS.
The interest and principal payments we expect to receive on the cost of such financings if theyAgency MBSin which we invest are obtained.guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Maecertificates are directly guaranteed by the U.S.
government. Principal and interest payments relating to the securities issued byFannie Mae and Freddie Mac are only guaranteed by
each respective GSE.
In April 2014, U.S. regulators adopted rules requiring enhanced supplementary leverage ratio standards beginning in January 2018, which would impose capital requirements more stringent than those September 2008, Fannie Mae and Freddie Mac were placed into the conservatorshipof the Basel III standardsFHFA, their federal regulator,
pursuant to its powers under The Federal Housing Finance Regulatory ReformAct of 2008, a part of the Housing and Economic
Recovery Act of 2008 (the “Recovery Act”). In addition to the FHFA becoming the conservator of Fannie Maeand Freddie Mac, the
U.S. 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 theirfinancial stability. In September 2019, the
FHFA and the U.S. Treasury 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. As of September 30, 2020, Fannie Mae and Freddie Mac had retainedequity
capital of approximately $21 billion and $14 billion, respectively.In December 2020, a final rule was published in the federal register
regarding GSE capital framework (the “December rule”), which requires Tier 1 capital inexcess of 4% (approximately $265 billion) and
a risk-weight floor of 20% for residential mortgages.On January 14, 2021, the U.S. Treasury and the FHFA executed letter
agreements (the “January agreement”) allowing the GSEs to continue to retaincapital up to their regulatory minimums, including
buffers, as prescribed in the December rule.These letter agreements provide, in part, (i) there will be no exit fromconservatorship until
all material litigation is settled and the GSEs have common equity Tier 1 capital of at least 3%of their assets, (ii) the GSEs will comply
with the FHFA’sregulatory capital framework, (iii) higher-risk single-family mortgage acquisitionswill be restricted to current levels, and
(iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform.On September 14, 2021, the U.S.
Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquiredfor cash
consideration, multifamily loans, loans with higher risk characteristics andsecond homes and investment properties.On September
15, 2021, the FHFA announced a notice of proposed rulemaking for the most systematically significant banking organizationspurpose of amending the December rule to,among other
things, reduce the Tier 1 capital and risk-weight floor requirements.
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 Fannie Mae and Freddie Mac inthe U.S. housing finance market should be re-examined. The
future roles of Fannie Mae and Freddie Mac could be significantly reduced andthe nature of their guarantees could be eliminated or
considerably limited relative to historical measurements. The U.S. Treasury could also stopproviding credit support to Fannie Mae and
Freddie Mac in the U.S. Adoption and implementationfuture. Any changes to the nature of the Basel III standardsguarantees providedby Fannie Mae and Freddie Mac could redefine what
constitutes an Agency MBS and could have broad adverse market implications.If Fannie Mae or Freddie Mac was eliminated, or their
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structures were to change in a material manner that is not compatible withour business model, we would not be able to acquire
Agency MBS from these entities, which could adversely affect our business operations.Such changes would likely have a similar
impact on the business operations of Orchid, which could adversely affect the value andperformance of our investment in Orchid
common stock and the supplemental regulatory standards adoptedamount of management fees and expense reimbursementswe receive from Orchid.
On June 23, 2021, the Supreme Court ruled in Collins v. Mnuchin, a case presenting a question of the constitutionalityof the FHFA
and its director’s protection from being replaced at will by U.S. regulators thePresident.The Supreme Court held that the FHFA did not exceed its
powers or functions as a conservator under the Recovery Act, and that the Presidentmay negatively impact our access to financing or affectreplace the termsdirector at will. On June 23,
2021, President Biden appointed Sandra Thompson as acting director of our future financing arrangements.theFHFA.
Our investment in Orchid Island Capital, Inc. or other mortgage REIT commonstock 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 besubject to all of the risks associated with the direct
ownership of Agency MBS discussed above that could adversely affect the market price ofthe investment and the ability of the REIT to
pay dividends. In addition, the market value of the common stock could be affected bymarket conditions beyond the Company's control.Company’s
control, such as limited liquidity in trading market for the common stock. A decreasein the dividend payment rate or the market value of
the common stock could have a material adverse effect on our business, financial conditionand results of operations.
In addition, the Company’s ability to dispose of the common stock investment becauseselling investments in Orchid’s common
equity securities may be hindered due to its relationship as Orchid’s manager and thepossession of inside information. Also, if we or
other significant investors sell or are perceived as intending to sell a substantialnumber 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 significantlyreduce our revenues.
Orchid is externally managed and advised by Bimini Advisors. As Manager, Bimini Advisors is responsible for administering Orchid's
Orchid’s business activities and day-to-day operations.Pursuant to the terms of the management agreement, BiminiAdvisors provides
Orchid with its management team, including its officers, along with appropriatesupport personnel.
In exchange for these services, Bimini Advisors receives a monthly managementfee.In addition, Orchid is obligated to reimburse
Bimini Advisors for any direct expenses incurred on its behalf and Bimini Advisorsallocates to Orchid its pro rata portion of certain
overhead costs. The significance of these management fees and overhead reimbursementshas 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 withoutcause, it would
be obligated to pay to Bimini Advisors a termination fee equal to three times theaverage annual management fee, as defined in the
management agreement, before or on the last day of the initial termor 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 marketprice of our common stock.
At any time, laws or regulations, or the administrative interpretations of thoselaws or regulations, which impact our business and
Maryland corporations may be amended. In addition, the markets for MBS andderivatives, 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 willbecome 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.
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We may incur losses as a result of unforeseen or catastrophic events, including the emergence ofa pandemic and acts of
terrorism.
The occurrence of unforeseen or catastrophic events, including the emergenceof 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 ourability to manage our businesses.
We are subject to risks related to corporate social responsibility.
Our business faces public scrutiny related to environmental, social and governance(“ESG”) activities. We risk damage to our
reputation if we fail to act responsibly in a number of areas, such as diversityand inclusion, environmental stewardship, support for
local communities, corporate governance and transparency and considering ESGfactors in our investment processes. Adverse
incidents with respect to ESG activities could impact the cost of our operations andrelationships with investors, all of which could
adversely affect our business and results of operations. Additionally, new legislative or regulatory initiatives related to ESG could
adversely affect our business.
Risks Related to Our Organization and Structure
Loss of our exemption from regulation under the Investment Company Act wouldnegatively 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 fromregistration under the Investment
Company Act, because we are "primarily“primarily engaged in the business of purchasingor 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 thatwe own on
an unconsolidated basis consist of qualifying mortgages and other liensand 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 unconsolidatedbasis consist of real estate-related
assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Macand Ginnie Mae whole-pool residential
mortgage pass-through securities issued with respect to an underlying pool ofmortgage loans in which we hold all of the certificates
issued by the pool as qualifying real estate assets based on no-action letters issuedby 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 and for any other exemption, we could be requiredto restructure our activities in a manner
that, or at a time when, we would not otherwise choose to do so, which could negativelyaffect the value of shares of our common stock
and our ability to distribute dividends. For example, if the market value ofour investments in CMOs or structured Agency MBS, neither
of which are qualifying real estate assets for Investment Company Act purposes, wereto increase by an amount that resulted in less
than 55% of our assets being invested in pass-through Agency MBS, we might haveto sell CMOs or structured Agency MBS in order
to maintain our exemption from the Investment Company Act. The sale could occurduring 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 and for any other exemption,we may have to register under the Investment
Company Act and we could become subject to substantial regulation with respectto our capital structure (including our ability to use
leverage), management, operations, transactions with affiliated persons (as definedin the Investment Company Act), portfolio
composition, including restrictions with respect to diversification and industry concentration,and other matters.
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We may be required at times to adopt less efficient methods of financing certain of our securities, and wemay be precluded from
acquiring certain types of higher yielding securities. The net effect of these factors would beto lower our net interest income. If we fail
to qualify for an exemption from registration as an investment company or an exclusionfrom the definition of an investment company,
our ability to use leverage would be substantially reduced, and we would not be ableto conduct our business as described in this
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prospectus. Our business will be materially and adversely affected if we fail to qualify for andmaintain an exemption from regulation
pursuant to the Investment Company Act.
Failure to obtain and maintain an exemption from being regulated as a commoditypool operator could subject us to additional
regulation and compliance requirements and may result in fines and other penaltieswhich could materially adversely affect our
business and financial condition.
The Dodd-Frank Act established a comprehensive regulatory framework for derivativecontracts commonly referred to as "swaps." “swaps.”
As a result, any investment fund that trades in swaps may be considereda "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 becauseof 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's NFA’s
rules with respect to capital raising, disclosure, reporting, recordkeeping andother business conduct.
commodity pool operator and commodity trading advisor.
We use hedging instruments in conjunction with our investment portfolio and related borrowingsto reduce or mitigate risks
associated with changes in interest rates, mortgage spreads, yield curve shapesand market volatility. These hedging instruments may
include interest rate swaps, interest rate futures and options on interest ratefutures. We do not currently engage in any speculative
derivatives activities or other non-hedging transactions using swaps, futuresor options on futures. We do not use these instruments for
the purpose of trading in commodity interests, and we do not consider the Company orits operations to be a commodity pool as to
which CPO registration or compliance is required. We have received a no-action letter fromthe 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 lawsover which it has jurisdiction, including their
anti-fraud and anti-manipulation provisions. For example, the CFTC may suspendor revoke the registration of or the no-action relief
afforded to a person who fails to comply with commodities laws and regulations, prohibit sucha person from trading or doing business
with registered entities, impose civil money penalties, require restitutionand seek fines or imprisonment for criminal violations. In the
event that the CFTC asserts that we are not entitled to the no-action letter reliefclaimed, we may be obligated to furnish additional
disclosures and reports, among other things. Further, a private right of action exists against those whoviolate the laws over which the
CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procurea 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 governmentalactions or proceedings, any of which could have a
materially adverse effect on our business, financial condition and results of operations.
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Our Rights Plan could inhibit a change in our control that would otherwisebe favorable to our stockholders.
In December 2015, our Board of Directors adopted a Rights Agreement (the "Rights Plan"“RightsPlan”) in an effort to protect against a possible
limitation on our ability to use our net operating losses "(NOLs"“(NOLs”) andnet capital losses ("NCLs"(“NCLs”) by discouraging investors from
aggregating ownership of our Class A Common Stock and triggering an "ownership change"“ownershipchange” for purposes of Sections 382 and 383 of
the Code.Under the terms of the Rights Plan, in general, if a person or groupacquires 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"(an “Acquiring Person”), all of our other
stockholders will have the right to purchase securities from us at a discount tosuch 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 impedinga 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 commonstock in connection with such a transaction.In addition,
because our Board of Directors may consent to certain transactions, the RightsPlan gives our Board of Directors significant discretion
over whether a potential acquirer'sacquirer’s efforts to acquire a large interestin us will be successful.There can be no assurance that the
Rights Plan will prevent an "ownership change"“ownership change” within the meaning of Sections382 and 383 of the Code, in which case we may lose all
or most of the anticipated tax benefits associated with our prior losses.
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Certain provisions of applicable law and our charter and bylaws may restrictbusiness 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 otherwisebe in the best interests of our stockholders, including
business combination provisions, supermajority vote and cause requirements forremoval of directors, provisions that vacancies on our
Board of Directors may be filled only by the remaining directors, for the fullterm of the directorship in which the vacancy occurred, the
power of our Board of Directors to increase or decrease the aggregate numberof authorized shares of stock or the number of shares of
any class or series of stock, to cause us to issue additional shares of stockof any class or series and to fix the terms of one or more
classes or series of stock without stockholder approval, the restrictionson 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 describedbelow, could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of us, which could adverselyaffect the market price of our securities.
Our rights and the rights of our stockholders to take action against our directors and officersare limited, which could limit your
recourse in the event of actions that may be considered to be not inyour best interests.
●
●
a final judgment based upon a finding of active and deliberate dishonesty bythe director or officer that was material to the
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Our charter limits the liability of our directors and officers to us and our stockholders for moneydamages, except for liability
resulting from:
●
| 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 bythe 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 obligateus to indemnify them to
the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnifyour
present and former directors and officers for actions taken by them in those and othercapacities 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 tobe made, a party by reason of his or her
service to us. In addition, we may be obligated to advance the defense costsincurred by our directors and officers. As a result, we and
our stockholders may have more limited rights against our directors and officers thanmight 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.
●
outstanding voting stock or an affiliate or associate of ours who, at any time within thetwo-year period immediately prior
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 undercircumstances that otherwise could provide our stockholders
with the opportunity to realize a premium over the then-prevailing market price ofour common stock, including:
●
outstanding voting stock or an affiliate or associate of ours who, at any time within thetwo-year period immediately prior
to the date in question, was the beneficial owner of 10% or more of the voting powerof our then-outstanding stock) or an
affiliate of an interested stockholder for five years after the most recent date on which the stockholderbecame 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 theCompany (defined as voting shares of stock
which, when aggregated with all other shares of stock owned by the acquiror orin respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a revocableproxy), entitle the acquiror to
exercise one of three increasing ranges of voting power in electing directors)acquired in a “control share acquisition”
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(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 controlshares except to the extent approved by our
stockholders by the affirmative vote of two-thirds of all the votes entitled to be caston the matter, excluding all interested
shares.
We have elected to opt-out of these provisions of the MGCL, in the case of the businesscombination provisions, by resolution of
our Board of Directors (provided that such business combination is first approvedby our Board of Directors, including a majority of our
directors who are not affiliates or associates of such person), and in the case of thecontrol share provisions, pursuant to a provision in
our bylaws. However, our Board of Directors mayby 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.
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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.
-26-
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.
This summary of certain tax risks is limited to the U.S. federal income tax risks addressed below. Additional risks or issues may existthat are not
addressed in this Form 10-K and that could affect the U.S. federal and state income tax treatment ofus or our stockholders.This
summary is not intended to be used and cannot be used by any stockholder to avoidpenalties that may be imposed on stockholders
under the Code. Management strongly urges shareholders to seek advice basedon their particular circumstances from an independenttheir tax
advisor concerning the effects of federal, state and local income tax law on an investmentin our common stock.
Our ability to use net operating loss ("NOL"(“NOL”) carryovers and net capitalloss ("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, aswell as certain other tax attributes.
Although we believe that a significant portion of our NOLs will be available to useto offset the future taxable income of Bimini Capital
and Royal Palm, no assurance can be provided that we will have taxable incomeor gains in the future to apply against our remaining
NOLs and NCLs.
In addition, our NOL and NCL carryovers may be limited by Sections 382and 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 ourcompany by
more than 50 percentage points looking back over the relevant testing period. Ifan ownership change occurs, our ability to use our
NOLs and NCLs to reduce our taxable income in a future year would belimited 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-exemptinterest rate in effect for the month of the
ownership change. In the event of an ownership change, NOLs and NCLs thatexceed the Section 382 limitation in any year will
continue to be allowed as carryforwards for the remainder of the carryforward periodand such losses can be used to offset taxable
income for years within the carryforward period subject to the Section 382 limitationin each year. However, if the carryforward period
for any NOL or NCL were to expire before that loss had been fully utilized, theunused portion of that loss would be lost. The
carryforward period for NOLs is 20 years from the year in which the lossesgiving rise to the NOLs were incurred, and the carryforward
period for NCL is five years from the year in which the losses giving riseto 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(unless there were another ownership
change after those new losses arose).
Based on our knowledge of our stock ownership, we do not believe thatan 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 NOLsand NCLs to
reduce future taxable income. The determination of whether an ownership changehas occurred or will occur is complicated and
depends on changes in percentage stock ownership among stockholders. We adopted theRights 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 rulingfrom the Internal Revenue Service, or IRS,
- 29 -
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 ownershipchange. Therefore, no assurance can be
provided as to whether an ownership change has occurred or will occur in thefuture.
Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwiseattractive opportunities.
Limitations imposed by Sections 382 and 383 of the Internal Revenue Code maydiscourage us from, among other things,
redeeming our stock or issuing additional stock to raise capital or to acquirebusinesses 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 differencesbetween 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 theperiod of the tax rate change.Based on the size of
our deferred tax assets, any such adjustment could be significant.
Risks Related to Conflicts of Interest in Our Relationship with Orchid
Bimini Capital and Orchid may compete for opportunities to acquire assets, whichare allocated in accordance with the Investment
Allocation Agreement by and among Orchid and Bimini Advisors.
-27-
From time to time we may seek to purchase for Bimini Capital the same or similarassets that we seek to purchase for Orchid. In
such an instance, we may allocate such opportunities in a manner that preferentiallyfavors Orchid. We will make available to either
Bimini Capital or Orchid opportunities to acquire assets that we determine, inour reasonable and good faith judgment, based on the
objectives, policies and strategies, and other relevant factors, are appropriatefor 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 specifiedquantities and because many of our
targeted assets are also targeted assets for Orchid, we may not be able to buy as muchof any given asset as required to satisfy the
needs of both Bimini Capital and Orchid. In these cases, the Investment Allocation Agreementwill require the allocation of such assets
to both accounts in proportion to their needs and available capital. The Investment AllocationAgreement will permit departure from
such proportional allocation when (i) allocating purchases of whole-pool AgencyMBS, because those securities cannot be divided into
multiple parts to be allocated among various accounts, and (ii) such allocation wouldresult in an inefficiently small amount of the
security being purchased for an account. In that case, the Investment AllocationAgreement 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, whichcould 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 Managerof Orchid. All of our executive officers
may have conflicts between their duties to Bimini Capital and their dutiesto 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 acquisitionsor 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.
- 30 -
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 andOrchid. During turbulent conditions in the mortgage industry,
distress in the credit markets or other times when we will need focused supportand assistance from employees, Orchid and other
entities for which we may act as manager in the future will likewise require greater focusand attention, placing personnel resources in
high demand. In such situations, Bimini Capital may not receive the necessarysupport 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, alsoserves as Chief Executive Officer and
Chairman of the Board of Directors of Orchid and owns shares of common stock of Orchidat 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 holdshares in the future.Mr. Dwyer and Mr. Jaumot, the two
independent members of our Board of Directors, own shares of common stockof 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.
-28-
Bimini continues to hold an investment in the common stock of Orchid. In evaluatingopportunities for ourselves and Orchid, this
may lead us to emphasize certain asset acquisition, disposition or management objectivesover others, such as balancing risk or
capital preservation objectives against return objectives. This could increasethe risks or decrease the returns of your investment in our
common stock.
Orchid may elect not to renew the management agreement without cause which mayadversely affect our business, financial
condition and results of operations.
●
●
the liquidity of any such market;
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
Orchid’s independent directors, and upon providing 180-days'180-days’ prior written notice, Orchid may elect notto renew the management
agreement. If Orchid elects to not renew the agreement because of a decision byits Board of Directors that the management fee is
unfair, Bimini Advisors will have the right to renegotiate a mutually agreeable management fee. If Orchidelects to not renew the
management agreement without cause, it is required to pay Bimini Advisors atermination fee equal to three times the average annual
management fee incurred during the prior 24-month period immediately precedingthe most recently completed calendar quarter prior
to the effective date of termination. Notwithstanding the termination fee, nonrenewal of themanagement 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 objectivesmay result in a high amount of risk when compared to
alternative investment options and volatility or loss of principal. Our investments maybe highly speculative and aggressive, and
therefore an investment in our common stock may not be suitable for someonewith 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 smallpublic 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
- 31 -
approved for listing on anothera national securities market, our ability to raise capitalthrough the sale of additional securities may be limited.
Accordingly, no assurance can be given as to:
●
| ● the ability of any holder to sell shares of our common stock; or ● the prices that may be obtained for our common stock. |
We have not made distributionsto our stockholders since 2011.
-29-
Our Board of Directors has not authorized the payment of any cash dividends toour stockholders since 2011.All distributions will
be made at the discretion of our Board of Directors out of funds legally availabletherefor and will depend on our earnings, our financial
condition and such other factors as our Board of Directors may deem relevant fromtime 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 fundsand future earnings to fund the development
and growth of our business. As a result, for the foreseeable future, we do not expectto 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 thepurposes of distributions, may harm the value of
our common stock.
employees are worked remotely until June of 2021. If our employees areunable to work effectively as a result of COVID-19, including
None.None.
-30-
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc.in the amount of $33.1 million related to the
-31-
SECURITIES.
The following table is a summary of historical prices of our Class A Common Stock.
Preferred Stock
-32-
On August 12, 2011, Bimini Capital's shareholders approved the 2011 Long Term Compensation Plan (the "Plan"). The Plan is intended to permit the grant of stock options, stock appreciation rights ("SARs"), stock awards, performance units and other equity-based and incentive awards 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, 2017 concerning shares of our common stock authorized for issuance under the Plan.
None.
Not Applicable.
-33-
- 37 -
In the future, we may attempt to increase our capital resources by making additionalofferings of debt or equity securities, including
commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or commonstock, 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 borrowingswill receive a distribution of our available assets
prior to the holders of our common stock. Additional equity offerings by us may dilute the holdingsof our existing stockholders or
reduce the market value of our common stock, or both. Furthermore, our Board of Directorsmay, without stockholder approval, amend
our charter to increase the aggregate number of our shares or the number of sharesof any class or series that we have the authority to
issue, and to classify or reclassify any unissued shares of common stock or preferredstock. 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 securities offerings. Our stockholders are therefore subject tothe 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.
●
actual or anticipated variations in our operating results;
●
changes in our earnings estimates or publication of research reports about usor the real estate or specialty finance
industry;
●
increases in market interest rates that affect the value of our MBS portfolios;
●
changes in our book value;
●
SharesSales 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 ofsubstantial amounts of shares of our common
The market value of shares of our common stock may be highly volatile and subjectto wide price fluctuations. In addition, the
trading volume in our common stock may fluctuate and cause significant pricevariations to occur. Some of the factors that could
negatively affect the share price or trading volume of our common stock include:
●
| changes in market valuations of similar companies; ● adverse market reaction to any increased indebtedness we incur in the future; ● departures of key management personnel; ● actions by institutional stockholders; ● speculation in the press or investment community; and - 32 - ● general market and economic conditions. |
We cannot make any assurances that the market price of our common stock will not fluctuateor decline significantly in the future.
stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock.
Risks Related to COVID-19
The 2011 Long Term Incentive Compensation Plan providesmarket and economic disruptions caused by COVID-19 have negatively impactedour business.
The COVID-19 pandemic has caused and continues to cause significant disruptionsto the U.S. and global economies and has
contributed to volatility, illiquidity and dislocations in the financial markets. The COVID-19 outbreak has led governments and other
authorities around the world to impose measures intended to controlits spread, including restrictions on freedom of movement and
business operations such as travel bans, border closings, closing non-essentialbusinesses, quarantines and shelter-in-place orders.
The market and economic disruptions caused by COVID-19 have negatively impactedand could further negatively impact our
business.
Beginning in mid-March 2020, Agency MBS markets experienced significant volatilityand sharp declines in liquidity, which
negatively impacted our portfolio. Our portfolio was pledged as collateral underdaily mark-to-market repurchase agreements.
Fluctuations in the value of our Agency MBS resulted in margin calls, requiring us to postadditional collateral with our lenders under
these repurchase agreements. These fluctuations and requirements to post additionalcollateral were material.
The Agency MBS market largely stabilized after the Fed announced onMarch 23, 2020 that it would purchase Agency MBS and
U.S. Treasuries in the amounts needed to support smooth market functioning. The Fed continued to increase itsholdings of U.S.
Treasuries and Agency MBS throughout 2020 and 2021 however;in response to growing inflation concerns in late 2021, the FOMC
began tapering its net asset purchases and announced on January 26,2022 that it would completely phase them out by early March
2022. If the COVID-19 outbreak continues or worsens, or if the current policy responsechanges or is ineffective, the Agency MBS
market may experience significant volatility, illiquidity and dislocations in the future, which may adversely affect our results of
operations and financial condition.
Our inability to access funding or the terms on which such funding is availablecould have a material adverse effect on our financial
condition, particularly in light of ongoing market dislocations resulting from the COVID-19pandemic.
Our ability to fund our operations, meet financial obligations and financeasset acquisitions is dependent upon our ability to secure
and maintain our repurchase agreements with our counterparties. Because repurchaseagreements are short-term commitments of
capital, lenders may respond to market conditions in ways that make itmore difficult for grantsus to renew or replace on a continuous basis
our maturing short-term borrowings and have imposed and may continue to imposemore onerous terms when rolling such financings.
If we are not able to renew our existing repurchase agreements or arrange fornew financing on terms acceptable to us, or if we are
required to post more collateral or face larger haircuts, we may have to curtailour asset acquisition activities and/or dispose of upassets.
Issues related to financing are exacerbated in times of significant dislocationin the financial markets, such as those experienced
related to the COVID-19 pandemic. It is possible our lenders will become unwillingor unable to provide us with financing, and we could
be forced to sell our assets at an aggregate of 10%inopportune time when prices are depressed.In addition, if the regulatory capital requirements
imposed on our lenders change, they may be required to significantly increasethe cost of the issuedfinancing that they provide to us. Our
lenders also have revised and may continue to revise the terms of such financings,including haircuts and requiring additional collateral
in the form of cash, based on, among other factors, the regulatory environmentand their management of actual and perceived risk.
- 33 -
Moreover, the amount of financing we receive under our repurchase agreements will be directly related to ourlenders’ valuation of our
assets that collateralize the outstanding sharesborrowings. Typically, repurchase agreements grant the lender the absolute right to re-
evaluate the fair market value of the assets that cover outstanding borrowingsat any time. If a lender determines in its sole discretion
that the value of the assets has decreased, the lender has the right to initiate a margincall. These valuations may be different than the
values that we ascribe to these assets and may be influenced by recent asset sales atdistressed levels by forced sellers. A margin call
requires us to transfer additional assets to a lender without any advance of funds fromthe lender for such transfer or to repay a portion
of the outstanding borrowings. Significant margin calls could have amaterial adverse effect on our results of operations, financial
condition, business, and liquidity, and could cause the value of our common stock (onto decline. In addition, we experienced an increase
in haircuts on financings we have rolled. As haircuts are increased, weare required to post additional collateral. We may also be forced
to sell assets at significantly depressed prices to meet such margin calls and to maintainadequate liquidity. As a fully diluted basis) at the timeresult of the award, subjectongoing
COVID-19 pandemic, we experienced margin calls in 2020 well beyondhistorical norms. As of December 31, 2021, we had met all
margin call requirements, but a sufficiently deep and/or rapid increase in margincalls or haircuts will have an adverse impact on our
liquidity.
We cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19pandemic and the
global recessionary economic conditions will have on us.
Governments have adopted, and may continue to adopt, policies, laws and plansintended to address the COVID-19 pandemic
and adverse developments in the economy and continued functioning ofthe financial markets. We cannot assure you that these
programs will be effective, sufficient or will otherwise have a maximum aggregate numberpositive impact on our business.
There can be no assurance as to how, in the long term, these and other actions by the U.S. government willaffect the efficiency,
liquidity and stability of sharesthe financial and mortgage markets or prepaymentson Agency MBS. To the extent the financial or mortgage
markets do not respond favorably to any of common stock thatthese actions, such actions do not functionas intended, or prepayments increase materially
as a result of these actions, our business, results of operations and financialcondition may continue to be issued undermaterially adversely affected.
Measures intended to prevent the 2011 Long Term Incentive Compensation Planspread of 4,000,000 sharesCOVID-19 may disrupt our abilityto operate our business.
In response to the outbreak of common stock.COVID-19 and the federal and state mandates implementedto control its spread, some of our
employees are worked remotely until June of 2021. If our employees areunable to work effectively as a result of COVID-19, including
because of illness, quarantines, office closures, ineffective remote work arrangements or technology failuresor limitations, our
operations could be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurityincidents, data
breaches or cyber-attacks, which could have a material adverse effect on our business andresults of operations, due to, among other
things, the loss of proprietary data, interruptions or delays in the operation ofour business and damage to our reputation.
ITEM 1B.UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
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 subsidiariesand Orchid. This property is suitable and adequate
for our business as currently conducted.
ITEM 3.LEGAL PROCEEDINGS.
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc.in the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
- 34 -
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007.In November 2021, Citigroup notified the Company of additionalindemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warrantiesin the related MLPA’s.The Company
believes the demands are without merit and intends to defend against the demandsvigorously.No provision or accrual has been
recorded as of December 31, 2021 related to the Citigroup demands.
We are not party to any other material pending legal proceedings as described in Item 103of Regulation S-K.
ITEM 4.MINE SAFETYDISCLOSURES.
Not Applicable.
- 35 -
PART II
ITEM 5. MARKETFOR REGISTRANT'SCOMMON EQUITY, RELATEDSTOCKHOLDERMATTERS AND ISSUERPURCHASESOF
EQUITY SECURITIES.
Market Information
Our Class A Common Stock is traded over-the-counter under the symbol "BMNM"“BMNM”.As of February 7, 2018,March 11, 2022, we had 12,743,959 10,531,772
shares of Class A Common Stock issued and outstanding, which were heldby 147102 shareholders of record and 1,484912 beneficial owners
whose shares were held in "street name"“street name” by brokers and depository institutions.
| 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 11, 2022, we had 31,938 shares of Class B Common Stock outstanding, which were held by 2 holders of recordand
31,938 shares of Class C Common Stock outstanding, which were held by oneholder 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, sobusiness.As a result, for the foreseeable future, distributions shouldwe do not be expected.expect to makedistributions.
Preferred Stock
Our charter authorizes us to issue preferred stock that could have apreference 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 preferenceon the preferred stock could limit our ability to make
distributions to the holders of our common stock.
Securities Authorized For Issuance Under Equity CompensationPlans
| �� | 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 | |||||||||
None.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On March 26,
2018, theBoard ofDirectorsof the Company(the “Board”)approveda Stock RepurchasePlan (the“2018 Repurchase
Plan”).Pursuantto the 2018RepurchasePlan, theCompany couldpurchaseup to 500,000shares ofits ClassA CommonStock from
time to time,subject tocertain limitationsimposed byRule 10b-18of the SecuritiesExchange Actof 1934.The 2018RepurchasePlan
was terminatedon September16, 2021.
On September16, 2021,the Boardauthorizeda share repurchaseplan pursuantto Rule 10b5-1of the SecuritiesExchangeAct of
1934 (the“2021 RepurchasePlan”). Pursuantto the 2021RepurchasePlan, theCompany maypurchaseshares ofits ClassA Common
Stock fromtimeto time foran aggregatepurchaseprice notto exceed$2.5 million.
The Company did nottablebelow presentsthe Company’sshare repurchase any shares of its stock duringactivityfor the threemonths endedDecember31, 2021.
Approximate Dollar
Shares Purchased
Amount of Shares
Total Number
Weighted-Average
as Part of Publicly
That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
Per Share
Programs
the Authorization
October 1, 2021 - October 31, 2021
64,849
$
2.01
64,849
$
2,369,860
November 1, 2021 - November 30, 2021
21,089
2.34
21,089
2,320,610
December 1, 2021 - December 31, 2017.2021
6,349
2.13
6,349
2,307,095
- 36 -
Totals / Weighted Average
92,287
$
2.09
92,287
$
2,307,095
ITEM 6. SELECTED FINANCIAL DATA.
[RESERVED]
[RESERVED]
- 37 -
ITEM 7. MANAGEMENT'S MANAGEMENT’SDISCUSSIONAND ANALYSIS OF FINANCIALCONDITIONAND RESULTS OFOPERATIONS.
●
●
increases in our cost of funds resulting from increases in the Federal Funds ratethat are controlled by the Fed and are likely
to occur in 2022;
●
the difference between Agency MBS yields and our funding and hedging costs;
●
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments;
●-34-the requirements to qualify for a registration exemption under the Investment Company Act;
●Change in Tax Lawour ability to use net operating loss carryforwards and net capital loss carryforwardsto reduce our taxable income;
���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. U.S. Generally Accepted Accounting Principles ("GAAP") requires that the impact of possible future changes in tax legislation be recognized inlaws or tax rates; and
Common Stock,Results of Operations
Described below are the Company's results of operations for the yearended December31, 2017, as compared to the year ended December 31, 2016.2020.
Net (Loss) Income Summary
Consolidated net loss for the year ended December 31, 2017 was $16.5 million, or $1.30 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net income of $3.4 million, or $0.27 basic and diluted income per share of Class A Common Stock, for the year ended December 31, 2016.
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)-35-
GAAP and Non-GAAP Reconciliation
(in thousands)We use derivative instruments, specifically Eurodollar and Treasury Note ("T-Note") futures contracts, to hedge a portion of the interest rate riskInterest Expense on our repurchase agreements and junior subordinate notes in a rising rate environment.Long-Term Debt
Interest IncomeWe have not elected to designate our derivative holdings for hedge accounting treatment under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging. Changes in fair valueEffect 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
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 gains or losses on specific derivative instruments that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on all derivative instruments would not accurately reflect our economic interest expense for these periods.
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, includingadding the effect of derivative instruments forinstrument hedges attributedto the period is referredpresented to as economicGAAP net portfolio interest expense. Net interest income, when calculated to includeincome.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.
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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, 2017 and 2016 and for each quarter during 2017 and 2016.
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Segment Information
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(in thousands)
InvestmentAdvisory Services RevenueManagement
Portfolio
●
●
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($ in thousands)
Our economic interest expense on repurchase liabilities for the years ended December 31, 2017 and 2016 was $2.4 million and $1.1 million, respectively, resulting in $3.7 million and $3.2 million of economic net portfolio interest income, respectively.
-41-
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
Our economic interest expense was $2.4 million2021 and $1.1 million for the years ended December 31, 2017 and 2016, respectively. There was an 60 basis point increase in the average economic cost of funds to 1.59% for the year ended December 31, 2017 from 0.99% for the previous year. The $1.3 million increase in economic interest expense was due to the $42.3 million increase in average outstanding repurchase agreements during the year ended December 31, 2017, combined with the negative 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 points above average one-month LIBOR and 21 basis points 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. The average term to maturity of the outstanding repurchase agreements decreased from 40 days at December 31, 2016 to 38 days at December 31, 2017.
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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 2017 and 2016 and for the years ended December 31, 2017 and 2016 on both a GAAP and economic basis.
Dividend Income
At December 31, 2017 and 2016, we owned 1,520,036 and 1,395,036 shares of Orchid common stock, respectively.2020. Orchid paid
Long-Term Debt-44-
On October 30, 2019,the Company borrowed $680,000 from a bank. The note is payable in equalmonthly principal and interest
We invest in MBS with the intent to earn net income from the realized yield on those assets over the related funding and hedging costs, and not for purposes of making short term
$The table below presents historical interest rate data as of each quarter end during 2017 and 2016.69
$
The retained interests in securitizations represent
As of December31, 2021,our MBS portfolioconsistedof $60.8million ofagency orgovernmentMBS at fairvalue andhad a
The following table presents the constant prepayment rate ("CPR") experienced on our structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
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The following tables summarize certain characteristics of our PT MBS and structured MBS as of December 31, 2017 and 2016:cash.
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The following table presents a summary of our portfolio assets acquired during the years ended December 31, 2017 and 2016.
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT MBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales.
The duration of our IO and IIO portfolio will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IO's may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIO's similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) 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.
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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, assuming rates instantaneously fall 100 basis points ("bps"), rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency MBS' effective duration to movements in interest rates.
In 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
Authorized Shares
GeneralGeneral
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Redemption.Redemption.At any time prior to the time an Acquiring Person becomes such,the Board may redeem the Rights in whole, but not
Anti-TakeoverEffects.Anti-Takeover Effects.While this was not the purpose of the Board when adopting the Rights Plan,the Rights will have certain
Amendments.Amendments.Before the Distribution Date, the Board may amend or supplementthe Rights Plan without the consent of the
Issuances of Common Stock
Stock Repurchase
Plans
1.85-82-per share.The
aggregatecost of thetender offer,includingcommissionsand fees,was approximately$There were no issuances of the Company's Class B Common Stock and Class C Common Stock during the years ended December 31, 2017 and 2016.
Bimini Capital
On August 12, 2011, Bimini Capital's shareholders approved the 2011 Long Term Compensation Plan (the "2011 Plan") to assist the Company in recruiting and retaining employees, directors and other service providers by enabling them to participate in the success of Bimini Capital and to associate their 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"), 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.
Share Awards
During 2016, the Compensation Committee of the Board of Directors of Bimini Capital (the "Committee") approved certain performance bonuses for members of management. These bonuses were awarded primarily 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 may issue Performance Units under the 2011 Plan to certain officers and employees. "Performance Units" represent the participant's right to receive an amount, based on the value of a specified number of shares of common stock, if the terms and conditions prescribed by the Committee are satisfied. The Committee will determine the requirements that must be satisfied before Performance Units are earned, including but not limited to any applicable performance period and performance goals. Performance goals may relate to the Company's financial performance or the participant's performance or such other criteria determined by the Committee, including goals stated with reference to the performance measures discussed below. If Performance Units are earned, they will be settled in cash, shares of common stock or a combination thereof.
The following table presents the activity related to Performance Units during the years ended December 31, 2017 and December 31, 2016:
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NOTE 14. COMMITMENTS AND CONTINGENCIES
On December 22, 2017,In 2021, 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. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company recorded an income tax provisionbenefit of $19.4 $
2021
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2021
2021
As of December 31, 2017, Royal Palm had tax capital loss carryforwards of approximately $0.1 million 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, Royal Palm had estimated federal NOL carryforwards of approximately $253.5 million and estimated available Florida NOLs of approximately $26.0 million. As of December 31, 2016, Royal Palm had estimated federal NOL carryforwards of approximately $257.0 million and estimated available Florida NOLs of approximately $29.5 million. These NOLs can be used to offset future taxable income and will begin to expire in 2025.
2026.
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Royal Palm holds
remaining securitizations as long as they are held.
$Shares of Class C274
11,198The Company has dividend eligible stock incentive plan shares that were outstanding during the years ended December 31, 2017 and 2016. The basic and diluted11,609
The table below reconciles the numerators and denominators of the basicBasic and diluted EPS.
0
0-86-
Authoritative accounting literature establishes a framework for using fair
●
(which includeexchangesand over-the-countermarkets withsufficientvolume),
●
Level 2 valuations,where thevaluationis based onquoted marketprices forsimilar instrumentstraded inactive markets,quoted
Mortgage-backed securitiesThe 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 $
Mortgage-backed securities
$
Our retained interests are valued based 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 any of these inputs may result in significantly different fair value measurements.
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The following table summarizes the significant quantitative information about our level 3 fair value measurements as of December 31, 2017.
NOTE18.15. SEGMENT INFORMATION
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-
1.8-90-
- 89 -
As of the end of the period covered by this report (the "evaluation date"“evaluation date”),the Company carried out an evaluation, under the
There were no significant changes in the Company'sCompany’s internal control over financialreporting that occurred during the Company's Company’s
reporting were unchanged during this period.Management'sManagement’s Report of Internal Control over Financial Reporting
●
-91-
-92-
- 91 -
-93-
a.Financial Statements. The consolidated financial statements of the Company, together with the report of Independent
reference.
c.Exhibits.c.Exhibits.
3.1
-94-
ITEM 16.Form 10-K Summary.
None.
-95-
- 95 -
Date:March 11, 2022
By:
11, 2022.-96-Signature
The following discussion of our financial condition and results of operations shouldbe 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 statementsare 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 holdingcompany 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 providedby Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, whichincludes 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 andday-to-day
operations.Pursuant to the terms of the management agreement, Bimini Advisorsprovides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all timessubject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated toit. In addition, the Company receives dividends from its investment in Orchid common shares.
from its investment in Orchid common shares.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiariesreferred 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"). We also invest in the common stock of Orchid. Ourinvestment strategy focuses on, and our
portfolio consists of, two categories of Agency MBS: (i) traditional pass-through AgencyMBS, ("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"), interestonly securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types ofstructured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock RepurchasePlans
On March 26,2018, theBoard ofDirectorsof the Companyapproveda Stock RepurchasePlan the“2018 RepurchasePlan”).
Pursuantto the 2018RepurchasePlan, wecould purchaseup to 500,000shares ofthe Company’sClass A CommonStock fromtime to
time, subjectto certainlimitationsimposed byRule 10b-18of the SecuritiesExchangeAct of 1934.The 2018RepurchasePlan was
terminatedon September16, 2021.
During theperiod beginningJanuary 1,2021 throughSeptember16, 2021,the Companyrepurchaseda total of1,195 sharesunder
the 2018RepurchasePlan at anaggregatecost of approximately$2,298, includingcommissionsand fees,for a weightedaverage priceof
$1.92 pershare. Fromcommencementof the 2018RepurchasePlan, throughits termination,the Companyrepurchaseda total of71,598
shares atan aggregatecost of approximately$169,243,includingcommissionsand fees,for a weightedaverage priceof $2.36per share.
On September16, 2021,the Boardauthorizeda share repurchaseplan pursuantto Rule 10b5-1of the SecuritiesExchangeAct of
1934 (the“2021 RepurchasePlan”). Pursuantto the 2021RepurchasePlan, wemay purchaseshares ofour ClassA CommonStock from
time to timefor an aggregatepurchase pricenot to exceed$2.5 million.Share repurchasesmay be executedthrough variousmeans,
- 38 -
including,without limitation,open markettransactions.The 2021RepurchasePlan doesnot obligatethe Companyto purchaseany
shares, andit expireson September16, 2023.The authorizationfor the 2021RepurchasePlan may beterminated,increasedor
decreasedby the Company’sBoard ofDirectorsin its discretionat any time.From thecommencementof the 2021RepurchasePlan,
through December31, 2021,we repurchaseda total of92,287 sharesat an aggregatecost of approximately$192,905,including
commissionsand fees,for a weightedaverage priceof $2.09per share.Subsequentto December31, 2021,and throughMarch 10,2022,
the Companyrepurchaseda total of170,422 sharesat an aggregatecost of approximately$343,732,includingcommissionsand fees,for
a weightedaverage priceof $2.02per share.
Tender Offer
In July 2021,we completeda “modifiedDutch auction”tender offerand paid$1.5 million,excludingfees andrelated expenses,to
repurchase812,879 sharesof our ClassA commonstock, whichwere retired,at a priceof $1.85 pershare.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (in addition to those related to the COVID-19pandemic) may impact our results of
operations and financial condition. These factors include:
●
| interest rate trends; |
| ● competition for, and supply of, investments in Agency MBS; ● actions taken by the U.S. government, including the presidential administration,the U.S. Federal Reserve (the “Fed”), the Federal Open Market Committee (the “FOMC”), The Federal Housing FinanceAgency (the “FHFA”) and the U.S. Treasury; ● prepayment rates on mortgages underlying our Agency MBS, and credit trendsinsofar as they affect prepayment rates; ● the equity markets and the ability of Orchid to raise additional capital; ● geo-political events that affect the U.S. and international economies, such as the current crisisin Ukraine; and ● other market developments. |
In addition, a variety of factors relating to our business may also impact our resultsof operations and financial condition. These
factors include:
●
| our degree of leverage; |
●
���
●
our ability to manage the period in which portfolio of Orchid and maintain our role as manager.
Resultsof Operations
Describedbelow arethe law was enacted. As such, we recorded anCompany’sresults ofoperationsfor theyear endedDecember31, 2021,as comparedto the yearended
December31, 2020.
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Net Income(Loss) Summary
Consolidatednet income tax provision of $19.4 million for the yearended December31, 2017, including a charge2021was $0.3million, or$0.02 basicand dilutedincome pershare of $25.9
Class A CommonStock, ascomparedto consolidatednet lossof $5.5 million, during the fourth quarter due to a remeasurement or $0.47basic anddiluted lossper shareof deferred tax assets 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 change as the Company receives additional clarification and implementation guidance.Class A
Common Stock,
The componentsof net income(loss) forthe yearsended December31, 2021and 2020,along withthe changesin those components
are presentedin the tablebelow:
(in thousands)
2021
2020
Change
Advisory services revenue
$
9,788
$
6,795
$
2,993
Interest and dividend income
4,262
5,517
(1,255)
Interest expense
(1,113)
(2,225)
1,112
Net revenues
12,937
10,087
2,850
Other expense
(4,744)
(10,279)
5,535
Expenses
(8,286)
(6,666)
(1,620)
Net loss before income tax benefit
(93)
(6,858)
6,765
Income tax benefit
(368)
(1,369)
1,001
Net income (loss)
$
275
$
(5,489)
$
5,764
GAAP andNon-GAAPReconciliation
Economic InterestExpense andEconomic NetInterestIncome
We use derivativeinstruments,specificallyEurodollarand TreasuryNote (“T-Note”)futures contractsand TBAshort positionsto
hedge a portionof the interestrate riskon repurchaseagreementsin a risingrate environment.
We have notdesignatedour derivativefinancialinstrumentsas hedgeaccountingrelationships,but ratherhold themfor economic
hedging purposes.Changes infair valueof theseinstrumentsare presentedin a separateline itemin our consolidatedstatementsof
operationsand not includedin interestexpense. Assuch, forfinancialreportingpurposes,interestexpense andcost of fundsare not
impacted bythe fluctuationin valueof the derivativeinstruments.
For the purposeof computingeconomic netinterestincome andratios relatingto cost offunds measures,GAAP interestexpense has
been adjustedto reflectthe realizedand unrealizedgains orlosses oncertain derivativeinstrumentsthe Companyuses thatpertain to
each periodpresented.We believethat adjustingour interestexpense forthe periodspresentedby the gainsor losseson thesederivative
instrumentswould notaccuratelyreflect oureconomic interestexpense forthese periods.The reasonis that thesederivativeinstruments
may coverperiods thatextend intothe future,not just thecurrent period.Any realizedor unrealizedgains orlosses onthe instruments
reflect thechange inmarket valueof the instrumentcaused bychanges inunderlyinginterestrates applicableto the termcovered bythe
instrument,not just thecurrent period.
For eachperiod presented,we have combinedthe effectsof the derivativefinancialinstrumentsin place forthe respectiveperiod with
the actualinterestexpense incurredon our borrowingsto reflecttotal economicinterestexpense forthe applicableperiod. Interest
expense, includingthe effectof derivativeinstrumentsfor the period,is referredto as economicinterestexpense. Netinterest income,
when calculatedto includethe effectof derivativeinstrumentsfor the period,is referredto as economicnet interestincome.
We believethat economicinterestexpense andeconomicnet interestincome providemeaningfulinformationto consider, inaddition
to the respectiveamounts preparedin accordancewith GAAP. The non-GAAPmeasures helpmanagementto evaluateour financial
position andperformancewithout theeffects ofcertain transactionsand GAAPadjustmentsthat arenot necessarilyindicativeof our
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current investmentportfolioor operations.The gainsor losseson derivativeinstrumentspresentedin our consolidatedstatementsof
operationsare not necessarilyrepresentativeof the totalinterestrate expensethat we willultimatelyrealize. Thisis becauseas interest
rates moveup or downin the future,the gainsor losseswe ultimatelyrealize, andwhich willaffect ourtotal interestrate expensein future
periods,may differfrom theunrealizedgains orlosses recognizedas of thereportingdate.
Our presentationof the economicvalue of ourhedging strategyhas importantlimitations.First, othermarket participantsmay
calculateeconomicinterestexpense andeconomic netinterestincome differentlythan theway we calculatethem. Second,while we
believe thatthe calculationof the economicvalue of ourhedgingstrategydescribedabove helpsto presentour financialpositionand
performance,it may beof limitedusefulnessas an analyticaltool. Therefore,the economicvalue ofour investmentstrategy shouldnot be
viewed inisolationand is nota substitutefor interestexpense andnet interestincome computedin accordancewith GAAP.
The tablesbelow presenta reconciliationof the adjustmentsto interestexpense shownfor eachperiod relativeto our derivative
instruments,and the consolidatedstatementsof operationsline item,gains (losses)on derivativeinstruments,calculatedin accordance
with GAAPfor the yearsended December31, 2021and 2020and for eachquarter during2021 and2020. Asa resultof the marketturmoil
during thefirst quarterof 2020 severalhedge positionswhere closed.However, thehedges closedwere hedgesthat coveredperiods well
beyond thefirst quarterof 2020.Accordingly, theopen equityat the timethese hedgeswere closedwill resultin adjustmentsto economic
interestexpense throughthe balanceof their respectiveoriginalhedge periods.Since theCompany’s portfoliowas significantlyreduced
during thefirst quarterof 2020, theeffect of applyingthe openequity atthe timeof closureof thesehedge instrumentsto the current,and
much smaller,repurchaseagreementinterestexpense amountshas materiallyimpactedthe economicinterestamounts reportedbelow.
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, 2017 and 2016, along with the changes 2021
$
-
$
-
$
-
September 30, 2021
-
-
-
June 30, 2021
-
-
-
March 31, 2021
-
-
-
December 31, 2020
-
-
-
September 30, 2020
-
-
-
June 30, 2020
(2)
-
(2)
March 31, 2020
(5,291)
(1,441)
(3,850)
Years Ended
December 31, 2021
$
-
$
-
$
-
December 31, 2020
(5,293)
$
(1,441)
(3,852)
Gains (Losses) on Futures Contracts
(in those components are presented in the table below:thousands)
Attributed to Current Period (Non-GAAP)
| (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 | ) | ||||
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, 2021
$
(707)
$
(60)
$
(767)
$
707
$
60
$
767
$
-
September 30, 2021
(709)
(57)
(766)
709
57
766
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
December 31, 2020
(615)
(40)
(655)
615
40
655
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
40
1,105
-
June 30, 2020
(456)
(40)
(496)
456
38
494
(2)
March 31, 2020
(456)
(40)
(496)
(2,879)
(475)
(3,354)
(3,850)
- 41 -
Years Ended
December 31, 2021
$
(2,832)
$
(233)
$
(3,065)
$
2,832
$
233
$
3,065
$
-
December 31, 2020
(2,592)
(160)
(2,752)
(743)
(357)
(1,100)
(3,852)
Economic Net Portfolio Interest Income
(in thousands)
Interest Expense and 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, 2021
$
511
$
21
$
(707)
$
728
$
490
$
(217)
September 30, 2021
537
24
(709)
733
513
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
December 31, 2020
597
43
(615)
658
554
(61)
September 30, 2020
604
43
(1,065)
1,108
561
(504)
June 30, 2020
523
60
(456)
516
463
7
March 31, 2020
2,040
928
(456)
1,384
1,112
656
Years Ended
December 31, 2021
$
2,237
$
116
$
(2,832)
$
2,948
$
2,121
$
(711)
December 31, 2020
3,764
1,074
(2,592)
3,666
2,690
98
(1)
Reflects the effect of derivative instrument hedges for only the periodpresented.
(2)
Calculated by subtracting the effect of derivative instrument hedgesattributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributedto the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Income
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, 2021
$
490
$
(217)
$
249
$
(60)
$
309
$
241
$
(526)
September 30, 2021
513
(196)
248
(57)
305
265
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
571
(137)
250
(58)
308
321
(445)
December 31, 2020
554
(61)
257
(40)
297
297
(358)
September 30, 2020
561
(504)
261
(40)
301
300
(805)
June 30, 2020
463
7
282
(40)
322
181
(315)
March 31, 2020
1,112
656
350
(40)
390
762
266
Years Ended
December 31, 2021
$
2,121
$
(711)
$
997
$
(233)
$
1,230
$
1,124
$
(1,941)
December 31, 2020
2,690
98
1,150
(160)
1,310
1,540
(1,212)
(1)
Calculated by the fluctuation in value of the derivative instruments.
(2)
Reflects the effect of derivative instrumentsinstrument hedges for only the periodpresented.
(3)
Calculated by subtracting the effect of derivative instrument hedgesattributed to the period is referredpresented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedgesattributed to as economicthe period presented to GAAP net interest income.
Segment Information
| 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 | ) | |||||||
| 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 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 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 | ||||||||||||||||||||
- 42 -
We have two operating segments. The asset management segment includes the investmentadvisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment portfolio segment includes theinvestment activities conducted by Bimini Capital and Royal Palm.
Segment information for the years ended December 31, 20172021 and 20162020 is as follows:
| (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 | ||||||||||
(in thousands)
Asset Management Segment
Investment
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
147
-
-
(147)
-
Interest and dividend income
-
4,262
-
-
4,262
Interest expense
-
(116)
(997)
(2)
-
(1,113)
Net revenues
9,935
4,146
(997)
(147)
12,937
Other (expense) income
-
(4,898)
154
(3)
-
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
-
-
(8,285)
Intercompany expenses
(1)
-
(147)
-
147
-
Income (loss) before income taxes
$
4,259
$
(3,508)
$
(843)
$
-
$
(92)
Assets
$
1,901
$
111,022
$
9,162
$
-
$
122,085
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
Advisory services, other operating segments
(1)
152
-
-
(152)
-
Interest and dividend income
-
5,517
-
5,517
Interest expense
-
(1,074)
(1,151)
(2)
(2,225)
Net revenues
6,947
4,443
(1,151)
(152)
10,087
Other expense
-
(9,825)
(454)
(3)
(10,279)
Operating expenses
(4)
(3,653)
(3,014)
-
(6,667)
Intercompany expenses
(1)
-
(152)
-
152
-
Income (loss) before income taxes
$
3,294
$
(8,548)
$
(1,605)
$
-
$
(6,859)
Assets
$
1,469
$
113,764
$
13,468
$
-
$
128,701
(1)
Includes advisory services revenue consist received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportionalshare of total revenues.
Asset ManagementSegment
Advisory ServicesRevenue
Advisory servicesrevenueconsistsof managementfees andoverheadreimbursementschargedto Orchidfor the managementof its
portfoliopursuantto the termsof a managementagreement.We receive a monthly management fee in the amount of:
●
● One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million. |
In addition, Orchid is obligated to reimburse us for any direct expensesincurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the managementagreement. The management agreement has been
- 43 -
renewed through February 20182023 and provides for automatic one-year extensionoptions. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee equalto three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automaticrenewal term.
The following table summarizes the advisory services revenue received fromOrchid for the years ended December 31, 20172021 and 2016
2020 and each quarter during 20172021 and 2016.2020.
| ($ 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, 2021
$
6,056,259
$
806,382
$
2,587
$
443
$
3,030
September 30, 2021
5,136,331
672,384
2,157
390
2,547
June 30, 2021
4,504,887
542,679
1,791
395
2,186
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
347
1,615
March 31, 2020
3,269,859
376,673
1,377
348
1,725
Years Ended
December 31, 2021
$
4,932,548
$
619,533
$
8,156
$
1,632
$
9,788
December 31, 2020
3,363,208
373,464
5,281
1,514
6,795
Investment Portfolio Segment
Net Portfolio Interest Income
We definenet portfoliointerestincome asinterestincome onMBS lessinterestexpense onrepurchaseagreementfunding.During
the yearended December31, 2017, 2021,we generated $4.3$2.1 millionof net portfoliointerestincome, consistingof $6.1$2.2 millionof interestincome
from MBSassets offsetby $0.1 millionof interestexpense onrepurchaseliabilities.For the yearended December31, 2020,we
generated$2.7 millionof net portfoliointerestincome, consistingof $3.8 millionof interestincome fromMBS assetsoffset by $1.8$1.1 million
of interestexpense onrepurchaseliabilities.The $1.5milliondecreasein interestincome forthe yearended December31, 2021was due
to a $13.2million decreasein averageMBS balances,combinedwith a 136basis point("bp") decreasein yieldsearned onthe portfolio.
The $1.0million decreasein interestexpense forthe yearended December31, 2021was due toa 121 bpdecreasein cost offunds,
combined witha $10.6 milliondecreasein averagerepurchaseliabilities.
Our economicinterestexpenseon repurchaseliabilitiesfor theyears endedDecember31, 2021and 2020was $2.9million and$3.7
million, respectively,resultingin ($0.7)million and$0.1 millionof economicnet portfoliointerestincome, respectively.
The tablesbelow provideinformationon our portfolioaverage balances,interestincome, yieldon assets,average repurchase
agreementbalances,interestexpense,cost of funds,net interestincome andnet interestrate spreadfor eachquarter in2021 and2020
and for theyears endedDecember31, 2021and 2020on both aGAAP andeconomic basis.
($ 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, 2021
$
62,597
$
511
3.27%
$
61,019
$
21
$
728
0.14%
4.77%
September 30, 2021
66,692
537
3.22%
67,253
24
733
0.14%
4.36%
June 30, 2021
70,925
578
3.26%
72,241
31
739
0.17%
4.09%
March 31, 2021
69,017
611
3.54%
69,104
40
748
0.23%
4.33%
- 44 -
December 31, 2020
69,161
597
3.45%
67,878
43
658
0.25%
3.88%
September 30, 2020
62,981
604
3.84%
61,151
43
1,108
0.28%
7.25%
June 30, 2020
53,630
523
3.90%
51,987
60
516
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
928
1,384
2.83%
4.22%
Years Ended
December31, 2021
$
67,308
$
2,237
3.32%
$
67,404
$
116
$
2,948
0.17%
4.37%
December 31, 2020
80,479
3,764
4.68%
78,043
1,074
3,666
1.38%
4.70%
($ 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, 2021
$
490
$
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.14)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
December 31, 2020
554
(61)
3.20%
(0.43)%
September 30, 2020
561
(504)
3.56%
(3.41)%
June 30, 2020
463
7
3.44%
(0.07)%
March 31, 2020
1,112
656
3.16%
1.77%
Years Ended
December 31, 2021
$
2,121
$
(711)
3.15%
(1.05)%
December 31, 2020
2,690
98
3.30%
(0.02)%
(1)
Portfolio yields and costs of borrowings presented in the tables above and thetables on pages 43 and 44 are calculated based on the
average balances of the underlying investment portfolio/repurchaseagreement balances and are annualized for the periods presented.
(2)
Economic interest expense on repurchase liabilities. For the year ended December 31, 2016, we generated $3.5 million of net portfolio interest income, consisting of $4.2 million of interest income from MBS assets offset by $0.7 million of interest expense on repurchase liabilities. The $1.9 million increase in interest income for the year ended December 31, 2017 was due to a 13 basis point increase in yields earned on the portfolio, combined with a $43.9 million increase in average MBS balances. The $1.0 million increase in interest expense for the year ended December 31, 2017 was due to a combination of a $42.3 million increase in average repurchase liabilities and a 51 basis point increase in cost of funds.
presented in the tables above and the tables on page 44 include the
effect of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivativeinstrument hedges attributed to the period related to hedging
activities divided by average MBS held.
(4)
Economic net interest rate spread for each quarter in 2017 and 2016 and for the years ended December 31, 2017 and 2016 on both a GAAP andis calculated by subtracting average economic basis.
-42-
yields.
($ in thousands)
| ($ 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) | ||||||||||||||||
| 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 | % | ||||||||||
Interest Income and Average Earning Asset Yield
Our interestincome was $6.1$2.2 millionfor the yearended December31, 2017 2021and $4.2 $3.8million foryear endedDecember31, 2016. 2020.
Average MBSholdings were $159.1$67.3 millionand $115.2 $80.5million forthe yearsended December31, 2017 2021and 2016, 2020,respectively. The $1.9 $1.5
million increase decreasein interestincome wasdue to a 13 basis point increase $13.2 milliondecreasein yields, averageMBS holdings,combined witha $43.9 million increase 136 bpdecreasein average MBS holdings.
yields.
The tables tablebelow present presentsthe consolidated averageportfoliosize, incomeand yieldsof our respectivesub-portfolios,consistingof structuredMBS
and pass-throughMBS ("(“PT MBS"MBS”). forthe yearsended December31, 2021and 2020and eachquarter during2021 and2020.
| ($ 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, 2021
$
59,701
$
2,896
$
62,597
$
500
$
11
$
511
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
533
4
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
- 45 -
June 30, 2020
53,101
529
53,630
502
21
523
3.78%
16.12%
3.90%
March 31, 2020
135,044
1,098
136,142
2,029
11
2,040
6.01%
3.93%
5.99%
Years Ended
December 31, 2021
$
65,813
$
1,495
$
67,308
$
2,217
$
20
$
2,237
3.37%
1.39%
3.32%
December 31, 2020
79,888
591
80,479
3,717
47
3,764
4.65%
7.98%
4.68%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our averageoutstandingrepurchaseagreementswere $150.3 $67.4million and $108.0$78.0 million,generatinginterestexpense of $1.8$0.1 millionand $0.7
$1.1 millionfor the yearsended December31, 2017 2021and 2016, 2020,respectively.Our averagecost of fundswas 1.20% 0.17%and 0.69% 1.38%for the
years endedDecember31, 20172021 and 2016,2020, respectively.There wasa 51 basis point increase 121 bpdecreasein the averagecost of fundsand a $42.3 $10.6million increase
decreasein averageoutstandingrepurchaseagreementsduring theyear endedDecember31, 2021 ascomparedto the yearended
December31, 2020.
Our economicinterestexpensewas $2.9millionand $3.7millionfor theyears endedDecember31, 2021and 2020,respectively.There
was a 33 bpdecreasein the averageeconomic costof funds to4.37% for theyear endedDecember31, 2021 from4.70% forthe previous
year. The $0.8 milliondecreasein economicinterestexpense wasdue to thedecreasein interestexpense onthe repurchaseagreements,
partiallyoffset by thenegativeperformanceof our hedgingagreementsattributedto the currentperiod.
Since allof our repurchaseagreementsare short-term,changes inmarket ratesdirectly affectour interestexpense.Our averagecost
of fundscalculatedon a GAAPbasis was5 bps aboveaverageone-monthLIBOR and9 bps belowaverage six-monthLIBOR forthe
quarter endedDecember31, 2021.Our averageeconomic costof fundswas 468 bpsabove averageone-monthLIBOR and454 bps
above averagesix-month LIBORfor the quarterended December31, 2021.The averageterm to maturityof the outstandingrepurchase
agreementsdecreasedfrom 33days at December31, 2020to 16 daysat December31, 2021.
The tablesbelow presentthe averageoutstandingbalance underall repurchaseagreements,interestexpense andaverageeconomic
cost of funds,and averageone-monthand six-monthLIBOR ratesfor eachquarter in2021 and2020 andfor the yearsended December
31, 2021and 2020on both aGAAP andeconomic basis.
($ 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, 2021
$
61,019
$
21
$
728
0.14%
4.77%
September 30, 2021
67,253
24
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
December 31, 2020
67,878
43
658
0.25%
3.88%
September 30, 2020
61,151
43
1,108
0.28%
7.25%
June 30, 2020
51,987
60
516
0.46%
3.97%
March 31, 2020
131,156
928
1,384
2.83%
4.22%
Years Ended
December 31, 2021
$
67,404
$
116
2,948
0.17%
4.37%
December 31, 2020
78,043
1,074
3,666
1.38%
4.70%
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, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
- 46 -
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
December 31, 2020
0.15%
0.27%
0.10%
(0.02)%
3.73%
3.61%
September 30, 2020
0.17%
0.35%
0.11%
(0.07)%
7.08%
6.90%
June 30, 2020
0.55%
0.70%
(0.09)%
(0.24)%
3.42%
3.27%
March 31, 2020
1.34%
1.43%
1.49%
1.40%
2.88%
2.79%
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, 2021
0.10%
0.20%
0.07%
(0.03)%
4.27%
4.17%
December 31, 2020
0.55%
0.69%
0.83%
0.69%
4.15%
4.01%
Dividend Income
We owned 1,520,036 shares of Orchid common stock as of December 31, 2019. We acquired 1,075,321additional shares during
the year ended December 31, 2017 2020, bringing our total ownership to 2,595,357 sharesas compared to the year endedof December 31, 2016.
| ($ 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 | % | |||||||||||||
| 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 | )% | ||||||||||||
total dividends of $1.68$0.78 per share during both 20172021 and 2016. $0.79 per share during 2020.During the years ended December 31, 20172021 and 2016,
2020, we received dividends on this common stock investment of approximately $2.5$2.0 million and $2.3$1.8 million, respectively.
Long-Term Debt
Junior Subordinated Notes
Debt
Interestexpense onour juniorsubordinateddebt securitieswas approximately $1.2$1.0 millionand $1.1million forthe yearsended
December31, 2021and 2020,respectively.The averagerate ofinterestpaid forthe yearended December31, 2017 and 2016, respectively. The average rate of interest paid 2021was 3.66%
comparedto 4.22%for the yearended December31, 2017 was 4.69% compared to 4.19% for the year ended December 31, 2016. 2020.The juniorsubordinateddebt securitiespay interestat a floatingrate.The
rate is adjustedquarterlyand setat a spreadof 3.50%over theprevailingthree-monthLIBOR rateon the determinationdate.As of
December31, 2017, 2021,the interestrate was 5.09%3.70%.
Note Payable
On October 30, 2019,the Company borrowed $680,000 from a bank. The note is payable in equalmonthly principal and interest
installments of approximately $4,500 through October 30, 2039. Interest accruesat 4.89% through October 30, 2024. Thereafter,
interest accrues based on the weekly average yield to the United States Treasury securities adjusted toa constant maturity of 5 years,
plus 3.25%.The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $152,000 through the PaycheckProtection Program (“PPP”) of the
CARES Act in the form of a low interest loan.The Small Business Administration notified the Company that, effective as of April 22,
2021, all principal and accrued interest under the PPP loan has been forgiven.
Gains or Losses and Other Income
The tablebelow presentsour gainsor lossesand otherincome forthe yearsended December31, 2017 2021and 2016.2020.
(in thousands)
| (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 | ) | |||||||
- 47 -
2021
2020
Change
Realized 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, we received proceeds of $1.7 million from the(losses) on sales of MBS compared to $73.1 million for the year ended December 31, 2016.
$
| 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 | % | ||||||||||
$
$ 5,814 Unrealized (losses) gains on MBS (3,099) 112 (3,211) Total losses onMBS (3,030) (5,633) 2,603 Losses on derivative instruments - (5,293) 5,293 Gains on |
-
59
(59)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,869)
584
(2,453)
We invest inMBS withthe residualintentto earn netincome fromthe realizedyield on thoseassets overtheir relatedfunding andhedging
costs, andnot for thepurpose ofmaking shortterm gainsfrom tradingin these securities.However, wehave sold,and may continueto
sell, existingassets toacquirenew assets,which ourmanagementbelieves mighthave higherrisk-adjustedreturns inlight of currentor
anticipatedinterest spread remaining after paymentsrates, federalgovernmentprogramsor generaleconomic conditionsor to manageour balancesheet aspart of our
asset/liabilitymanagementstrategy.During theyear endedDecember 31,2021, wereceived proceedsof $13.1million fromthe salesof
MBS comparedto $176.2million forthe yearended December31, 2020.Most of the2020 salesoccurredduring thesecond halfof March
2020 as wesold assetsin orderto maintainour leverageratio atprudent levels,maintain sufficientcash and liquidityand reducerisk
associatedwith themarket turmoilbrought aboutby COVID-19.
The fairvalue of ourMBS portfolioand derivativeinstruments,and the gains(losses) reportedon thosefinancialinstruments,are
sensitiveto changesin interestrates.The tablebelow presentshistoricalinterestrate dataas of eachquarter endduring2021 and2020.
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, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 Year and 10Year TreasuryRates are obtained from quoted end of day prices on the notes issued throughChicago Board OptionsExchange.
(2)
Historical 30 Year and15 Year FixedRate Mortgage Rates are obtained from Freddie Mac’sPrimary Mortgage Market Survey.
(3)
Historical LIBOR are obtained from 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.Intercontinental Exchange Benchmark Administration
Ltd.-45-
(in thousands)
2021
Ltd.
Operating Expenses
For the yearended December31, 2017, 2021,our totaloperatingexpenses wereapproximately $6.4$8.3 millioncomparedto approximately $5.7
$6.7 millionfor the yearended December31, 2016. 2020.The tablebelow presentsa breakdownof operatingexpenses forthe yearsended
December31, 2017 2021and 2016.2020.
(in thousands)
| (in thousands) | ||||||||||||
| 2017 | 2016 | Change | ||||||||||
| Compensation and benefits | $ | 3,852 | $ | 3,325 | $ | 527 | ||||||
| Legal fees | 111 | 210 | (99 | ) | ||||||||
| Accounting, auditing and other professional fees | 344 | 389 | (45 | ) | ||||||||
| Directors' fees and liability insurance | 659 | 622 | 37 | |||||||||
| Other G&A expenses | 1,437 | 1,198 | 239 | |||||||||
| $ | 6,403 | $ | 5,744 | $ | 659 | |||||||
2021
2020
Change
Compensation and benefits
$
5,721
$
4,235
$
1,486
Legal fees
137
145
(8)
Accounting, auditing and other professional fees
377
431
(54)
Directors’ fees and liability insurance
763
691
72
Administrative and other expenses
1,287
1,165
122
$
8,285
$
6,667
$
1,618
- 48 -
The increasein compensationand benefitsin 2021 comparedto 2020 reflectsan evaluationperformedby the Company’sBoard of
Directorsof the performanceof the Company’sexecutiveofficers,particularlythe increasein advisoryservicesrevenue.
FinancialCondition:
Mortgage-Backed Securities
As of December31, 2021,our MBS portfolioconsistedof $60.8million ofagency orgovernmentMBS at fairvalue andhad a
weightedaverage couponof 3.41%.During theyear endedDecember 31,2021,we receivedprincipalrepaymentsof $14.5million
comparedto $13.9million forthe yearended December31, 2020.The averageprepaymentspeeds forthe quartersended December31,
2021 and2020 were21.1% and14.4%,respectively.
The followingtable presentsthe three-monthconstant prepaymentrate (“CPR”)experiencedon our structuredand PT MBSsub-
portfolios,on an annualizedbasis, forthe quarterlyperiods presented.CPR is amethod ofexpressingthe prepaymentrate fora mortgage
pool thatassumes thata constantfractionof the remainingprincipalis prepaideach monthor year. Specifically,the CPRin the chart
below representsthe threemonth prepaymentrate of thesecuritiesin the respectiveasset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
The followingtables summarizecertain characteristicsof our PTMBS and structuredMBS as ofDecember31, 2021and 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
December 31, 2021
Fixed Rate PT MBS
$
58,029
95.4%
3.69%
330
1-Sep-51
Interest-Only Securities
2,759
4.6%
2.86%
306
15-May-51
Inverse Interest-Only Securities
15
0.0%
5.90%
209
15-May-39
Total Mortgage Assets
$
60,803
100.0%
3.41%
329
1-Sep-51
December 31, 2020
Fixed Rate PT MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only Securities
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only Securities
25
0.0%
5.84%
221
15-May-39
Total Mortgage Assets
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
December 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
- 49 -
Fannie Mae
$
39,703
65.3%
$
38,946
59.8%
Freddie Mac
21,100
34.7%
26,232
40.2%
Total Portfolio
$
60,803
100.0%
$
65,178
100.0%
December 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
109.33
$
109.51
Weighted Average Structured Purchase Price
$
4.81
$
4.28
Weighted Average Pass-through Current Price
$
109.30
$
112.67
Weighted Average Structured Current Price
$
9.87
$
3.20
Effective Duration
(1)
2.103
3.309
(1)
Effective duration is the approximate percentage change in pricefor a 100 bp change in rates.An effective duration of 2.103 indicates that an
interest rate increase of 1.0% would be expected to cause a 2.103% decrease in the valueof the MBS in our investment portfolio at December
31, 2021.An effective duration of 3.309 indicates that an interest rate increaseof 1.0% would be expected to cause a 3.309% decrease in the
value of the MBS in our investment portfolio at December 31, 2020. These figuresinclude the structured securities in the portfolio but do include
the effect of our funding cost hedges. Effective duration quotesfor individual investments are obtained from The YieldBook, Inc.
The followingtable presentsa summaryof our portfolioassets acquiredduring theyears endedDecember31, 2021and 2020.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
23,338
$
106.48
1.41%
$
43,130
$
111.44
1.99%
Structured MBS
2,852
10.01
3.44%
-
-
0.00%
Our portfolioof PT MBSis typicallycomprisedof adjustable-rateMBS, fixed-rateMBS and hybridadjustable-rateMBS. We generally
seek to acquirelow durationassets thatoffer highlevels ofprotectionfrom mortgageprepaymentsprovidedthat theyare reasonably
priced bythe market.The statedcontractualfinal maturityof the mortgageloans underlyingour portfolioof PT MBSgenerally rangesup
to 30 years.However, theeffect of prepaymentsof the underlyingmortgageloans tendsto shortenthe resultingcash flowsfrom our
investmentssubstantially.Prepaymentsoccur forvarious reasons,includingrefinancingof underlyingmortgages,loan payoffsin
connectionwith homesales, andborrowerspaying morethan theirscheduledloan payments,which acceleratesthe amortizationof the
loans.
The durationof our IOand IIO portfoliowill varygreatly dependingon the structuralfeaturesof the securities.While prepayment
activity willalways affectthe cashflows associatedwith thesecurities,the interestonly natureof IO’s maycause theirdurationsto become
extremelynegative whenprepaymentsare high,and less negativewhen prepaymentsare low. Prepaymentsaffect thedurationsof IIO’s
similarly, but thefloating ratenature ofthe couponof IIOs (whichis inverselyrelated tothe levelof one monthLIBOR) causetheir price
movements- and modelduration- to be affectedby changesin bothprepaymentsand one monthLIBOR - bothcurrent andanticipated
levels.As a result,the durationof IIO securitieswill alsovary greatly.
Prepaymentson the loansunderlyingour MBScan alterthe timingof the cashflows receivedby us. Asa result,we gaugethe interest
rate sensitivityof its assetsby measuringtheir effectiveduration.While modifieddurationmeasuresthe pricesensitivityof a bondto
movementsin interestrates, effectivedurationcapturesboth themovement ininterestrates andthe factthat cashflows toa mortgage
related securityare alteredwhen interestrates move.Accordingly, whenthe contractinterestrate on amortgageloan is substantially
above prevailinginterestrates inthe market,the effectivedurationof securitiescollateralizedby such loanscan be quitelow becauseof
expected prepayments.
We face therisk thatthe marketvalue of ourPT MBS assetswill increaseor decreaseat differentrates thanthat of ourstructured
- 50 -
MBS or liabilities,includingour hedginginstruments.Accordingly, weassess ourinterestrate riskby estimatingthe durationof our assets
and the durationof our liabilities.We generallycalculatedurationand effectivedurationusing variousthird-partymodels orobtain these
quotes fromthird-parties.However, empiricalresults andvarious third-partymodels mayproducedifferent durationnumbers forthe same
securities.
The followingsensitivityanalysisshows theestimatedimpact onthe fairvalue of ourinterestrate-sensitiveinvestmentsand hedge
positionsas of December31, 2021,assuming ratesinstantaneouslyfall 100 bps,rise 100bps andrise 200bps, adjustedto reflectthe
impact ofconvexity, whichis themeasure ofthe sensitivityof our hedgepositionsand AgencyMBS’ effectiveduration tomovementsin
interestrates.
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
58,029
$
1,830
$
(2,594)
$
(5,654)
3.15%
(4.47)%
(9.74)%
Interest-Only MBS
2,759
(813)
651
999
(29.48)%
23.59%
36.21%
Inverse Interest-Only MBS
15
1
(2)
(4)
5.51%
(14.75)%
(29.76)%
Total MBSPortfolio
$
60,803
$
1,018
$
(1,945)
$
(4,659)
1.67%
(3.20)%
(7.66)%
In additionto changesin interestrates, otherfactors impactthe fairvalue of ourinterestrate-sensitiveinvestmentsand hedging
instruments,such as theshape ofthe yieldcurve, marketexpectationsas to futureinterestrate changesand othermarket conditions.
Accordingly, inthe eventof changesin actualinterestrates, thechange inthe fairvalue of ourassets wouldlikely differfrom thatshown
above andsuch differencemight bematerial andadverse toour stockholders.
Repurchase Agreements
As of December31, 2017, our MBS portfolio consisted 2021,we had establishedborrowingfacilitiesin the repurchaseagreementmarket witha numberof $209.7 million of agency or government MBS at fair value commercial
banks andother financialinstitutionsand had a weighted average couponborrowingsin place withfive of 4.21%. Duringthesecounterparties.We believethese facilitiesprovide
borrowingcapacity inexcess ofour needs.None of theselenders areaffiliatedwith the year ended December 31, 2017, we received principal repayments of $12.5 million compared to $13.1 million for the year ended December 31, 2016. The average prepayment speeds for the quarters ended December 31, 2017 and 2016 were 8.8% and 11.1%, respectively.Company. These borrowingsare securedby our
| Structured | ||||||||||||
| PT MBS | MBS | Total | ||||||||||
| Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) | |||||||||
| December 31, 2017 | 7.2 | 16.9 | 8.8 | |||||||||
| September 30, 2017 | 5.2 | 18.8 | 8.3 | |||||||||
| June 30, 2017 | 5.9 | 20.4 | 9.9 | |||||||||
| March 31, 2017 | 4.8 | 18.8 | 8.8 | |||||||||
| December 31, 2016 | 5.5 | 27.3 | 11.1 | |||||||||
| September 30, 2016 | 9.4 | 19.7 | 13.6 | |||||||||
| June 30, 2016 | 7.8 | 20.4 | 12.6 | |||||||||
| March 31, 2016 | 11.8 | 16.6 | 14.3 | |||||||||
| ($ 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) | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| 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 | % | ||||||||||||
| Structured MBS | - | - | - | 2,993 | 11.43 | 5.15 | % | |||||||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||
| Fair | $ Change in Fair Value | % Change in Fair Value | ||||||||||||||||||||||||||
| MBS Portfolio | Value | -100BPS | +100BPS | +200BPS | -100BPS | +100BPS | +200BPS | |||||||||||||||||||||
| Fixed Rate MBS | $ | 207,179 | $ | 5,989 | $ | (10,427 | ) | $ | (22,982 | ) | 2.89 | % | (5.03 | )% | (11.09 | )% | ||||||||||||
| Interest-Only MBS | 1,476 | (619 | ) | 358 | 617 | (41.90 | )% | 24.27 | % | 41.75 | % | |||||||||||||||||
| Inverse Interest-Only MBS | 1,037 | (132 | ) | (84 | ) | (280 | ) | (12.76 | )% | (8.12 | )% | (27.03 | )% | |||||||||||||||
| Total MBS Portfolio | $ | 209,692 | $ | 5,238 | $ | (10,153 | ) | $ | (22,645 | ) | 2.50 | % | (4.84 | )% | (10.80 | )% | ||||||||||||
| ($ in thousands) | ||||||||||||||||||||||||||||
| Notional | $ Change in Fair Value | % Change in Fair Value | ||||||||||||||||||||||||||
Amount(1) | -100BPS | +100BPS | +200BPS | -100BPS | +100BPS | +200BPS | ||||||||||||||||||||||
| Eurodollar Futures Contracts | ||||||||||||||||||||||||||||
| Repurchase Agreement Hedges | $ | 960,000 | $ | (1,343 | ) | $ | 2,400 | $ | 4,800 | (0.57 | )% | 1.02 | % | 2.05 | % | |||||||||||||
| Junior Subordinated Debt Hedges | 416,000 | (582 | ) | 1,040 | 2,080 | (0.57 | )% | 1.02 | % | 2.05 | % | |||||||||||||||||
| $ | 1,376,000 | $ | (1,925 | ) | $ | 3,440 | $ | 6,880 | (0.57 | )% | 1.02 | % | 2.05 | % | ||||||||||||||
| Gross Totals | $ | 3,313 | $ | (6,713 | ) | $ | (15,765 | ) | ||||||||||||||||||||
As of December31, 2017, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with five of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company. These borrowings are secured by our MBS and cash.2021,
As of December 31, 2017, we had obligationsoutstandingunder therepurchaseagreementsof approximately $200.2$58.9 millionwith a net
Offsetting of Liabilities
weightedaverage borrowingcost of 1.52%0.14%.The remainingmaturity ofour outstandingrepurchaseagreementobligationsranged from6 to
45 days, witha weightedaverage maturityof 16 to 72 days, with a weighted average maturity of 38 days.Securingthe repurchaseagreementobligationas of December31, 2017 2021are MBS
with an estimatedfair value,includingaccrued interest,of $210.0$61.0 millionand a weightedaverage maturityof 321330 months,and cashposted
as collateralof $2,208,000. $1.4 million.ThroughMarch 9, 2018, 11, 2022,we have beenable to maintainour repurchasefacilitieswith comparableterms to
those thatexisted atDecember31, 2017 2021with maturitiesthrough April 2, 2018.May
-49-
16, 2022.
($ in thousands)
In orderto generateadditionalcash to beinvested inour MBSportfolio,on October30, 2019,we obtaineda $680,000loan secured
Some of the clouds on the economic horizon that existed at the end of the third quarter of 2017 did not prove to be troubling. The three hurricanes that made landfall in 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 during the fourth quarter of 2017 actually occurred2021–the first time this happened since the late 1960s.Continuing claims for unemployment insurance
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 continues 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 less 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 ratespandemic emerged in the U.S. in thespring of 2020.
Interest Rates
The mortgage market was impacted by these events in a positive way. The strong "risk on" tonefrom the effects of the markets continuedpandemic and the federal government and the Fed took unprecedentedactions to drive spreads available inbuttress the various investment grade and sub-investment grade markets tighter. This enabled spreads available in economy from
repurchased in most cases before the 24-month deadline under one of the followingexceptions listed below.Recent Regulatory Developments•a loan that is paid in full, or where the related lien is released and/or thenote debt is satisfied or forgiven;
•a loan repurchased by a seller/servicer under applicable selling andservicing requirements;
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.
evolve.
-53-
If Fannie Mae and Freddie Mac were to modify or end their repurchase programs, our investment portfolio could be negatively impacted.
-54-
change.
Lateactivity in the fourth quarterresidential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency
on its common stock.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,All of the balance between prepayment activity, and thus mortgage origination levels, and reduced purchasesabove developments are being impacted by the geo-political events inthe Ukraine which may cause the Fed will be critical for Agency MBS performance. The shapeto alter their
-55-
term.
Our consolidatedfinancialstatementsare preparedin accordancewith GAAP. GAAP requiresour managementto make someManagement's discussioncomplex andsubjectivedecisionsand assessments.Our mostcritical accountingpoliciesinvolve decisionsand assessmentswhich could
GAAP requires●
The Company invests primarily in pass-through (“PT”) mortgage-backed certificatesissued by Freddie Mac, Fannie Mae or GinnieOur investmentsMae (“MBS”), collateralized mortgage obligations (“CMOs”),interest-only (“IO”) securities and inverse interest-only (“IIO”) securities
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.
-56-
Management believes its pricing methodology to be consistent with the definition 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 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 other income in the consolidated statements of operations. We estimate the fair value of our investment in Orchid on a market approach using "Level 1" inputs based on the quoted market price of Orchid's common stock on the NYSE. Electing the fair value option requires the Company to record changes in fairvalue in the consolidated statementsstatement of operations, which,
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 InstrumentsWe 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.
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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's evaluation, it is more likely than not that they will not be realized. A majority of the Company's net deferred tax assets, which consist primarily of NOLs, are expected to be realized over an extended number of years. Management's conclusion is supported by the revenue 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. However, a material change in those estimates 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.
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Capital Expenditures
At December 31, 2017, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At December 31, 2017, 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.
Not Applicable.-59-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of DirectorsBimini Capital Management, Inc.Vero Beach, Florida
Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Bimini Capital Management, Inc. (the "Company") and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial 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, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.Basis for OpinionThese consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'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") 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'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.
/s/ BDO USA, LLPCertified Public Accountants
We have served as the Company's auditor since 2008.
West Palm Beach, FloridaMarch 9, 2018-61-
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BIMINI CAPITAL MANAGEMENT, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description
Bimini Capital Management, Inc., a Maryland corporation ("Bimini Capital" or the "Company") formed in September 2003, is a holding company. The Company's principal operating subsidiaries are 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 (a registered investment advisor), are collectively referred to as "Bimini Advisors." Bimini Advisors manages a residential mortgage-backed securities ("MBS") portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services.
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 a variable interest entity ("VIE") by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 11 for a description of the accounting used for this VIE.
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"). 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 and the level of 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.
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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's operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance. The accounting policies of the operating segments are the same as the Company's accounting policies 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.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments. The following table presents the Company's cash, cash equivalents and restricted cash as of December 31, 2017 and 2016.
The Company maintains cash balances at several banks, and, 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 counterparties 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.
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through ("PT") certificates, collateralized mortgage obligations, and interest-only ("IO") securities and inverse interest-only ("IIO") securities representing interest in or obligations backed by pools of mortgage-backed loans. The Company has elected to account for its investment in MBS under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management's view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.
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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 paidto transfer the liability in an orderly transaction
RetainedThe Company holds retained interests in the subordinated tranches of securitiescreated in securitization transactions were initiallytransactions.These
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future.
rather are used as economic hedges of its portfolio assets and liabilities. Gains and losseson derivatives, except those that result in
ASC Topic 825, Financial Instruments, requires disclosure of theThe fair value of financial instruments for which it is practicable to estimate thatvalue is disclosed either in the body of the
statement of operations.
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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.
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 dividedby the weighted average number of common shares
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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.
●
●
2021
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2021
$
69
$
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The Companypledges certainof its RMBSas collateralunder repurchaseagreementswith financialinstitutions.Interestrates are
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1.4
million and$As 3.4
7. PLEDGED ASSETSIn 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.
As of December 31, 2017 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.
Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company's cash accounts on a daily basis. A minimum balance, or "margin", is required to be maintained in the account on a daily basis. The tables below present information related to the Company's Eurodollar futures positions at December 31, 2017 and December 31, 2016.
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Assets Pledged
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Losses From Derivative Instruments, Net
to Counterparties
December 31, 2020Credit Risk-Related Contingent FeaturesRepurchase
DerivativeThe 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 obtaining its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company's derivative instruments are included in restricted cash on the consolidated balance sheets.Repurchase
DerivativeNOTE 9. PLEDGED ASSETS
Agreements
Assets Pledged to Bimini
2021-77-
16, 2022.
The table below presents information about our period-end and average repurchaseagreement obligations for each quarter in 2017
2021 and 2016.2020.
| ($ 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) | |||||||||||
($ in thousands)
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, 2021 $ 58,878 $ 62,139 $ 61,019 $ (2,141) (3.51)% September 30, 2021 63,160 72,047 67,253 (4,093) (6.09)% June 30, 2021 71,346 72,372 72,241 (895) (1.24)% March 31, 2021 73,136 76,004 69,104 4,032 5.83% December 31, 2020 65,071 70,684 67,878 (2,807) (4.14)% - 51 - September 30, 2020 70,685 70,794 61,151 9,534 15.59% (1) June 30, 2020 51,617 52,068 51,987 (370) (0.71)% March 31, 2020 52,357 214,921 131,156 (78,799) (60.08)% (2) (1)The higher ending balance relative to the average balance during the quarterended September 30, 2020 reflects the increase in the portfolio. During that quarter,the Company's investment in PT MBS increased $20.4 million. (2)The lower ending balance relative to the average balance during the quarterended March 31, 2020 reflects the Company’s response to the COVID-19 pandemic. During that quarter,the Company's investment in PT MBS decreased $162.4 million. |
Liquidity and Capital Resources
Liquidity isour abilityto turn non-cashassets intocash, purchaseadditionalinvestments,repay principaland intereston borrowings,
fund overheadand fulfillmargin calls. Our principal immediate We have bothinternaland externalsources ofliquidity. However,our materialunused sourcesof
liquidityinclude cashbalances,unencumberedassets andour abilityto sell encumberedassets toraise cash.At the availability onsetof the COVID-
19 pandemicin the springof 2020,the marketsthe Companyoperatesin were severelydisruptedand the Companywas forcedto borrow under repurchase agreements, rely on
these sourcesof liquidity. Ourbalance sheetalso generatesliquidityon an on-goingbasis throughpayments ofprincipaland fees interestwe
receive onour MBSportfolioand dividends received from Orchid. we receiveon our investmentin Orchidcommon stock.
InternalSources ofLiquidity
Our internalsources ofliquidityinclude ourcash balances,unencumberedassets andour abilityto liquidateour encumberedsecurity
holdings.Our balancesheet alsogeneratedliquidityon an ongoingbasis throughpaymentsof principaland interestwe receiveon our
MBS portfolioand dividendswe receiveon our investmentin Orchidcommon stock.
We have previously,and mayagain in thefuture, employa hedgingstrategythat typicallyinvolvestaking shortpositionsin Eurodollar
futures,T-Note futures,TBAs or otherinstruments.When themarket causesthese shortpositionsto declinein value weare requiredto
meet margincalls withcash.This canreduce ourliquiditypositionto the extentother securitiesin our portfoliomove in pricein such away
that we donot receiveenough cashthrough margincalls to offsetthe Eurodollarrelated margincalls. Ifthis wereto occurin sufficient
magnitude,the loss ofliquiditymight forceus to reducethe sizeof the leveredportfolio,pledge additionalstructuredsecuritiesto raise
funds orrisk operatingthe portfoliowith lessliquidity.
ExternalSources ofLiquidity
Our primaryexternalsources ofliquidityare our abilityto (i) borrowunder masterrepurchaseagreementsand (ii)use the TBAsecurity
market. Ourborrowingcapacity willvary overtime as themarket valueof our interestearning assetsvaries. Our balance sheet also generates 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. 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 the payment of other accrued obligations.
Our strategy for hedging our funding costs typically involves taking short positions in Eurodollar futures, T-Note futures, swaptions 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
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agreementshave no statedexpiration,but can beterminatedat any timeat our optionor at theoption ofthe counterparty.However, once
a definitiverepurchaseagreementunder a masterrepurchaseagreementhas beenentered into,it generallymay not beterminatedby
either party.A negotiatedterminationcan occur, butmay involvea fee to bepaid by theparty seekingto terminatethe repurchase
agreementtransaction.
Under ourrepurchaseagreementfunding arrangements,we are requiredto post marginat the initiationof the borrowing.The margin
posted representsthe haircut,
��
which is apercentageof the marketvalue of thecollateralpledged.To the extent themarket valueof theasset collateralizingthe financingtransactiondeclines,the marketvalue of ourposted marginwill be insufficientand we willbe requiredto
post additionalcollateral.Conversely, ifthe marketvalue 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 pledgedincreasesin value,we wouldbe over collateralizedand we
would beentitled tohave excessmargin returnedto us by thecounterparty.Our lenderstypicallyvalue ourpledged securitiesdaily to
ensure theadequacy ofour marginand make margincalls asneeded, asdo we.Typically, but not always,the partiesagree toa minimum
thresholdamount formargin callsso as to avoidthe needfor nuisancemargin callson a dailybasis. Ourmaster repurchaseagreements
do not specifythe haircut;rather haircutsare determinedon an individualrepurchasetransactionbasis.
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As discussedabove, weinvest aportion ofour capitalin structuredMBS.We generallydo not applyleverageto this portionof our
portfolio.The leverageinherentin structuredsecuritiesreplacesthe leverageobtained byacquiringPT securitiesand fundingthem in the
repurchasemarket.This structuredMBS strategyhas beena core elementof the Company's Company’soverall investmentstrategysince 2008.
However, wehave andmay continueto pledgea portionof our structuredMBS in orderto raise ourcash levels,but generallywill not
pledge thesesecuritiesin orderto acquireadditionalassets.
In futureperiods weexpect tocontinue tofinance ouractivitiesthrough repurchaseagreements.As of December31, 2017, 2021,we had
cash and cashequivalentsof $6.1 $8.4million.We generatedcash flowsof $18.3 $16.7million fromprincipaland interestpayments onour MBS
portfolio and $1.1 million from retained interests and had averagerepurchaseagreementsoutstandingof $150.3 $67.4million duringthe yearended December31, 2017. 2021.In addition,
during theyear endedDecember31, 2017, 2021,we receivedapproximately $7.3$9.4 millionin managementfees andexpense reimbursementsas
manager ofOrchid andapproximately $2.5$2.0 millionin dividendsfrom ourinvestmentin Orchidcommon shares.stock.
In orderto generateadditionalcash to beinvested inour MBSportfolio,on October30, 2019,we obtaineda $680,000loan secured
by a mortgageon the Company’soffice property.The loanis payablein equal monthlyprincipaland interestinstallmentsof approximately
$4,500 throughOctober 30,2039. Interestaccrued at4.89%, throughOctober 30,2024. Thereafter,interestaccrued basedon the weekly
average yieldto the UnitedStates Treasurysecuritiesadjustedto a constantmaturity offive years,plus 3.25%.Net loanproceedswere
approximately$651,000.In addition,during 2020,we completedthe sale ofreal propertythat wasnot usedin the Company’sbusiness.
The table below summarizes the effect that certain future contractual obligations existing as of December 31, 2017 will have onnet proceedsfrom thissale wereapproximately$462,000 andwere investedin our liquidity and cash flows.MBS
portfolio.
stockholders.Our operatingresults arealso impactedby changesin the marketvalue of ourholdings ofOrchid commonshares,although
Economic SummaryInterest RatesCOVID-19 continued to impact the United States and the MBS Marketrest of the world during
Thethe fourth quarter of 2017 marked a reversal2021 and into the first
| (in thousands) | ||||||||||||||||||||
| Obligations Maturing | ||||||||||||||||||||
| Within | One to Three | Three to Five | More than Five | Total | ||||||||||||||||
| Year | Years | Years | Years | Total | ||||||||||||||||
| Repurchase agreements | $ | 200,183 | $ | - | $ | - | $ | - | $ | 200,183 | ||||||||||
Interest expense on repurchase agreements(1) | 603 | - | - | - | 603 | |||||||||||||||
Junior subordinated notes(2) | - | - | - | 26,000 | 26,000 | |||||||||||||||
Interest expense on junior subordinated notes(1) | 1,404 | 2,686 | 2,683 | 17,390 | 24,163 | |||||||||||||||
| Settlement obligation | 250 | 250 | - | - | 500 | |||||||||||||||
| Totals | $ | 202,440 | $ | 2,936 | $ | 2,683 | $ | 43,390 | $ | 251,449 | ||||||||||
portfolio.
Outlook
Orchid IslandCapital Inc.
To the extent Orchidis able toincreaseits capitalbase overtime, wewill benefitvia increasedmanagementfees.In addition,Orchid
is obligatedto reimburseus for directexpenses paidon its behalfand to payto us Orchid's Orchid’spro ratashare ofoverheadas definedin the
managementagreement.As a stockholderof Orchid,we will alsocontinue toshare indistributions,if any, paid byOrchid toits stockholders.
stockholders.Our operatingresults arealso impactedby changesin the marketvalue of ourholdings ofOrchid commonshares,although
these market-51-value changes
do not impactour cashflows fromOrchid.
The independentBoard ofDirectorsof Orchidhas the abilityto terminatethe managementagreementand thusend our abilityto
collect managementfees andshare overheadcosts.Should Orchidterminatethe managementagreementwithout cause,it will be
obligatedto pay usa terminationfee equalto threetimes theaverage annualmanagementfee, asdefined inthe managementagreement,
before oron the lastday of thecurrent automaticrenewal term.
Economic Summary
quarter of 2022.The most recent variant, Omicron, spreads much more readilythan past variants, but also tends to be much less
severe.Instances of new cases spiked rapidly, starting in December of 2021 and peaked, in the trendU.S., the week ended January 16,
2022 at 5.58 million.Since then, cases have declined fairly rapidly, as have hospitalizations, which have also tended to involve much
shorter stays in placethe hospital, especially in comparison to the Delta variant.Despite the Omicron wave, the economy added 481,000
jobs in January 2022, 678,000 jobs in February 2022 and January retail sales alsorose well above estimates at 3.8%, causing the
markets and the Fed to meaningfully revise expectations for the first nine monthspath of monetarypolicy in 2022 and beyond.
The rationale for the year. shift in expectations for monetary policy was foundin the economic data that was released during the fourth
quarter of 2021.There were several economic indicators that reached milestonelevels and made it clear the economy had more than
recovered from the pandemic.The shifts that occurred were numerous. PerhapsFed focuses on two areas of economic performance – inflation and the most significantlabor market– tied to their
dual mandates of stable prices and maximum employment.With respect to inflation, the year-over-year consumer price index reading
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increased from a long-term perspectivethe 4% increase reported in September of 2021 to 5.43%in December of 2021. Core personal consumption
expenditures – the Fed’s preferred inflation measure – increased from 3.7% year-over-yearto 4.85% between September and
December of 2021. In the latter case, this was the surprise successhighest reading since the Trump administration hadearly 1980s.The producer price index was also increasing
rapidly – approaching 7% year over year in passing a substantive tax package – The Tax Cuts and Jobs ActDecember of 2017 (the "Act"). The significance2021.This led the Fed to formally declare that their assessment of inflation
as “transitory” was no longer the Act was two-fold. Oncase.
Labor market indicators also reached new milestones. Initial claims forunemployment insurance breached the one hand, its passage ended the Trump administration's string of legislative failures, and on the other, we believe the legislation should be stimulative for the economy. Passage of the Act coincided with continuing strong economic data and contributed to the "risk on" sentiment in the markets. The result was a continuation of the ever-increasing levels in the equity markets, particularly the domestic equity markets, as well as other risk assets such as commodities, investment grade and sub-investment grade debt.200,000 level
reached levels even lower than the lows reached prior to the pandemic,and the unemployment rate reached 3.9% in December, still
0.4% above the lowest level reached prior to the pandemic butbelow the Fed’s long-term target level and their proxy for full
employment.The final piece of information was gross domestic product growthof 6.9% for the fourth quarter, released in January of
2022.The Fed’s outlook for monetary policy pivoted materially beginning in Novemberof 2021.
The economic data has strengthened further in early 2022.In particular, measures of inflation have accelerated from the trend of
late 2021 and are very broad based, as prices for essentially every categoryof goods and services are accelerating.The employment
data has also been very strong, exhibiting little effect from the Omicron variant. Thecombination of accelerating inflation well above the
Fed’s target level and a very tight labor market have led the market to anticipate the Fed will reactaggressively soon. The Fed has
signaled they are about to start an accelerated removal of the extreme monetary accommodationnecessitated by the pandemic.In
January of 2022 the FOMC announced they would end their asset purchasesin March of 2022 and were likely to start decreasing the
reinvestment of their U.S. Treasury and MBS assets as they matured or were repaid starting shortly after theirfirst rate hike. The first
rate hike is likely to be in March as well. Current pricing in the futures marketindicates the Fed will increase the Fed Funds rate at least
five times by January of 2023 and by approximately 75 basis points more in 2023.
Based solely on domestic economic developments of late the Fed is likely to aggressivelyremove their accommodative monetary
policy. However, a potentially significant geo-political development has unfolded in the Ukraine. Russia invaded Ukraine on February
24, 2022. The United States and several NATO allies have imposed significant economic sanctions that are likely to cripple the
Russian economy and currency, the Ruble. Should the situation deteriorate further and military action lead to a protractedwar, there
would likely be an economic impact on Europe and therefore indirectly in the U.S., potentiallyslowing economic activity at the margin
and possibly lessening the need for the Fed to remove monetary policyas aggressively as expected otherwise.
Legislative Response and the Federal Reserve
Congress passed the CARES Act (described below) quickly in response tothe pandemic’s emergence during the spring of 2020.
As provisions of the CARES Act expired and the effects of the pandemic continuedto adversely impact the country, the federal
government passed an additional stimulus package in late December of 2020. Further, on March 11, 2021, President Biden signed into
law an additional $1.9 trillion coronavirus aid package as part of the AmericanRescue Plan Act of 2021.This law provided for, among
other things, direct payments to most Americans with a gross income of lessthan $75,000 a year, expansion of the child tax credit,
extension of expanded unemployment benefits through September 6, 2021, fundingfor procurement of vaccines and health providers,
loans to qualified businesses, funding for rental and mortgage assistance andfunding for schools. The expanded federal
unemployment benefits expired on September 6, 2021.In addition, the Fed provided as much support to the markets and the economy
as it could within the constraints of its mandate.
During the third quarter of 2017. At the conclusion of the September 2017 meeting of the FOMC, chair Janet Yellen stated that2020, the Fed viewed recent softunveiled a new monetary policy frameworkfocused on average inflation data as owing to transitory factors and rate targeting
that they remained confident that inflation would trend towards their 2% target level over the medium term. This acknowledgement byallows the Fed thatFunds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% targetlevel. Further, the
Fed stated they would look past softthe presence of very tight labor markets,should they be present at the time.This marks a significant
shift from their prior policy framework, which was focused on the unemploymentrate as a key indicator of impending inflation.
Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for aconsiderable period but
longer-term rates could rise given the Fed’s intention to let inflation datapotentially run above2% in the near term,future as the economy more fully
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recovers.As mentioned above, this policy shift will not likely have an effect on currentmonetary policy as inflation is now running
considerably higher than the Fed’s 2% target level and continue the Fed appears likely to move quicklyto remove the extreme monetary
accommodation forcedthey provided as the market to revisit expectations for additional interest rate hikes. While there was a substantial gap in the markets pricing for additional Fed rate hikes and the extent of hikes implied in the Fed's "dot plot" prior to the September 2017 meeting, this gap closed markedly by the end of 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 closing 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.
Interest Rates
At the beginning of 2021, interest rates were still close to the lowest levels-52-ever observed.As the country and economy emerged
the Agency MBS market to appear relatively attractive and continue to tighteneffects of the pandemic, interest rates increased over the course of the quarter. Inyear.Increases in interest rates were not uniform over the
year as shorter maturity rates, typically more sensitive to anticipated increases inshort term rates controlled by the Fed, increased
more than longer term rates.As inflation accelerated in the fourth quarter of 2021, and even more so in early January 2018,2022, this trend
intensified and the spread of the 30-year, fixed rate conventional mortgage to thebetween certain intermediate rates – such as 5-yearand 7-year maturities – trade at yields only marginally
below longer-term rates such as 10-year U.S. T-Note hit its tightest level since early 2013 in early January 2018. Treasuries.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 yieldrates curve tends to hurt fixed income markets generallyis typical as spreads on these assets relative to funding levels are compressed. However,the economy strengthensand
the market anticipates increases in the case of the Agency MBS market, we believe this effect is off-set somewhatshort-term rates by the seasonal slow-downFed. As economic and/orinflation data strengthen and the market
anticipates progressively more increases in prepayment activity that occurs around year end and intoshort-term rates, this flattening effectintensifies as well. Eventually the first quarter. Going forward,rates curve could
actually invert, whereby the balance between slower prepayment activity, and thus mortgage origination levels, and reduced purchasesintermediate rates mentioned above actually yieldmore than longer-term rates.This would occur when the
market anticipates the increases to short-term rates by the Fed will actually slow theeconomy too much in the future and a possible
recession is on the horizon.However, recent developments in the Ukraine have reversed some of the compression in the treasury
curve as shorter term rates have decreased more than longer-term rates, a sign ofa “flight to quality” rally as investors across the
globe seek the safety of short-term US treasury securities in times of duress.Given the unprecedented nature of the monetary and
fiscal stimulus needed to combat the pandemic and the related superchargedeffect on the economy, the current recovery and pending
rate increase cycle will be criticaleven more difficult to manage by the Fed and we expect that suchan outcome is more likely to occur than in
past cycles.
The Agency MBS Market
As was anticipated, the Fed announced a tapering of their U.S.Treasury and Agency MBS asset purchases at their November
2021 meeting.As described above, the forthcoming data was likely to necessitate an acceleratedpace of accommodation removal
and in December of 2021, and again in January of 2022, the Fed announcedrevised schedules for tapering.This means a material
source of demand for Agency MBS performance. The shapeis about to leave the market.Given Fed purchases are a source of reserves into the banking
system, this also means banks, which have also been a material sourcefor Agency MBS, may also be buying fewer securities.
However, the securities that were the focus of the yield curve will also be importantFed and bank buying, namely production coupon securities, performedrelatively well
during the fourth quarter of 2021.
Totalreturns for Agency MBS for the quarter and year ended December 31, 2021were -0.4% and -1.2%, respectively.Agency
MBS returns generally trailed other major domestic fixed income categories.High yield debt returned 0.7% and 5.4% for the quarter
and year ended December 31, 2021, respectively.Investment grade returns for the same two periods were 0.2% and -1.0%,
respectively.Legacy non-Agency MBS returns were equal to or exceeded high yield returns.Relative to comparable duration U.S.
Treasuries Agency MBS returns were -1.0% and -1.6%, respectively for the same two periods.Again, these returns trailed the same
other major domestic fixed-income categories and by comparable amounts.Within the Agency MBS 30-year coupons, production
coupons – 2.0% and 2.5% - outperformed higher, liquid securities – 3.0% and 3.5% - both on absoluteterms and relative performanceto
comparable duration U.S. Treasuries for the fourth quarter of higher versus lower coupon mortgages,2021.
Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 untilJuly 2020 to address disruptions in the U.S.
Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully
tamed volatile funding costs that had threatened to cause disruption across thefinancial system.
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The Fed has taken a number of other actions to stabilize markets as a flatter yield curve tendsresultof the impacts of the COVID-19 pandemic. On March
15, 2020, the Fed announced a $700 billion asset purchase program to cause lower coupon mortgagesprovideliquidity to out-perform higher coupon mortgages - since higher coupon mortgages are more sensitivethe U.S. Treasury and Agency MBS
markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of
Agency MBS. The Fed also lowered the Fed Funds rate to prepaymenta range of 0.0% – 0.25%,after having already lowered the Fed Funds rate
by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell announcedexpectations to maintain interest rates at this level
until the Fed is confident that the economy has weathered recent eventsand is on track to achieve maximum employment and price
stability goals. The Federal Open Market Committee (“FOMC”) continued to reaffirm this commitmentat all subsequent meetings
through December of 2021, as well as an intention to allow inflation to climb modestlyabove their 2% target and maintain that level for
a period sufficient for inflation to average 2% long term. On January 26, 2022, the FOMC reiteratedits goals of maximum employment
and a flatter yield curve usually2% long-run inflation rate and stated that, with a strong labor marketand inflation well above 2%, it expected it would soon be
appropriate to raise the target federal funds rate.
The COVID-19 pandemic and the actions taken to contain and minimize itsimpact resulted in the deterioration of the markets for
U.S. Treasuries, Agency MBS and other mortgage and fixed income markets. As a result, investors liquidatedsignificant holdings in
these assets. In response, on March 23, 2020, the Fed announced a programto acquire U.S. Treasuries and Agency MBS in the
amounts needed to support smooth market functioning. With these purchases, marketconditions improved substantially, and in early
April, the Fed began to gradually reduce the pace of these purchases. ThroughNovember of 2021, the Fed was committed to
purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November of 2021,it began tapering its net
asset purchases each month, reducing them to $70 billion, $60 billion and $40billion of U.S. Treasuries and $35 billion, $30 billion and
$20 billion of Agency MBS in November of 2021, December of 2021 and Januaryof 2022, respectively.On January 26, 2022, the
FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20billion per month and its holdings of Agency
MBS by $10 billion per month for February of 2022 and would end its net assetpurchases entirely by early March of 2022.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020.The CARES Act provided
many forms of direct support to individuals and small businesses in order to stem thesteep decline in economic activity.This over $2
trillion COVID-19 relief bill, among other things, provided for direct payments toeach American making up to $75,000 a year, increased
unemployment benefits for up to four months (on top of state benefits), fundingto hospitals and health providers, loans and
investments to businesses, states and municipalities and grants to the airlineindustry. On April 24, 2020, President Trump signed an
additional funding bill into law that provides an additional $484 billion of fundingto individuals, small businesses, hospitals, health care
providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a
moratorium on evictions (July 25, 2020), expanded unemployment benefits (July31, 2020), and a moratorium on foreclosures (August
31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the Departmentof Health and Human
Services, the Centers for Disease Control and Prevention (“CDC”),the Department of Housing and Urban Development, and
Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures,including through temporary
financial assistance.
On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid packageas part of the
Consolidated Appropriations Act, 2021, providing for extensions ofmany of the CARES Act policies and programs as well as additional
relief. The package provided for, among other things, direct payments to most Americans with a gross income of lessthan $75,000 a
year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health providers,loans to
qualified businesses, funding for rental assistance and funding for schools.On January 29, 2021, the CDC issued guidance extending
eviction moratoriums for covered persons through March 31, 2021. The FHFA subsequently extended the foreclosuremoratorium
begun under the CARES Act for loans backed by Fannie Mae and FreddieMac and the eviction moratorium for real estate owned by
Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development
Department subsequently extended the FHA foreclosure and eviction moratoriato July 31, 2021 and September 30, 2021, respectively.
Despite the expirations of these foreclosure moratoria, a final rule adopted bythe CFPB on June 28, 2021 effectively prohibited
servicers from initiating a foreclosure before January 1, 2022 in most instances.
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On March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the American
Rescue Plan Act of 2021.This law provided for, among other things, direct payments to most Americans with a gross income of less
than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September6, 2021,
funding for procurement of vaccines and health providers, loans to qualified businesses,funding for rental and mortgage assistance
and funding for schools. The expanded federal unemployment benefits expired on September6, 2021.
In January 2019, the Trump administration made statements of its plans to work with Congressto overhaul Fannie Mae and
Freddie Mac and expectations to announce a framework for the development ofa policy for comprehensive housing finance reform
soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowedto increase their capital buffers
to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and
Freddie Mac being privatized and represents the first concrete step on the road toGSE reform.On June 30, 2020, the FHFA released
a proposed rule on a new regulatory framework for the GSEs which seeks to implementboth a risk-based capital framework and
minimum leverage capital requirements. The final rule on the new capital frameworkfor the GSEs was published in the federal register
in December 2020.On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue
to retain capital up to their regulatory minimums, including buffers, as prescribed in the Decemberrule.These letter agreements
provide, in part, (i) there will be no exit from conservatorship until allmaterial litigation is settled and the GSE has common equity Tier 1
capital of at least 3% of its assets, (ii) the GSEs will comply withthe FHFA’sregulatory capital framework, (iii) higher-risk single-family
mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process
for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respectto ending the
conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEsin the U.S. mortgage market. On September 14,
2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans
acquired for cash consideration, multifamily loans, loans with higher riskcharacteristics and second homes and investment properties.
On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the Decemberrule to,
among other things, reduce the Tier 1 capital and risk-weight floor requirements.
In 2017, policymakers announced that LIBOR would be replaced by December31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlyingtransactions on which to base levels and the
liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in itscapacity as administrator of
USD LIBOR, has announced that it intends to extend publication of USD LIBOR (otherthan one-week and two-month tenors) by 18
months to June 2023.Notwithstanding this possible extension, a joint statement by key regulatoryauthorities calls on banks to cease
entering into new contracts that use USD LIBOR as a reference rate by nolater than December 31, 2021. The ARRC, a steering
committee comprised of large U.S. financial institutions, has proposed replacingUSD-LIBOR with a new SOFR, a rate based on U.S.
repo trading. Many banks believe that it may take four to five years to completethe transition to SOFR, despite the December 31, 2021
deadline. We will monitor the emergence of SOFR carefully as it appears likely to becomethe new benchmark for hedges and a range
of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternativesto
LIBOR.
On December 7, 2021, the CFPB released a final rule that amends RegulationZ, which implemented the Truth in Lending Act,
aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) andopen-end (e.g., home equity line of credit)
products. The rule, which mostly becomes effective in April of 2022, establishes requirementsfor the selection of replacement indices
for existing LIBOR-linked consumer loans. Although the rule does not slowmandatethe use of SOFR as the alternative rate, it identifies
SOFR as a comparable rate for closed-end products and states that for open-end products,the CFPB has determined that ARRC’s
recommended spread-adjusted indices based on SOFR for consumer productsto replace the one-month, three-month, or six-month
USD LIBOR index “have historical fluctuations that are substantially similar tothose of the LIBOR indices that they are intended to
replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacementindex to replace the one-year USD
LIBOR until it obtained additional information.
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On December 8, 2021, the House of Representatives passed the Adjustable InterestRate (LIBOR) Act of 2021 (H.R. 4616) (the
“LIBOR Act”), which provides for a statutory replacement benchmark rate for contractsthat use LIBOR as a benchmark and do not
contain any fallback mechanism independent of LIBOR. Pursuant to the LIBORAct, SOFR becomes the new benchmark rate by
operation of law for any such contract. The LIBOR Act establishes a safe harbor fromlitigation for claims arising out of or related to the
use of SOFR as the recommended benchmark replacement. The LIBOR Actmakes clear that it should not be construed to disfavor the
use of any benchmark on a prospective basis.
The LIBOR Act also attempts to forestall challenges that it is impairingcontracts. It provides that the discontinuance of LIBOR and
the automatic statutory transition to a replacement rate neither impairs oraffects the rights of a party to receive payment under such
contracts, nor allows a party to discharge their performance obligations or to declarea breach of contract. It amends the Trust
Indenture Act of 1939 to state that the “the right of any holder of anyindenture security to receive payment of the principal of and
interest on such indenture security shall not be deemed to be impaired oraffected” by application of the LIBOR Act to any indenture
security.On December 9, 2021, the United States Senate referred the LIBOR Act tothe Committee on Banking, Housing and Urban
Affairs.
One-week and two-month U.S. dollar LIBOR rates phased out on December31, 2021, but other U.S. dollar tenors may continue
until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likelyto become the new benchmark for hedges
and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates maybecome accepted
alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe forits delinquent loan buyout
policy for Single-Family Uniform Mortgage-Backed Securities (UMBS)and Mortgage-Backed Securities (MBS) from four consecutively
missed monthly payments to twenty-four consecutively missed monthly payments (i.e.,24 months past due). This new timeframe
applied to outstanding single-family pools and newly issued single-family pools and wasfirst reflected when January 2021 factors were
released on the fourth business day in February 2021.
For Agency MBS investors, when a delinquent loan is bought out ofa pool of mortgage loans, the removal of the loan from the
pool is the same as a total prepayment behavior materially.of the loan.The respective GSEs anticipated, however, that delinquent loans will be
repurchased in most cases before the 24-month deadline under one of the followingexceptions listed below.
•a loan repurchased by a seller/servicer under applicable selling andservicing requirements;
•a loan entering a permanent modification, which generally requires it tobe removed from the MBS. During any modification
trial period, the loan will remain in the MBS until the trial period ends;
•a loan subject to a short sale or deed-in-lieu of foreclosure; or
•a loan referred to foreclosure.
Because of these exceptions, the GSEs believe based on prevailing assumptionsand market conditions this change will have only
a marginal impact on prepayment speeds, in aggregate. Cohort level impactsmay vary. For example, more than half of loans referred
to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on
delinquency levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed willultimately undertake are unknown and will continue to evolve. Although the Trump administration has made statements of its intentions to reform housing finance, these potential policy changes will require congressional action. In addition, the Fed has made statements regarding additional increases to the Federal Funds Rate in 2018 and beyond.
evolve.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us inmany ways, including the following:
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Effects on our Assets
A change in or elimination of the guarantee structure of Agency MBS may increase ourcosts (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structureof Agency
MBS may cause us to change our investment strategy to focus on non-AgencyMBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest rateand 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,
(due, in part, to the refinancing problems described above), lower long-terminterest rates can increase the value of higher-coupon
Agency MBS. This is because investors typically place a premium on assets with yieldsthat are higher than market yields. Although
lower long-term interest rates may increase asset values in our portfolio, wemay not be able to invest new funds in similarly-yielding
assets.
If prepayment levels increase, the value of our Agency MBS affected by such prepaymentsmay decline. This is because a
principal prepayment accelerates the effective term of an Agency MBS, which would shorten the periodduring which wean investor would
receive above-market returns (assuming the yield on the prepaid asset is higher thanmarket yields). Also, weprepayment proceeds may
not be able to reinvest prepayment proceedsbe reinvested in similar-yielding assets. Agency MBS backedby mortgages with high interest rates are more susceptible
to prepayment risk because holders of those mortgages are most likely to refinanceto a lower rate. IOs and IIOs, however, may be the
types of Agency MBS most sensitive to increased prepayment rates. Because theholder of an IO or IIO receives no principal
payments, the values of IOs and IIOs are entirely dependent on the existence of a principalbalance on the underlying mortgages. If the
principal balance is eliminated due to prepayment, IOs and IIOs essentially becomeworthless. Although increased prepayment rates
can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POsact like zero-coupon bonds,
meaning they are purchased at a discount to their par value and have an effectiveinterest rate based on the discount and the term of
the underlying loan, an increase in prepayment rates would reduce the effective termof 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 expectedaverage life of mortgage cash flows.As the expected
average life of the mortgage cash flows increase,increases, coupled with higher discountrates, the value of Agency MBS declines.Some of the
instruments the Company usesmay use to hedge our Agency MBS assets, such as Eurodollar interest ratefutures,, swaps and swaptions, are stable
average life instruments.This means that to the extent we use such instruments to hedgeour Agency MBS assets, our hedges may
not adequately protect us from price declines, and therefore may negatively impact ourbook value. ForIt is for this reason we use interest
only securities in our portfolio. As interest rates rise, the expected averagelife of these securities increase,increases, causing generally positive
price movements as the number and size of the cash flows increase thelonger the underlying mortgages remain outstanding. This
makes interest only securities desirable hedge instruments for pass-throughAgency 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 indescribed above, the Agency MBS market began to experience severedislocations in mid-March 2020 as a result of the
economic, health and asmarket turmoil brought about by COVID-19. On March 23, 2020,the Fed announced that it is reduced slowly overwould purchase
Agency MBS and U.S. Treasuries in the courseamounts needed to support smooth market functioning, which largelystabilized the Agency
MBS market. However, in November 2021 the Fed announced a tapering of 2018 and essentially eliminated beyond 2018, the removalthese purchases. The Fed’s reduction of this source of demand these purchases
could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictionsdescribed above will likely
delay potential defaults on loans that would otherwise be bought out of Agency MBSpools as described above.Depending on the
ultimate resolution of the foreclosuresor evictions, when and if they occur, these loans may be removed from the pool into which they
were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time.
As the majority of the Company’s Agency MBS prices. The extentassets were acquired at a premium to whichpar, this negatively impactswill tend to increase the Agency MBS market will be a function of realized yield on
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.in question.
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Because we base our investment decisions on risk management principlesrather than anticipated movements in interest rates, in
a volatile interest rate environment we may allocate more capital to structured AgencyMBS with shorter durations, such as short-term fixed and floating rate CMOs.durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than otherasset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs andIIOs, which typically have different sensitivities to changes in
long-term interest rates than PT MBS, particularly PT MBS backedby fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balancesthrough the use of short-termshort-
term repurchase agreement transactions. The interest rates on our debtare determined by market levels of both the Federal Funds Rate and LIBOR.short term interest rate markets. An
increase in the FederalFed Funds Raterate or LIBOR would increase our borrowing costs, whichcould affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would bemost prevalent with respect to our Agency MBS backed by
fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does notchange even though market rates may change.
change.
In order to protect our net interest margin against increases in short-term interest rates, wemay enter into interest rate swaps,
which effectivelyeconomically convert our floating-rate repurchaseagreement debt to fixed-rate debt, or utilize other hedging instrumentssuch 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, risk assets were performing very well as the Trump administration took office in late Januarycountry and appearedeconomy currently appear to be very pro-business. The markets looked forward to a roll backon the verge of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbish recovering fromthe nation's aging roads, highways, bridges and airports. COVID-19 pandemic.While the administration made bold promises, there was little delivered. Market optimism was quickly replacedvirus
continues to infect people and often results in hospitalizations and deaths,the effect on economic activity has decreased materially.
Coupled with pessimism. Geopolitical events surfacedunprecedented monetary and fiscal policy, the most significant combination of the two since the Second World War, the
fading effect of the pandemic is clearly causing the economy to run at unsustainablelevels, resulting in April, specificallyvery tight labor markets and the Korean peninsula. These events kept
highest levels of inflation in decades. The Fed has begun the rapid transformationfrom accommodation to constraint and will likely
begin raising short-term rates at their meeting in March of 2022.Currently the market on edgeanticipates the Fed will continue to raise rates
throughout the year and induced sporadic flight to quality ralliesinto 2023, possibly by as headlines hitmuch as 200 basis points.Further, they are rapidly winding down their asset
purchases and will likely stop asset purchases altogether – possibly by the market from time to time. Starting in March, incoming inflation data was consistently below expectations. In the caseend of the core Consumer Price Index ("CPI") measure,year – as they begin the yearprocess of “normalizing”
the size of their balance sheet.Market experts estimate the Fed may have to shrink the size of their balancesheet by up to $4 trillion,
and over year figure moveda much shorter time frame than the last time they did so over theperiod from 2.3% in January 2017 to 1.7% by May and2019.The effect of these developments
on the level of interest rates 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 wasbeen a significant development and it marked a clear change in the biasmaterial flattening of the Fed from a dovishU.S.Treasury curve, whereby short and intermediate term rates rise
and more so relative to a more hawkish, or aggressive stance. Overlonger maturity U.S. Treasuries.
For the Company, this means our funding costs are likely to rise materially over the course of the fourth quarter of 20172022 and possibly into early 2018, the market has grown to accept this outcome -2023.While
longer-term maturities have not risen as reflected in Fed Funds futures pricing.much as short and intermediate term rates,they have risen and refinancing and purchase
MBS securities. The net effect of 2017,higher funding costs and slower premium amortizationwill depend on the Trump administration had its first major legislative success whenextent and timing of both,
but may reduce the Tax CutsCompany’s net interest income, 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. perhaps materiallyso, over this period.
These developments drove the markets to pricewill likely impact Orchid Island Capital in a more aggressive Fed going forward. More importantly,similar manner. In particular, Orchid’s ability to grow or maintain its
capital base at its current level could be adversely affected if these developments continue topressure Orchid’s MBS assets.This
could slow the combinationgrowth of benign inflation readings, coupled with hawkish Fed expectations, causedor reduce the yield curve to flatten significantly in 2017, to multi-year lows.Company’s advisory service revenues and could reducethe amount of dividends paid by Orchid
on its common stock.
monetary policy decisions over the course of 2022 and beyond.However, given the level of inflation and strength of the yield curve will alsoeconomy at
- 60 -
present, such developments would likely have to be important forsevere in order to meaningfullyimpact the relative performancepath 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. Onmonetary policy over 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.near-
term.
Critical Accounting PoliciesEstimates
Our consolidatedfinancialstatementsare preparedin accordancewith GAAP. GAAP requiresour managementto make some
significantlyaffect reportedassets, liabilities,revenuesand expenses.Managementhas identifiedthe followingas its mostcritical
accountingestimates:
Mortgage-BackedSecurities
Our investmentsin MBS areaccountedfor at fairvalue. We acquireour MBSfor the purposeof generatinglong-termreturns,and not
for the short-terminvestmentof idle capital.
As discussedin Note 14to the financialstatements,our MBSare valuedusing Level2 valuations,and such valuationscurrentlyare
determinedbased onindependentpricing sourcesand/or thirdparty brokerquotes, whenavailable.Because theprice estimatesmay vary,
managementmust makecertainjudgmentsand assumptionsabout theappropriateprice touse to calculatethe fairvalues. Alternatively,
the Companycould optto have thevalue of allof our positionsin MBS determinedby eitheran independentthird-partyor do sointernally.
In managingour portfolio,the Companyemploys thefollowingfour-stepprocess ateach valuationdate to determinethe fairvalue of our
MBS.
●
First, theCompany obtainsfair valuesfrom subscription-basedindependentpricing services.
●
Second, theCompany requestsnon-bindingquotes fromone to fourbroker-dealersfor certainMBS in orderto validatethe
values obtainedby the pricingservice. TheCompany requeststhese quotesfrom broker-dealersthat activelytrade andmake
markets inthe respectiveasset classfor whichthe quoteis requested.
●
Third, theCompany reviewsthe valuesobtainedby the pricingsource andthe broker-dealersfor consistencyacross similar
assets.
●
Finally, if thedata fromthe pricingservices andbroker-dealersis not homogenousor if thedata obtainedis inconsistentwith
management’smarket observations,the Companymakes a judgmentto determinewhich priceappears themost consistentwith
observedprices fromsimilar assetsand selectsthat price.To the extent managementbelievesthat noneof the pricesare
consistentwith observedprices forsimilar assets,which is typicallythe case foronly an immaterialportion ofour portfolioeach
quarter, theCompany mayuse a thirdprice thatis consistentwith observedprices foridenticalor similarassets. Inthe caseof
assets thathave quotedprices suchas AgencyMBS backedby fixed-ratemortgages,the Companygenerallyuses the quotedor
observedmarket price.For assetssuch as AgencyMBS backedby ARMs orstructuredAgency MBS,the Companymay
determinethe pricebased onthe yieldor spreadthat is identicalto an observedtransactionor a similarasset forwhich a dealer
mark or subscription-basedprice hasbeen obtained.
Managementbelieves itspricing methodologyto be consistentwith thedefinitionof fair valuedescribedin FinancialAccounting
StandardsBoard (the“FASB”) AccountingStandardsCodification(“ASC”)Topic 820, Fair Value Measurements.
Income Recognition
All of ourMBS areeither PTMBS or structuredMBS, includingCMOs, IOs,IIOs or POs.Income onPT MBS,POs and CMOsthat
contain principalbalancesis basedon the statedinterestrate of thesecurity. As aresult ofaccountingfor our MBSunder the fairvalue
option, premiumor discountpresentat the dateof purchaseis not amortized.For IOs,IIOs andCMOs thatdo not containprincipal
balances,income isaccrued basedon the carryingvalue andthe effectiveyield. Ascash is receivedit is firstapplied toaccrued interest
and thento reducethe carryingvalue of thesecurity. At eachreportingdate, theeffective yieldis adjustedprospectivelyfrom thereporting
- 61 -
period basedon the newestimate ofprepayments,current interestrates andcurrent assetprices. Thenew effectiveyield iscalculated
based onthe carryingvalue at theend of theprevious reportingperiod, thenew prepaymentestimatesand the contractualterms ofthe
security. Changesin fair valueof all ofour MBSduring theperiod arerecorded inearningsand reportedas unrealizedgains orlosses on
mortgage-backedsecuritiesin the accompanyingconsolidatedstatementsof operations.For IIO securities,effective yieldand income
recognitioncalculationsalso takeinto accountthe indexvalue applicableto the security.
Income Taxes
Incometaxes areprovidedfor usingtheassetand liabilitymethod.Deferred taxassets andliabilitiesrepresent thedifferences
between the financialstatement and incometax bases of assetsand liabilities using enactedtax rates. The measurementof net deferred
tax assetsis adjustedby avaluation allowanceif, basedon theCompany’s evaluation,it ismore likelythan notthat theywill notbe
realized. Amajority ofthe Company’snet deferredtax assets,which consistprimarily ofNOLs, areexpected tobe realizedover an
extended numberof years.Management’s conclusionis supportedby taxableincome projectionswhich includeforecasts ofmanagement
fees, Orchiddividends andnet interestincome, andthe subsequentreinvestment ofthose amountsinto theMBS portfolio.However,
management reassesses its valuation allowance conclusions whenever there is a materialchange in taxable income projections.
Capital Expenditures
At December 31, 2021, we had no material commitments for capital expenditures.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKETRISK.
Not Applicable.
- 62 -
ITEM 8. FinancialStatementsand SupplementaryData.
Index to FinancialStatements
Report ofIndependentRegisteredPublic AccountingFirm (
BDO USA, LLP
:
West Palm Beach, FL
; PCAOB ID#
243
)
63
ConsolidatedBalance Sheets
65
ConsolidatedStatementsof Operations
66
ConsolidatedStatementsof Equity
67
ConsolidatedStatementsof Cash Flows
68
Notes toConsolidatedFinancialStatements
69
- 63 -
Report of Independent Registered PublicAccounting Firm
Stockholders and Board of Directors
Bimini Capital Management, Inc.
Vero Beach, Florida
Opinion on the Consolidated FinancialStatements
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofBiminiCapitalManagement,Inc.(the
“Company”) as of December 31, 2021 and 2020, therelated consolidated statements of operations, stockholders’
equity,and cashflows foreach ofthe twoyears inthe periodended December 31,2021, andthe related notes
(collectivelyreferredtoasthe“consolidated financialstatements”). Inouropinion,theconsolidated financial
statements presentfairly, in all material respects,the financialposition ofthe Companyat December31, 2021 and
2020, and the results of its operations and itscash flows for each of the two yearsin the period ended December
31, 2021
,
in conformity with accounting principlesgenerally accepted in the United Statesof America.
Basis for Opinion
These consolidated financialstatements are theresponsibility of theCompany’s management. Our responsibilityis
to expressan opinionon theCompany’sconsolidated financialstatements basedon ouraudits. Weare apublic
accounting firm registeredwith the PublicCompany AccountingOversight Board(United States)(“PCAOB”) andare
required to be independent withrespect to the Company inaccordance with the U.S. federal securitieslaws and
the applicable rules and regulations of the Securitiesand Exchange Commission and the PCAOB.
We conducted our auditsin accordancewith the standardsof the PCAOB.Those standardsrequire thatwe plan and
perform the audit to obtain reasonableassurance about whether the consolidatedfinancial statements are free of
material misstatement,whether due to erroror fraud. TheCompany is not requiredto have, nor werewe engaged
to perform, an auditof its internal controlover financial reporting.As part of our auditswe are required to obtain
an understanding ofinternal control overfinancial reporting butnot for thepurpose of expressingan opinion on
theeffectivenessoftheCompany’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuch
opinion.
Our auditsincluded performingproceduresto assessthe risksof materialmisstatementof theconsolidatedfinancial
statements, whetherdue toerror orfraud, andperforming proceduresthat respondto thoserisks. Suchprocedures
included examining, on a test basis, evidence regarding the amounts and disclosures inthe consolidated financial
statements. Our audits also included evaluating the accounting principles usedand significant estimates made by
management, as well as evaluating theoverall presentation of the consolidated financial statements. Webelieve
that our audits provide a reasonable basisfor our opinion.
Critical Audit Matters
Thecriticalauditmatterscommunicatedbelowaremattersarisingfromthecurrentperiodauditofthe
consolidatedfinancialstatements thatwere communicatedor requiredto becommunicatedto theaudit committee
and that: (1)relate to accountsor disclosures thatare material tothe consolidated financial statementsand (2)
involvedourespecially challenging,subjective,orcomplexjudgments. Thecommunication of the criticalaudit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
arenot,bycommunicatingthecriticalauditmattersbelow,providing separateopinionsonthecriticalaudit
matters or on the accounts or disclosuresto which they relate.
Realizability of deferred tax assets
As described in Note 12 to the consolidatedfinancial statements, the Company has recorded$64.8 million in gross
deferred taxassets asof December31, 2021and recordeda valuationallowance of$29.8 million.Management
appliessignificantjudgmentinassessingtheprojectionsoffuturetaxableincomeinthedeterminationofthe
amountofdeferredtaxassetsthatweremore-likely-than-nottoberealizedinthefuture.Inassessingthe
realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or
all of the deferred tax assets will not berealized.
- 64 -
We identified assessingthe realizability ofdeferred tax assetsas a criticalaudit matter. Specifically, we identified
there is significant judgment required by management in formulating the forecast of taxable income over the net
operating loss expiration periodsto determine theamount of deferredtax assets that weremore-likely-than-not
to be realizedin the future. Auditingthese forecasts involved especially challengingauditor judgment, including
the need for specialized knowledge and skillin assessing these elements.
The primary procedures we performedto address this critical audit matter included:
●
Evaluating the designand implementationof controls relatingto the projectionof taxable incomein future
periods, including controls over management’s process to select theassumptions utilized.
●
Evaluating the positive and negative evidence in assessing whether the deferredtax assets are more likely
than not to be utilized, including evaluating the trends of historical financial results, projected sources of
taxable income in future periods, and marketinformation (such as interest yield curves).
●
Assessing thereasonablenessof management’shistorical abilityto makeforecasts offuture taxableincome,
by performing a retrospective review of theprior year’s estimates.
●
Utilizing personnel with specializedknowledge and skill inincome taxes toassist in theevaluation of the
appropriateness of the Company’s positions and analysis of the realizabilityof the deferred tax assets.
Valuation of Investments in Mortgage-Backed Securities
As describedin Notes
1
and
14
to theconsolidated financial conditionstatements, theCompany
accounts forits
mortgage-
backedsecuritiesatfairvalue,which
totaled
$60.8
m
illionatDecember31,2021.
Thefairvalueofmortgage-
backedsecuritiesis
basedonindependentpricingsourcesand/orthird-partybroker
quotes,whenavailable.
Becausethepriceestimatesmayvary,managementmustmakecertainjudgmentsandassumptionsaboutthe
appropriatepricetouse tocalculatethefairvaluesbasedonvarioustechniquesincludingobservingthemost
recentmarketforlikeoridenticalassets(including securitycouponrate,maturity,yield,prepayment speed),
market credit spreads, and resultsmodel driven approaches.
We identifiedthe valuation of operations is based on mortgage-backed securities
as
a critical audit matter.
The principal considerations
for ourdeterminationare: (i)
the amounts reported potentialfor biasin our consolidated financial statements. These consolidated financial statements are prepared in accordancehowmanagement subjectivelyselects theprice frommultiple
pricing sourcesto determinethe fairvalue ofthe mortgage-backedsecurities and(ii)
the auditeffort involved,
including the use of
valuation professionals with GAAP. specialized skilland knowledge.
The Company's significant accounting policies are described in Note 1 primary procedures we performedto address this critical audit matter included:
●
Evaluatingthe
designandimplementationof
controls
relatingtothevaluationofmortgaged-backed
securities,including
controlsover
management’s
process toselecttheprice frommultiplepricing
sources.
●
Reviewing
the
rangeofvaluesusedforeachinvestmentposition,
and
assessing
thepriceselected
for
management bias by comparingthe price
to the Company's accompanying consolidated financial statements.high, low andaverage of the rangeof pricing sources.
Testingthereasonableness offairvaluesdetermined bymanagement bycomparing thefairvalue of
certain securities to recent transactions,if applicable.
●
Utilizing personnelwith specializedknowledge andskill in valuationto
develop an independentestimate
ofthefairvalueofeachinvestmentposition
byconsideringthe statedsecuritycouponrate,yield,
maturity,and prepayment speeds, and comparingto the fair value used by management.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's managementauditor since 2008.
West Palm Beach, Florida
March 11, 2022
- 65 -
BIMINI CAPITAL MANAGEMENT,INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 and 2020
2021
2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to make complexcounterparties
$
60,788,129
$
65,153,274
Unpledged
15,015
24,957
Total mortgage-backed securities
60,803,144
65,178,231
Cash and subjective decisionscash equivalents
8,421,410
7,558,342
Restricted cash
1,391,000
3,353,015
Investment in Orchid Island Capital, Inc. common stock, at fair value
11,679,107
13,547,764
Accrued interest receivable
229,942
202,192
Property and assessments. The Company's most critical accounting policies involve decisionsequipment, net
2,024,190
2,093,440
Deferred tax assets, net of allowances
35,036,312
34,668,467
Due from affiliates
1,062,155
632,471
Other assets
1,437,381
1,466,647
Total Assets
$
122,084,641
$
128,700,569
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
58,877,999
$
65,071,113
Long-term debt
27,438,976
27,612,781
Accrued interest payable
55,610
107,417
Other liabilities
2,712,206
1,421,409
Total Liabilities
89,084,791
94,212,720
Commitments and assessments which could significantly affect reportedContingencies (Note 11)
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, 2021 and 2020
-
-
Class A Common stock, $
0.001
par value;
98,000,000
shares designated:
10,702,194
shares issued and outstanding as of December 31, 2021 and
11,608,555
shares issued
-
-
and outstanding as of December 31, 2020
10,702
11,609
Class B Common stock, $
0.001
par value;
1,000,000
shares designated,
31,938
shares
issued and outstanding as of December 31, 2021 and 2020
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, 2021 and 2020
32
32
Additional paid-in capital
330,880,252
332,642,758
Accumulated deficit
(297,891,168)
(298,166,582)
Stockholders' Equity
32,999,850
34,487,849
Total Liabilitiesand Equity
$
122,084,641
$
128,700,569
See Notes to Consolidated Financial Statements
- 66 -
BIMINI CAPITAL MANAGEMENT,INC.
CONSOLIDATED STATEMENTSOF OPERATIONS
For the Years Ended December 31, 2021and 2020
2021
2020
Revenues:
Advisory services
$
9,788,340
$
6,795,072
Interest income
2,237,217
3,764,003
Dividend income from Orchid Island Capital, Inc. common stock
2,024,379
1,752,730
Total revenues
14,049,936
12,311,805
Interest expense:
Repurchase agreements
(116,179)
(1,073,528)
Long-term debt
(996,794)
(1,150,613)
Net revenues
12,936,963
10,087,664
Other income (expense)
Unrealized (losses) gains on mortgage-backed securities
(3,098,866)
111,615
Realized gains (losses) on mortgage-backed securities
69,498
(5,744,589)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,868,657)
583,961
Losses on derivative instruments
(198)
(5,292,521)
Gains on retained interests in securitizations
0
58,735
Other income
154,191
3,478
Other expense, net
(4,744,032)
(10,279,321)
Expenses:
Compensation and related benefits
5,721,315
4,235,487
Directors' fees and liability insurance
762,735
690,713
Audit, legal and other professional fees
513,925
576,662
Administrative and other expenses
1,287,387
1,164,039
Total expenses
8,285,362
6,666,901
Net loss before income tax benefit
(92,431)
(6,858,558)
Income tax benefit
(367,845)
(1,369,416)
Net income (loss)
$
275,414
$
(5,489,142)
Basic and Diluted Net Income (Loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
0.02
$
(0.47)
CLASS B COMMON STOCK
Basic and Diluted
$
0.02
$
(0.47)
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
11,198,434
11,608,555
CLASS B COMMON STOCK
Basic and Diluted
31,938
31,938
See Notes to Consolidated Financial Statements
- 67 -
BIMINI CAPITAL MANAGEMENT,INC
CONSOLIDATED STATEMENTSOF EQUITY
Years Ended December 31, 2021 and 2020
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2020
11,672,431
$
11,673
$
332,642,758
$
(292,677,440)
$
39,976,991
Net loss
-
0
0
(5,489,142)
(5,489,142)
Balances, December 31, 2020
11,672,431
11,673
332,642,758
(298,166,582)
34,487,849
Net income
-
0
0
275,414
275,414
Class A common shares repurchased and retired
(906,361)
(907)
(1,762,506)
0
(1,763,413)
Balances, December 31, 2021
10,766,070
$
10,766
$
330,880,252
$
(297,891,168)
$
32,999,850
See Notes to Consolidated Financial Statements
- 68 -
BIMINI CAPITAL MANAGEMENT,INC.
CONSOLIDATED STATEMENTSOF CASH FLOWS
Years Ended December 31, 2021 and 2020
2021
2020
CASH FLOWS FROM OPERATINGACTIVITIES:
Net income (loss)
$
275,414
$
(5,489,142)
Adjustments to reconcile net income (loss) to net cash provided by operatingactivities:
Depreciation
69,250
69,536
Deferred income tax
(367,845)
(1,379,931)
Losses on mortgage-backed securities
3,029,368
5,632,974
Gains on retained interests in securitizations
0
(58,735)
Gain from disposition of real property held for sale
0
(11,591)
PPP loan forgiveness
(153,724)
0
Realized losses on forward settling to-be-announced securities
0
1,441,406
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
1,868,657
(583,961)
Changes in operating assets and liabilities:
Accrued interest receivable
(27,750)
548,683
Due from affiliates
(429,684)
(10,351)
Other assets
29,266
1,629,514
Accrued interest payable
(50,248)
(537,885)
Other liabilities as well as reported revenues
1,290,797
48,469
NET CASH PROVIDED BY OPERATINGACTIVITIES
5,533,501
1,298,986
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(26,189,505)
(43,129,835)
Sales
13,063,248
176,249,711
Principal repayments
14,471,976
13,909,872
Payments received on retained interests in securitizations
0
58,735
Net settlement of forward settling TBA contracts
0
(1,500,000)
Purchases of Orchid Island Capital, Inc. common stock
0
(4,071,592)
Proceeds from disposition of real property held for sale
0
461,590
NET CASH PROVIDED BY INVESTING ACTIVITIES
1,345,719
141,978,481
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
293,283,000
538,558,549
Principal repayments on repurchase agreements
(299,476,114)
(683,441,436)
Proceeds from long-term debt
0
152,165
Principal repayments on long-term debt
(21,640)
(20,505)
Class A common shares repurchased and expenses. retired
(1,763,413)
0
NET CASH USED IN FINANCING ACTIVITIES
(7,978,167)
(144,751,227)
NET DECREASE IN CASH, CASH EQUIVALENTSAND RESTRICTED CASH
(1,098,947)
(1,473,760)
CASH, CASH EQUIVALENTSAND RESTRICTED CASH, beginning of the year
10,911,357
12,385,117
CASH, CASH EQUIVALENTSAND RESTRICTED CASH, end of the year
$
9,812,410
$
10,911,357
SUPPLEMENTAL DISCLOSURE OFCASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest
$
1,164,780
$
2,762,026
Income taxes
$
0
$
(1,581,828)
See Notes to Consolidated Financial Statements
- 69 -
BIMINI CAPITALMANAGEMENT, INC.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
NOTE 1.ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BusinessDescription
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital”or the “Company”) formed in September 2003, is a
holding company.The Company believes that alloperates in two business segments through its principal wholly-ownedoperating subsidiary,Royal
Palm Capital, LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC
(
an investment advisor registered with the
Securities and Exchange Commission), are collectively referred to as "Bimini Advisors."Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.("Orchid") and receives fees for providing these services.
Bimini Advisors also manages the MBS portfolio of the decisionsRoyal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarilyof MBS investments and assessments upon whichshares of Orchid common
stock, for its financial statements own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiariesare based were reasonable at the time made based upon information availablecollectively referred to it at that time.as "Royal Palm."
Consolidation
The accompanying consolidated financial statements include the accounts of BiminiCapital, its wholly-owned subsidiaries, Bimini Advisors and Royal Palm.All
inter-company accounts and transactions have been eliminated from theconsolidated financial statements.
Variable Interest Entities (VIEs)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemedthe primary beneficiary of the VIE. Bimini Capital
has a common share investment in a trust used in connection with the issuanceof Bimini Capital's junior subordinated notes. See Note
9 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 financialinterest 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-backedsecurities. See Note 3 for additional
information regarding our investments in mortgage-backed securities. Our maximumexposure 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 accrualbasis of accounting in accordance with
accounting principles generally accepted in the United States (“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 requiresmanagement to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from
- 70 -
those estimates.Significant estimates affecting the accompanying consolidated financial statements includedetermining the fair
values of MBS and derivatives, determining the amounts of asset valuation allowances,and the computation of the income tax
provision or benefit and the deferred tax asset allowances recorded for each accountingperiod.
Segment Reporting
The Company’s operations are classified into two principal reportable segments: the assetmanagement segment and the
investment portfolio segment. These segments are evaluated by management in decidinghow to allocate resources and in assessing
performance.The accounting policies of the operating segments are the same as theCompany’s accounting policies described in this
note with the exception that inter-segment revenues and expenses are included inthe presentation of segment results.For further
information see Note 15.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutionsand highly liquid investments with original maturities
of three months or less at the time of purchase.Restrictedcash includescash pledgedas collateralfor repurchaseagreementsand
derivativeinstruments.
The followingtable presentsthe Company’scash, cashequivalentsand restrictedcash as ofDecember31, 2021
and 2020.
2021
2020
Cash and cash equivalents
$
8,421,410
$
7,558,342
Restricted cash
1,391,000
3,353,015
Total cash, cash equivalentsand restricted cash
$
9,812,410
$
10,911,357
The Companymaintainscash balancesat severalbanks andexcess marginwith an exchangeclearing member.At times,balances
may exceedfederallyinsuredlimits. TheCompany hasnot experiencedany lossesrelated tothese balances.The FederalDeposit
InsuranceCorporationinsures eligibleaccounts upto $250,000per depositorat each financialinstitution.Restrictedcash balancesare
uninsured,but are heldin separateaccounts thatare segregatedfrom thegeneral fundsof the counterparty.The Companylimits
uninsuredbalances toonly large,well-knownbanks andexchange clearingmembers andbelievesthat it isnot exposedto significant
credit riskon cash andcash equivalentsor restrictedcash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the termsof a management agreement. Under the terms
of the management agreement, Orchid is obligated to pay Bimini Advisors a monthlymanagement fee and a pro rata portion of certain
overhead costs and to reimburse the Company for any direct expenses incurredon its behalf. Revenuesfrom 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 (“PT”) mortgage-backed certificatesissued by Freddie Mac, Fannie Mae or Ginnie
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 accountfor its investment in MBS are accounted for under the fair value option. 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. We elected to account for all of our MBS under the 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:
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.
| 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, 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, 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 | ||||||||
| (in thousands) | ||||
| 2017 | 2016 | |||
| Cash and cash equivalents | $ | 6,103,250 | $ | 4,429,459 |
| Restricted cash | 2,649,610 | 1,221,978 | ||
| Total cash, cash equivalents and restricted cash | $ | 8,752,860 | $ | 5,651,437 |
- 71 -
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 soldthat have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
between market participants at the measurement date.The fair value measurement assumes that the transaction to sellthe asset or
transfer the liability either occurs in the principal market for the assetor liability, or in the absence of a principal market, occurs in the
most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third party
third-party broker quotes, when available.
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchaseare
not amortized.Premium lost and discount accretion resulting from monthly principal repaymentsare reflected in unrealized gains (losses)and
losses on MBS in the consolidated statementsof 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 ischaracterized as a return of
investment and serves to reduce the asset'sasset’s carrying value. At each reporting date, theeffective yield is adjusted prospectively from thefor
future reporting periodperiods based on the new estimate of prepayments and the contractualterms of the security.For IIO securities,
effective yield and income recognition calculations also take into account the indexvalue applicable to the security.Changes in fair
value of MBS during each reporting period are recorded in earnings and reportedas unrealized gains or losses on mortgage-backed
securities in the accompanying consolidated statements of operations. Theamount reported as unrealized gains or losses on mortgage backed
mortgage-backed securities thus captures the net effect of changes in the fair marketvalue of securities caused by market
developments and any premium or discount lost as a result of principal repaymentsduring the period.
Orchid Island Capital, Inc. Common Stock
The Company has elected theaccounts forits investmentin Orchidcommon sharesat fair value option for its investment in Orchid common shares. value.The changein the fairvalue of this investment anddividendsreceived
on this investmentare reflectedin the consolidatedstatementsof operations for the year ended December 31, 2017. operations.We estimatethe fairvalue of ourinvestmentin Orchidon a
market approachusing "Level 1"“Level1” inputsbased onthe quotedmarket priceof Orchid's Orchid’scommon stockon a nationalstock exchange. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management's view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.
Retained Interests in Securitizations
retained interests currently have a recorded at their fair value when issued by Royal Palm. Subsequent adjustments to fair value are reflected inof zero, as the consolidated statements prospectof 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 estimatesbeing received is uncertain. Any
cash received from the retained interests is reflected as a gain in the consolidatedstatements of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.operations.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk,facilitate asset/liability strategies and manage other
exposures, and it may continue to do so in the future. The principal instrumentsthat 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 otherderivatives in the future.
The Company has elected not to treat any of itsaccounts for TBA securities as derivative financial instruments as hedgesinstruments. Gainsand losses associated with TBA securities transactions
are reported in order to align the accounting treatment of itsgain (loss) on derivative instruments within the treatmentaccompanyingconsolidated 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 recordedin the consolidated statements of
operations for each period. The Company’s derivative financial instruments are not designatedas hedge accounting relationships, but
rather are used as economic hedges of its portfolio assets and liabilities. Gains and losseson derivatives, except those that result in
cash receipts or payments, are included in operating activities on the statementsof cash flows. Cash payments and cash receipts from
- 72 -
settlements of derivatives,including current period net cash settlements on interest rate swaps, is classifiedas an investing activity on
the statements of cash flows.
Holding derivatives creates exposure to credit risk related to the potentialfor 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. ToThe Company’s derivative agreements require it to post or receive collateral to mitigate this risk,
such risk. In addition,the Company uses only registered central clearing exchanges and well-establishedcommercial banks as counterparties.
counterparties, monitors positions with individual counterparties and adjustsposted collateral as required.
Financial Instruments
consolidated financial statements or in the accompanying notes. MBS, Orchidcommon 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 methodsand assumptions used to estimate fair value for these
instruments are presented in Note 1714 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interestreceivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximatestheir 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 rateswould be available to the Company for similar financial
instruments. InformationFurther information regarding carrying amount and effective interest rate for these instruments is presented inNote 119 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciablelife of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildingsand improvements with depreciable lives of 30
years.Property and equipment is recorded at acquisition cost and depreciatedto their respective salvage values using the straight-line
method over the estimated useful lives of the assets. Depreciation is included in administrativeand other expenses in the consolidated
statement of operations.
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS throughthe 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 collateralizedfinancing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Earnings Per Share
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-classmethod, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the resultis anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertibleinto 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 usingthe two-class method and, consequently, are presented
separately from Class A Common Stock.
- 73 -
The shares of Class C Common Stock are not included in the basic EPS computationas these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stockare not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A CommonStock 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.
its includable subsidiaries, file as separate tax paying entities.-70-
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
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.occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidatedfinancial statements.
Income taxes are provided for using the asset and liability method. Deferred taxassets and liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities usingenacted 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, 20142018 remain open for examination.
Although management believes its calculations for tax returns are correct and thepositions taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company.For tax filing purposes, Bimini Capital and its includable subsidiaries,and Royal Palm and
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 uncertaintax positions will be sustained upon
examination based on the facts, circumstances and information available at theend of each period.The measurement of uncertain tax
positions is adjusted when new information is available, or when an eventoccurs that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely thannot that the position will be sustained upon
examination by the relevant taxing authority based on the technical meritsof the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realizedupon settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to asan unrecognized tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,if applicable, within the income tax
provision.
Recent Accounting Pronouncements
In November 2016,March 2020, the FASB issued Accounting Standards Update ("ASU"(“ASU”) 2016-18, Statement 2020-04 “Reference Rate Reform (Topic 848): Facilitation
of Cash Flows – (Topic 230): Restricted Cash. the Effects of Reference Rate Reform on Financial Reporting.”ASU 2016-18 requires2020-04 provides optional expedients and exceptions to GAAP
requirements for modifications on debt instruments, leases, derivatives, and othercontracts, related to the expected market transition
from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmarkindices, or collectively, IBORs, to
alternative reference rates. ASU 2020-04 generally considers contract modificationsrelated to reference rate reform to be an event that restricted cash
does not require contract remeasurement at the modification date nor a reassessmentof a previous accounting determination. The
guidance in ASU 2020-04 is optional and restricted cash equivalentsmay be includedelected over time, through December31, 2022, 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.reference rate reform activities
In June 2016,January 2021, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses2021-01 “Reference Rate Reform (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)848). ASU 2016-132021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to applycertain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedientsto modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a resultof reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuationof the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change tomodifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective for fiscal years,immediately and for interim periods within those years, beginning afteravailable generally through December 15, 2019. Early application is permitted for fiscal periods beginning after December 15, 2018.31, 2022, as reference rate reform
- 74 -
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidatedfinancial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to theterms of a management agreement.As Manager,
Bimini Advisors is responsible for administering Orchid's business activities andday-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its managementteam, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervisionand oversight of Orchid's board of directors andhas only
such functions and authority as delegated to it. Bimini Advisors receives a monthlymanagement fee in the amount of:
●
and ● 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 incurredon its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth inthe management agreement. The management
agreement has been renewed through February 201920, 2023 and provides for automaticone-year extension options.options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated topay 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 fromOrchid for the years ended December 31, 20172021 and 2016.2020.
(in thousands)
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Management fee | $ | 5,855 | $ | 4,188 | ||||
| Allocated overhead | 1,576 | 1,301 | ||||||
| Total | $ | 7,431 | $ | 5,489 | ||||
2021
2020
Management fee
$
8,156
$
5,281
Allocated overhead
1,632
1,514
Total
$
9,788
$
6,795
At December 31, 20172021 and 2016,2020, the net amount due from Orchid was approximately $0.8 $
1.1
million and $0.6 $
0.6
million, respectively. These amounts are included in "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 followingtable presentsthe Company's Company’sMBS portfolioas of December31, 2017 2021and 2016:2020:
(in thousands)
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Pass-Through MBS: | ||||||||
| Fixed-rate Mortgages | $ | 207,179 | $ | 124,299 | ||||
| Total Pass-Through MBS | 207,179 | 124,299 | ||||||
| Structured MBS: | ||||||||
| Interest-Only Securities | 1,476 | 2,654 | ||||||
| Inverse Interest-Only Securities | 1,037 | 3,349 | ||||||
| Total Structured MBS | 2,513 | 6,003 | ||||||
| Total | $ | 209,692 | $ | 130,302 | ||||
2021
2020
Fixed-rate Mortgages
$
58,029
$
64,902
Interest-Only Securities
2,759
251
Inverse Interest-Only Securities
15
25
Total
$
60,803
$
65,178
The followingtable summarizes is asummary ofour net gain(loss) fromthe Company's sale ofMBS portfolio as offorthe yearsended December31, 20172021 and 2016, according to the contractual maturities of the securities 2020:
(in the portfolio. Actual maturitiesthousands)
2021
2020
Proceeds from sales of MBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives
$
13,063
$
176,250
- 75 -
Carrying value of the underlying mortgages, periodic paymentsMBS sold
12,994
181,995
Net gain (loss) on sales of principal, and prepaymentsMBS
$
69
$
(5,745)
Gross gain sales of principal.MBS
$
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Greater than or equal to ten years | $ | 209,692 | $ | 130,302 | ||||
| Total | $ | 209,692 | $ | 130,302 | ||||
69
$
60
Gross loss on sales of MBS
0
(5,805)
Net gain (loss) on sales of MBS
$
69
$
(5,745)
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:
NOTE 5. PROPERTY AND EQUIPMENT, NET
| (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 | |||||
The compositionof propertyand equipmentat December31, 2021and 2020follows:
(in thousands)
2021
2020
Land
$
1,185
$
1,185
Buildings and improvements
1,827
1,827
Computer equipment and software
26
181
Office furniture and equipment
193
198
Total cost
3,231
3,391
Less accumulated depreciation and amortization
1,207
1,298
Property and equipment, at December 31, 2017 and 2016 follows:net
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Land | $ | 2,247 | $ | 2,247 | ||||
| Buildings and improvements | 1,827 | 1,827 | ||||||
| Computer equipment and software | 165 | 177 | ||||||
| Office furniture and equipment | 198 | 180 | ||||||
| Total cost | 4,437 | 4,431 | ||||||
| Less accumulated depreciation and amortization | 1,078 | 1,024 | ||||||
| Property and equipment, net | $ | 3,359 | $ | 3,407 | ||||
$
2,024
$
2,093
Depreciationof propertyand equipmenttotaled approximately $77,000 $
69,000
and $86,000 $
70,000
for the yearsended December31, 2017 2021and 2016,
2020, respectively.
NOTE 6. 5.OTHER ASSETS
The composition of other assets at December 31, 20172021 and 20162020 follows:
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Prepaid expenses | $ | 468 | $ | 756 | ||||
| Servicing advances | 243 | 245 | ||||||
| Servicing sale receivable, including accrued interest | 222 | 309 | ||||||
| Investment in Bimini Capital Trust II | 804 | 804 | ||||||
| Due from affiliates | 797 | 566 | ||||||
| Other | 220 | 262 | ||||||
| Total other assets | $ | 2,754 | $ | 2,942 | ||||
(in thousands)
2021
2020
Investment in Bimini Capital Trust II
$
804
$
804
Prepaid expenses
297
278
Servicing advances
159
205
Other
177
180
Total otherassets
$
1,437
$
1,467
Receivablesare carriedat theirestimatedcollectibleamounts.The Companymaintains allowances an allowancefor doubtful accountscreditlosses for estimated expected
losses, resulting from the inability of the counterparty to make required payments, ifany. Managementconsidersthe followingfactors whendeterminingthe collectabilityexpectedlosses ofspecificaccounts:past transaction
activity, currenteconomicconditions, and changes inpayment terms. Amounts thattermsand reasonableand supportableforecasts.Adjustmentsto the Company determinesallowance
for creditlosses are no longer collectible are written off. recordedwith a correspondingadjustmentincluded inthe consolidatedstatementof operations.As of December31, 2017
2021 and 2016,2020, managementdeterminedthat no allowancefor doubtful accountscreditlosses wasnecessary.Collectionson amountspreviouslywritten off
are includedin incomeas received.
NOTE 7. 6.REPURCHASE AGREEMENTS
The Companypledges certainof its RMBSas collateralunder repurchaseagreementswith financialinstitutions.Interestrates are
generallyfixed basedon prevailingrates correspondingto the termsof the borrowings,and interestis generallypaid at theterminationof a
borrowing.If the fairvalue of thepledged securitiesdeclines,lenderswill typicallyrequire theCompany topost additionalcollateralor pay
down borrowingsto re-establishagreed uponcollateralrequirements,referredto as "margincalls." Similarly,if the fairvalue ofthe pledged
securitiesincreases,lendersmay releasecollateralback to theCompany. As of December31, 2021,the Companyhad met allmargin call
requirements.
- 76 -
As of December31, 2017, 2021and December31, 2020,the Company Company’srepurchaseagreementshad outstanding repurchaseremainingmaturitiesas summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
December 31, 2021
Fair value of securities pledged, including accrued
interest receivable
$
0
$
60,859
$
159
$
0
$
61,018
Repurchase agreement obligations of approximately $200.2 millionliabilities associated with a net
these securities
$
0
$
58,793
$
85
$
0
$
58,878
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
-
0.14%
0.70%
-
0.14%
December 31, 2016, the Company had outstanding repurchase2020
Fair value of securities pledged, including accrued
interest receivable
$
0
$
49,096
$
8,853
$
7,405
$
65,354
Repurchase agreement obligations of approximately $121.8 millionliabilities associated with a net
these securities
$
0
$
49,120
$
8,649
$
7,302
$
65,071
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 $0.5 million.
-
0.25%
0.23%
0.30%
0.25%
In addition,cash pledgedto counterpartiesas collateralfor repurchaseagreementswas approximately$
million and$
million as
of December31, 2017 2021and December 31, 2016, the Company's repurchase agreements had remaining maturities as summarized below:2020,
respectively.
| ($ in thousands) | ||||||||||||||||||||
| OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
| (1 DAY OR | AND | AND | THAN | |||||||||||||||||
| LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Fair value of securities pledged, including accrued | ||||||||||||||||||||
| interest receivable | $ | - | $ | 94,649 | $ | 115,350 | $ | - | $ | 209,999 | ||||||||||
| Repurchase agreement liabilities associated with | ||||||||||||||||||||
| these securities | $ | - | $ | 90,686 | $ | 109,497 | $ | - | $ | 200,183 | ||||||||||
| Net weighted average borrowing rate | - | 1.47 | % | 1.56 | % | - | 1.52 | % | ||||||||||||
| December 31, 2016 | ||||||||||||||||||||
| Fair value of securities pledged, including accrued | ||||||||||||||||||||
| interest receivable | $ | - | $ | 71,565 | $ | 41,334 | $ | 17,172 | $ | 130,071 | ||||||||||
| Repurchase agreement liabilities associated with | ||||||||||||||||||||
| these securities | $ | - | $ | 66,919 | $ | 38,733 | $ | 16,176 | $ | 121,828 | ||||||||||
| Net weighted average borrowing rate | - | 1.01 | % | 0.96 | % | 0.98 | % | 0.99 | % | |||||||||||
respectively.
If, duringthe termof a repurchaseagreement,a lenderfiles forbankruptcy, theCompany mightexperiencedifficulty recoveringits
pledged assets,,which couldresult inan unsecuredclaim againstthe lenderfor the differencebetween theamount loanedto the Company
plus interestdue to thecounterpartyand the fairvalue of thecollateralpledged tosuch lender,, including the accrued interest receivable,
and cash posted by the Company as collateral, if any.At December31, 2017 2021and December31, 2016, 2020,the Companyhad an aggregate
amount atrisk (thedifferencebetween theamount loanedto the Company,includinginterestpayable, andthe fairvalue of securitiesand
cash pledged (if(if any),includingaccrued intereston such securities)with allcounterpartiesof approximately $11.7 $
3.5
million and $8.4 $
3.6
million,
respectively.The Companydid nothave an amountat risk withany individualcounterpartygreaterthan 10%of the Company's Company’sequity at
December31, 2017 2021and 2016.December31, 2020.
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
| ($ 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 | ||||||||||||||||
| Junior Subordinated Debt Funding Hedges | ||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||
| Contract | Average | Average | ||||||||||||||
| Notional | Entry | LIBOR | Open | |||||||||||||
| Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
| 2018 | $ | 26,000 | 1.84 | % | 1.97 | % | $ | 33 | ||||||||
| 2019 | 26,000 | 1.63 | % | 2.27 | % | 166 | ||||||||||
| 2020 | 26,000 | 1.95 | % | 2.36 | % | 107 | ||||||||||
| 2021 | 26,000 | 2.22 | % | 2.42 | % | 51 | ||||||||||
| Total / Weighted Average | $ | 26,000 | 1.91 | % | 2.25 | % | $ | 357 | ||||||||
| ($ 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 | ||||||||
to Counterparties
The tablebelow presents the effectsummarizesBimini’s assetspledgedas collateralunder itsrepurchaseagreementsand derivativeagreementsas of the Company's derivative financial instruments on the consolidated statements of operations for the years ended
December31, 2021and 2020.
($ in thousands)
December 31, 2017 and 2016.
2021| (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 | ) | ||
December 31, 2020
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
58,029
$
0
$
58,029
$
64,902
$
0
$
64,902
Structured MBS - at fair value
2,759
0
2,759
251
0
251
Accrued interest on pledged securities
230
0
230
201
0
201
Cash
1,391
0
1,391
3,352
1
3,353
Total
$
62,409
$
0
$
62,409
$
68,706
$
1
$
68,707
Assets Pledgedfrom Counterparties
- 77 -
The tables tablebelow summarize our summarizesassets pledged as collateral to Biminifrom counterpartiesunder our repurchaseagreements and derivative agreements as of December31, 2017 2021
and 2016.2020.Cash receivedas marginis recognizedin cash andcash equivalentswith a correspondingamount recognizedas an increasein
repurchaseagreementsin the consolidatedbalance sheets.
($ in thousands)
| ($ in thousands) | ||||||||||||
| As of December 31, 2017 | ||||||||||||
| Repurchase | Derivative | |||||||||||
| Assets Pledged to Counterparties | Agreements | Agreements | Total | |||||||||
| PT MBS - at fair value | $ | 207,179 | $ | - | $ | 207,179 | ||||||
| Structured MBS - at fair value | 2,091 | - | 2,091 | |||||||||
| Accrued interest on pledged securities | 730 | - | 730 | |||||||||
| Cash | 2,208 | 442 | 2,650 | |||||||||
| Total | $ | 212,208 | $ | 442 | $ | 212,650 | ||||||
Assets Pledged to Bimini
| ($ 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 | ||||||
2021
2020
Cash
$
106
$
80
Total
$
106
$
80
NOTE 10.8. OFFSETTING ASSETS AND LIABILITIES
The Company's Company’srepurchaseagreementsare subjectto underlyingagreementswith masternetting orsimilar arrangements,which
provide forthe rightof offset inthe eventof defaultor in theevent ofbankruptcyof eitherparty tothe transactions.The Companyreports
its assetsand liabilitiessubject tothese arrangementson a grossbasis.The followingtable presentsinformationregardingthose assets
and liabilitiessubject tosuch arrangementsas if theCompany hadpresentedthem on anet basisas of December31, 2017 2021and 2016.2020.
(in thousands)
| (in thousands) | ||||||||||||||||||||||||
| Offsetting of Liabilities | ||||||||||||||||||||||||
| Net Amount | Gross Amount Not Offset in the | |||||||||||||||||||||||
| of Liabilities | Consolidated Balance Sheet | |||||||||||||||||||||||
| Gross Amount | Presented | Financial | ||||||||||||||||||||||
| Gross Amount | Offset in the | in the | Instruments | Cash | ||||||||||||||||||||
| of Recognized | Consolidated | Consolidated | Posted as | Posted as | Net | |||||||||||||||||||
| Liabilities | Balance Sheet | Balance Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | 200,183 | $ | - | $ | 200,183 | $ | (197,975 | ) | $ | (2,208 | ) | $ | - | ||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | 121,828 | $ | - | $ | 121,828 | $ | (121,372 | ) | $ | (456 | ) | $ | - | ||||||||||
Offsetting of Liabilities
Net Amount
Gross Amount Not Offset in the
of Liabilities
Consolidated Balance Sheet
Gross Amount
Presented
Financial
Gross Amount
Offset in the
in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2021
Repurchase Agreements
$
58,878
$
0
$
58,878
$
(57,487)
$
(1,391)
$
0
$
58,878
$
0
$
58,878
$
(57,487)
$
(1,391)
$
0
December 31, 2020
Repurchase Agreements
$
65,071
$
0
$
65,071
$
(61,719)
$
(3,352)
$
0
$
65,071
$
0
$
65,071
$
(61,719)
$
(3,352)
$
0
The amountsdisclosedfor collateralreceived byor postedto the samecounterpartyare limitedto the amountsufficientto reducethe
asset orliabilitypresentedin the consolidatedbalance sheetto zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01. zero.The fairvalue of theactual collateralreceived byor postedto the
same counterpartytypicallyexceeds theamounts presented.See Note 97 for a discussionof collateralposted for, orreceived against,
repurchaseobligationsand derivativeinstruments.
NOTE 11. TRUST PREFERRED SECURITIES9.LONG-TERM DEBT
Long-termdebt at December31, 2021and 2020is summarizedas follows:
(in thousands)
2021
2020
Junior subordinated debt
$
26,804
$
26,804
Note payable
635
657
Paycheck Protection Plan ("PPP") loan
0
152
Total
$
27,439
$
27,613
Junior SubordinatedDebt
During 2005,Bimini Capitalsponsoredthe formationof a statutorytrust, knownas BiminiCapital TrustII ("BCTII"(“BCTII”)of which 100%of
- 78 -
the commonequity is ownedby BiminiCapital.It was formedfor the purposeof issuingtrust preferredcapital securitiesto third-party
investorsand investingthe proceedsfrom thesale of suchcapital securitiessolely injunior subordinateddebt securitiesof BiminiCapital.
The debtsecuritiesheld by BCTIIare the soleassets ofBCTII.
As of December31, 2017 2021and 2016, 2020,the outstandingprincipalbalance onthe juniorsubordinateddebt securitiesowed to BCTIIwas $26.8
$
26.8
million.The BCTIItrust preferredsecuritiesand BiminiCapital'sBCTII JuniorSubordinatedNotes havea rate ofinterest thatfloats
at a spreadof 3.50%
3.50
% over theprevailingthree-monthLIBOR rate.As of December31, 2017, 2021,the interestrate was 5.09%
3.70
%. The BCTIItrust
preferredsecuritiesand BiminiCapital'sBCTII JuniorSubordinatedNotes requirequarterlyinterestdistributionsand are redeemableat
Bimini Capital'soption, inwhole orin part andwithout penalty.Bimini Capital'sBCTII JuniorSubordinatedNotes aresubordinateand junior
in rightof paymentto all presentand futuresenior indebtedness.
method.
BCTII isa VIE becausethe holdersof the equityinvestmentat risk donot have adequate substantivedecisionmaking abilityover BCTII's BCTII’s
activities.Since BiminiCapital'sinvestmentin BCTII'scommon equitysecuritieswas financeddirectly byBCTII asa resultof its loanof the
proceedsto BiminiCapital,that investmentis not consideredto be anequity investmentat risk.Since BiminiCapital'scommon share
investmentin BCTIIis not a variableinterest,Bimini Capitalis not theprimary beneficiaryof BCTII.Therefore,Bimini Capitalhas not
consolidatedthe financialstatementsof BCTIIinto its consolidatedfinancialstatementsand thisinvestmentis accountedfor on theequity method.
method.
The accompanyingconsolidatedfinancialstatementspresentBimini Capital'sBCTII JuniorSubordinatedNotes issuedto BCTIIas a
liabilityand BiminiCapital'sinvestmentin the commonequity securitiesof BCTIIas an asset (included (includedin otherassets).For financial
statementpurposes,Bimini Capitalrecords paymentsof intereston the JuniorSubordinatedNotes issuedto BCTIIas interestexpense.
Note Payable
On October30, 2019,the Companyborrowed$
680,000
from a bank.The noteis payablein equalmonthly principaland interest
installmentsof approximately$
5,000
through October30, 2039.Interestaccrues at
4.89
% throughOctober 30,2024. Thereafter,interest
accrues basedon the weeklyaverageyield to theUnited StatesTreasury securitiesadjusted toa constantmaturity of5 years,plus
3.25
%.
The noteis securedby a mortgageon the Company’soffice building.
Paycheck ProtectionPlan Loan
On April13, 2020,the Companyreceived approximately$
152,000
through thePaycheck ProtectionProgram (“PPP”)of the CARES
Act in theform of alow interestloan.The PPPloan hada fixed rateof
1.00
% and a termof two years,if not forgiven,in whole orin part.
The SmallBusiness Administrationnotified theCompany that,effective April22, 2021,all principaland accruedinterestunder thePPP
loan wasforgiven.
The tablebelow presentsthe futurescheduledprincipalpaymentson the Company’slong-termdebt.
(in thousands)
Year Ending December -78-31,
Amounts
Amounts
2022
$
23
2023
24
2024
25
2025
26
2026
28
Thereafter
27,313
Total
$
27,439
NOTE 12. 10.CAPITAL STOCK
- 79 -
AuthorizedShares
The totalnumber ofshares ofcapital stockwhich theCompanyhas the authorityto issue is110,000,000 shares,classifiedas
100,000,000
shares ofcommon stock,and
10,000,000
shares ofpreferredstock. TheBoard of Directorshas the authorityto classifyany
unissued sharesby settingor changingin any oneor more respectsthe preferences,conversionor otherrights, votingpowers,
restrictions,limitationsas to dividends,qualificationsor termsor conditionsof redemptionof such shares.
Common Stock
Of the
100,000,000
authorizedshares ofcommon stock,
98,000,000
shares weredesignatedas Class Acommon stock,
1,000,000
shares weredesignatedas Class Bcommon stockand
1,000,000
shares weredesignatedas Class Ccommon stock.Holdersof shares
of commonstock haveno sinkingfund or redemptionrights andhave no pre-emptiverights tosubscribefor any ofthe Company's Company’s
securities.All commonshareshave a $0.001 $
0.001
par value.
Class ACommon Stock
Each outstanding
share ofClass A commonstock entitlesthe holderto one voteon all matterssubmittedto a voteof stockholders,
includingthe electionof directors.Holders ofshares ofClass A commonstock arenot entitledto cumulatetheir votesin the electionof
directors.
Subject tothe preferentialrights ofany otherclass or seriesof stockand to theprovisionsof the Company'scharter, as amended,
regardingthe restrictionson transferof stock,holders ofshares ofClass A commonstock areentitled toreceive dividendson such stockif,
as and whenauthorizedand declaredby the Boardof Directors.
Class BCommon Stock
Each outstandingshare ofClass B commonstock entitlesthe holderto one voteon all matterssubmittedto a voteof common
stockholders,includingthe electionof directors.Holders ofshares ofClass B commonstock arenot entitledto cumulatetheir votesin the
election ofdirectors.Holders ofshares ofClass A commonstock entitles the holder toandClass B commonstock shallvote togetheras one vote onclassin all matters submitted to a vote of stockholders, including
except thatany matterswhich wouldadverselyaffect 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.preferences
Class B Common Stock
Each outstanding share of Class Bcommon stock entitlesas a separateclass shall
-79-
require aseparateapprovalby holdersof a majorityof the holder to one vote on all matters submitted to a voteoutstandingshares ofClass B common stockholders, including the election of directors. stock.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 commonstock in an amount equal to the dividends declared
on each share of Class A common stock if, as and when authorized and declared bythe Board of Directors.
Each shareof ClassB commonstock shallautomaticallybe convertedinto oneshare ofClass A commonstock on thefirst dayof the
fiscal quarterfollowingthe fiscalquarter duringwhich theCompany's Boardof Directorswere notifiedthat, asof the endof such fiscal
quarter, thestockholders'equity attributableto the ClassA commonstock,calculatedon a proforma basisas if conversionof the ClassB
common stock (or(or portionthereofto be converted)had occurred,and otherwisedeterminedin accordancewith GAAP, equalsno less than $150.00
$
150.00
per share (adjusted (adjustedequitablyfor any stocksplits, stockcombinations,stock dividendsor the like);provided,that the numberof
shares ofClass B commonstock tobe convertedinto ClassA commonstock in anyquarter shallnot exceedan amountthat willcause the
stockholders'equity attributableto the ClassA commonstock calculatedas set forthabove tobe less than$
150.00
per share;provided
further, thatsuch conversionsshall continueto occuruntil allshares ofClass B commonstock havebeen convertedinto sharesof ClassA
common stock;and providedfurther, thatthe totalnumber ofshares ofClass A commonstock in any quarter issuableupon conversionof the ClassB
common stockshall notexceed
3
% of thetotal sharesof commonstock outstandingprior tocompletionof an amount that will cause the stockholders' equity attributable to the initialpublic offeringof Bimini
Capital'sClass 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.
Class CCommon Stock
- 80 -
No dividendswill be paidon the ClassC commonstock.Holdersof sharesof ClassC commonstock arenot entitledto voteon any
matter submittedto a voteof stockholders,includingthe electionof directors,except thatany mattersthat wouldadversely affectthe rights
and privilegesof the ClassC commonstock as aseparateclass shallrequire theapprovalof a majorityof the ClassC commonstock.
Each shareof ClassC commonstock shallautomaticallybe convertedinto oneshare ofClass A commonstock on thefirst dayof the
fiscal quarterfollowingthe fiscalquarter duringwhich theCompany's Boardof Directorswere notifiedthat, asof the endof such fiscal
quarter, thestockholders'equity attributableto the ClassA commonstock,calculatedon a proforma basisas if conversionof the ClassC
common stockhad occurredand givingeffect to theconversionof all ofthe sharesof Class Bcommon stockas of suchdate, and
otherwisedeterminedin accordancewith GAAP, equalsno less than $150.00 $
150.00
per share (adjusted (adjustedequitablyfor any stocksplits,stock
combinations,stock dividendsor the like);provided,that thenumber ofshares ofClass C commonstock to beconvertedinto ClassA
common stockshall notexceed anamount thatwill causethe stockholders'equity attributableto the ClassA commonstock calculatedas
set forthabove tobe less than$
150.00
per share;and providedfurther, thatsuch conversionsshall continueto occur untilall sharesof
Class C commonstock havebeen convertedinto sharesof Class Acommon stockand providedfurther, thatthe totalnumber ofshares of
Class A commonstock issuableupon conversionof the ClassC commonstock shallnot exceed
3
% of thetotal sharesof commonstock
outstandingprior tocompletionof an amount that will cause the stockholders' equity attributable to the initialpublic offeringof BiminiCapital'sClass 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.
Preferred Stock
General
There are
10,000,000
authorized shares of preferred stock, with a $0.001 $
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 reclassifyany 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, qualificationsand 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 adoptedon
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 $
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.
Preferred Stock
The Class A Redeemable Preferred Stock and Class B Redeemable PreferredStock rank equal to each other and shall have the
same preferences, rights, voting powers, restrictions, limitations as to dividendsand other distributions, qualifications and terms;
provided, however that the redemption provisions of the Class A Redeemable PreferredStock and the Class B Redeemable Preferred
Stock differ.Each outstanding share of Class A Redeemable Preferred Stock and Class BRedeemable Preferred Stock shall have
one-fifth of a vote on all matters submitted to a vote of stockholders (or such lesserfraction 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 securitieswithout obtaining a stockholder vote).
Holders of shares of preferred stock shall vote together with holders of sharesof 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 wereconverted into Class A common stock on April
28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.
- 81 -
In 2015 the Board approved Articles Supplementary to the Company'sCompany’s charter reclassifyingand 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 $
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 Stockand Class B Preferred Stock, the Company has
authority to issue
10,000,000
shares of undesignated Preferred Stock and no shares of Class A PreferredStock or Class B Preferred
Stock. The Articles Supplementary were filed with the State Departmentof Assessments and Taxation of Maryland (the "SDAT"“SDAT”) and
became effective upon filing on December 21, 2015.
OnOn December 21, 2015
Exercisability.Exercisability.The Rights will generally not be exercisable until the earlier of (i) 10 businessdays after a public announcement by
stock.
Exchange-81-
Exchange. After the Distribution Date and following a determination by theBoard that a person or group is an Acquiring Person,
In 2015 the Board approved Articles Supplementary to the Company'sCompany’s charter creatinga new series of Preferred Stock designated
as Series A Junior Preferred Stock, par value $0.001 $
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
the Board adopted a rights agreement and declared a distributionof one preferred stock purchase right ("Right"
(“Right”) for each outstanding share of the Company'sCompany’s Class A common stock, Class B commonstock, and Class C common stock.
The distribution was payable to stockholders of record as of the close of businesson December 21, 2015.
The Rights
. Subject to the terms, provisions and conditions of the Rights Plan, if theRights become exercisable, each Right would
initially represent the right to purchase from the Company one ten-thousandthof a share of Series A Preferred Stock for a purchase
price of $4.76, subject to adjustment in accordance with the terms of the RightsPlan (the "Purchase Price"“Purchase Price”). If issued, each fractional
share of Series A Preferred Stock would give the stockholder approximately thesame 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 rightsas a
stockholder of the Company, including without limitation any distribution, voting or liquidation rights.
Exercisability.
the Company that a person or group has acquired 4.9%
4.9
% or more of the outstanding Class A common stock without the approvalof the
Board of Directors (an "Acquiring Person"“Acquiring Person”) and (ii) 10 business days after thecommencement of a tender or exchange offer by a
person or group for 4.9%
4.9
% or more of the Class A common stock.
The date that the Rights may first become exercisable is referred to asthe "Distribution“Distribution Date."” Until the Distribution Date, the
Class A common stock, Class B common stock and Class C common stockcertificates will represent the Rights and will contain a
notation to that effect. Any transfer of shares of Class A common stock, Class B commonstock 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 commonstock, Class B common stock or Class C common stock.
stock.
After the Distribution Date and following a determination by the Board that a personis an Acquiring Person, each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will thereuponbecome 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 marketvalue of two times the Purchase Price (or, at our
option, shares of Series A Preferred Stock or other consideration as providedin the Rights Plan).
the Board may exchange the Rights (other than Rights owned bysuch 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 commonstock 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 similarclass or series of the Company'sCompany’s preferred stock
having similar Rights, preferences and privileges) of equivalent value, per Right (subject(subject to adjustment).
- 82 -
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 pursuantto the Rights Plan, (iv) the repeal of
Section 382 of the Code or any successor statute if the Board determinesthat the Rights Plan is no longer necessary for the
preservation of the applicable tax benefits, (v) the beginning of a taxableyear of the Company to which the Board determines that no
applicable tax benefits may be carried forward and (vi) the close of businesson June 30, 2016 if approval of the Rights Plan by the Company's
Company’s stockholders has not been obtained.
Redemption.
in part, at a price of $0.001 per Right (the "Redemption Price"“Redemption Price”). The redemptionof 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 Rightswill be to receive the Redemption Price.
Anti-Dilution Provisions.
The Board may adjust the Purchase Price, the number of sharesof Series A Preferred Stock or other
securities issuable and the number of outstanding Rights to prevent dilution thatmay occur as a result of certain events, including
among others, a stock dividend, a forward or reverse stock split or a reclassificationof the preferred shares or Class A common stock,
Class B common stock or Class C common stock. No adjustments to the PurchasePrice of less than 1% will be made.
Anti-TakeoverEffects.
anti-takeover effects. The Rights will cause substantial dilution to any person or group thatattempts to acquire the Company without
the approval of the Board. As a result, the overall effect of the Rights may be to render moredifficult 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 otherbusiness combination approved by the Board.
Amendments.
holders of the Rights. After the Distribution Date, the Board may amend or supplementthe Rights Plan only to cure an ambiguity, to
alter time period provisions, to correct inconsistent provisions, or to makeany additional changes to the Rights Plan, but only to the
extent that those changes do not impair or adversely affect, in any material respect, anyRights holder and do not result in the Rights
again becoming redeemable, and no such amendment may cause the Rights againto become redeemable or cause this Rights Plan
again to become amendable other than in accordance with the applicable timingof the Rights Plan.
There wereno issuancesThe table below presents information related toof the Company'sClass A CommonStock, issuedClassB CommonStock orClass C CommonStock duringthe
years endedDecember31, 20172021 and 2016.2020.
Stock Repurchase
| Shares Issued Related To: | 2017 | 2016 | ||||||
| Incentive plan shares | 29,000 | 258,333 | ||||||
| Total shares of Class A Common Stock issued | 29,000 | 258,333 | ||||||
Plans
On January 12, March 26,2018, Robert Cauley and Hunter Haas each purchased 41,666 shares theBoard ofDirectorsof the Company's Company(the “Board”)approveda Stock RepurchasePlan (the“2018 Repurchase
Plan”).Pursuantto the 2018RepurchasePlan, theCompany couldpurchaseup to 500,000shares ofits ClassA CommonStock from
time to time,subject tocertain limitationsimposed byRule 10b-18of the SecuritiesExchangeAct of 1934.The 2018RepurchasePlan
was terminatedon September16, 2021.
During theperiod beginningJanuary 1,2021 throughSeptember16, 2021,the Companyrepurchaseda total of
1,195
shares under
the 2018RepurchasePlan at anaggregatecost of approximately$
2,298
, includingcommissionsand fees,for a weightedaverage priceof
$
1.92
per share.From theinceptionof the 2018RepurchasePlan throughits termination,the Companyrepurchaseda total of
71,598
shares atan aggregatecost of approximately$
169,243
, includingcommissionsand fees,for a weightedaverage priceof $
2.36
per share.
On September16, 2021,the Boardauthorizeda share repurchaseplan pursuantto Rule 10b5-1of the SecuritiesExchangeAct of
1934 (the“2021 RepurchasePlan”). Pursuantto the 2021RepurchasePlan, theCompany maypurchaseshares ofits ClassA Common
- 83 -
Stock fromtime to timefor an aggregatepurchaseprice notto exceed$2.5 million.Share repurchasesmay be executedthroughvarious
means, including,without limitation,open markettransactions.The 2021RepurchasePlan doesnot obligatethe Companyto purchase
any shares,and it expireson September16, 2023.The authorizationfor the 2021RepurchasePlan maybe terminated,increasedor
decreasedby the Company’sBoard ofDirectorsin its discretionat any time.During theyear endedDecember31, 2021,
the Company
repurchaseda total of
92,287
shares atan aggregatecost of approximately$
192,905
, includingcommissionsand fees,for a weighted
average priceof $
2.09
per shareunder the2021 repurchasePlan.
Subsequentto December31, 2021,and throughMarch 10,2022, the
Company repurchaseda total of
170,422
shares atan aggregatecost of approximately$
343,732
, includingcommissionsand fees,for a
weightedaverage priceof $
2.02
per share.
Tender Offer
In July 2021,the Companycompleteda “modifiedDutch auction”tender offerand paidan aggregateof $1.5 million,excludingfees
and relatedexpenses,to repurchase
812,879
shares ofBimini Capital’sClass A Common Stockcommonstock ata price of $2.40 per share directly from the Company. These newly issued shares are not reflected in the consolidated balance sheet as of December 31, 2017.$
1.85
aggregatecost of thetender offer,includingcommissionsand fees,was approximately$
1.6
million.
NOTE 13. STOCK INCENTIVE PLANS11.
| 2017 | 2016 | |||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | |||||||||||||||
| Grant-Date | Grant-Date | |||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
| Nonvested, at January 1 | 70,000 | $ | 1.23 | 77,500 | $ | 1.22 | ||||||||||
| Vested during the period | (29,000 | ) | 1.78 | - | - | |||||||||||
| Forfeited during the period | - | - | (7,500 | ) | 1.15 | |||||||||||
| 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 | ||||
From time to time, the Company may become involved in various claims andlegal actions arising in the ordinary course of
business.
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amountof $
33.1
million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of additionalindemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warrantiesin the related MLPA’s.The Company
believes the demands are without merit and intends to defend against the demandsvigorously.No provision or accrual has been
recorded as of December 31, 2021 related to the Citigroup demands.
Management is not aware of any other significant reported or unreported contingenciesat December 31, 2017.2021.
NOTE 15. 12.INCOME TAXES
0.4
million, for the year ended December 31, 2017, including a charge of $25.9 $
2.2
million due to a remeasurement ofdecrease 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 interpretationasset
valuation allowance as a result of management’s reassessment of the Tax Reform ActCompany’s ability toutilize net operating losses (“NOLs”) and may change as
capital loss carryforwards to offset future taxable income. In 2020, the Company receives additional clarificationrecordedan income tax benefit of $
1.4
million,
including a $
0.3
million increase in the deferred tax asset valuation allowance as a resultof management’s reassessment of the
Company’s ability to utilize NOLs and implementation guidance.capital loss carryforwards to offset future taxable income.
The income tax provisionbenefit included in the consolidated statements of operations consistsof the following for the years ended
December 31, 20172021 and 2016:2020:
(in thousands)
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Current | $ | 70 | $ | 143 | ||||
| Deferred | 19,308 | 999 | ||||||
| Income tax provision | $ | 19,378 | $ | 1,142 | ||||
2021
2020
Current
$
0
$
10
Deferred
(368)
(1,379)
Income tax benefit, net
$
(368)
$
(1,369)
- 84 -
The income tax provision differs from the amount computed by applying the federal incometax 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, 20172021 and 20162020 ispresented 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)
2021
2020
Federal tax benefit based on statutory rate applicable for each year
$
(19)
$
(1,440)
State income tax benefit
(8)
(302)
Non-deductible expenses
631
0
(Decrease) increase of deferred tax asset valuation allowance
(2,191)
349
Other
1,219
24
Income tax benefit
$
(368)
$
(1,369)
Deferred tax assets consisted of the following as of December 31, 2017 2021and 2016:2020:
(in thousands)
| (in thousands) | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 59,691 | $ | 96,500 | ||||
| Orchid Island Capital, Inc. common stock | 2,349 | 3,291 | ||||||
| MBS | 1,038 | 1,425 | ||||||
| Management agreement | 813 | 1,267 | ||||||
| Tax hedges | 49 | 366 | ||||||
| Accrued expenses | 148 | 330 | ||||||
| Other | 661 | 697 | ||||||
| 64,749 | 103,876 | |||||||
| Valuation allowance | (20,224 | ) | (40,043 | ) | ||||
| Net deferred tax assets | $ | 44,525 | $ | 63,833 | ||||
2021
2020
Deferred tax assets:
Net operating loss carryforwards
$
58,391
$
58,701
Orchid Island Capital, Inc. common stock
3,198
3,083
MBS unrealized losses and gains
582
241
Capital loss carryforwards
1,423
2,573
Management agreement
813
813
Other
413
1,232
64,820
66,643
Valuation allowance
(29,784)
(31,975)
Net deferred tax assets
$
35,036
$
34,668
As ofDecember 31, 20172021 and 2016, Bimini Capital2020, theCompany had tax capital loss federal NOLcarryforwards ofapproximately $
267.7
million and$
268.9
million,
respectively, and Florida NOLcarryforwards of approximately $0.3 $
39.6
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. In addition, as of December 31, 2017 and 2016, Bimini Capital had estimated federal NOL carryforwards of approximately $19.1 million and $19.3 million, respectively, and estimated Florida NOL carryforwards of $18.5 million and $18.6 $
40.8
million, respectively. The NOLcarryforwards canbe used tooffset
future taxable income and will begin to expire in 2028.
2026.
In connectionwith Orchid's Orchid’s2013 IPO,Bimini Advisorspaid for,and expensedfor GAAPpurposes, certainoffering coststotaling
approximately $3.2 $
3.2
million.Fortaxpurposes,theseofferingcostscreatedanintangibleassetrelatedtotheOrchidmanagement
agreement with a tax basis of $3.2 $
3.2
million. The deferred tax asset relatedto the intangible asset at December31, 20172021 and 20162020 totaled approximately$
$
0.8
million and $1.3 $
0.8
million, respectively.
In assessing therealizability of deferred tax assets,management considers whether itis more likely thannot that some portionor
all of the deferredtax assets will notbe realized. The ultimate realizationof capital loss and NOLcarryforwards is dependent upon the
generationoffuturecapitalgainsandtaxableincomeinperiodspriortotheirexpiration.Thevaluationallowanceisbasedon
management’s estimatedprojections offuture capital gainstaxableincome, andthe projectedability toutilize theNOL carryforwardsto offsetthat
projected taxable income in periods prior to their expiration. The valuation allowance relates primarily tobefore the ability to utilize the NOL carryforwards of Bimini Capital and Royal Palm in future periods and is based on management's estimated projections of future taxable income.NOLs expire. With respect to the utilization of NOL carryforwards at Bimini,taxableincome projections, management must estimateestimates the dividends the Company will receive
to be received on its Orchid share holdings as well as the managementfees 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 willplans to acquire,
its future funding andinterest costs, futureprepayment speeds andnet interest margin,among others. Management must Estimates arealso estimatemade for other
assets and expenses.Changes in the dividends it will receive on its Orchid shares and the cash flows it will receivetaxableincome projections have adirect impact on the retained interests. Utilizationamount of the valuationallowance, and
the impactin anyreporting periodmay besignificant. Utilizationof theNOLs isbased onthese estimatesand theassumptions that
management will be able to reinvest retainedearnings in order to grow theMBS portfolio going forward and thatmarket 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 bookvalue changes,thus increasing changingprojected managementfees andoverhead sharingpayments, and/ormarket
conditions, changeincluding changes in interest rates, such that estimateswith respect to the portfolio metrics warrant revisions.
- 85 -
The Companycontinues tohold aminimal amountof residualinterests in various real estatemortgage investmentconduits ("REMICs"(“REMICs”),
some of which generate excess inclusionincome ("EII"(“EII”), a type of taxable income pursuant to specific provisions of.These residual interests have no recordedvalue on the Code. During 2010 (as part balance sheet.In its
2009taxreturn,theCompanydisclosedataxfilingpositionrelatedtotheEIItaxableincomeandhassinceincludedanoticeof 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 2009todisclose the position.The tax filingposition and it continueswill continue to include a notice of inconsistent treatment in each return.be disclosed with respectto the
remaining securitizations as long as they are held.
The Company does hasnot believe it hasidentified anyunrecognized tax benefits included that would resultin liabilities itsconsolidated financial statements.
The Company has not had any settlements in the current period with taxingauthorities nor has it recognized and is not currently under audit. Additionally,no
tax benefits have been recognized in the consolidated financial statementsas a result of a lapse of the applicable statute of limitations.
NOTE 16. 13.EARNINGS PER SHARE
Shares of
Class B commonstock, participatingand convertibleinto ClassA common stock,are entitledto receivedividendsin an
amount equalto the dividendsdeclaredon each shareof Class Acommon stockif, and when,authorizedand declaredby the Boardof
Directors.The ClassB common stockis includedin the computationof basic EPSusing thetwo-classmethod, andconsequentlyis
presentedseparatelyfrom ClassA commonstock. Sharesof ClassB commonstock arenot includedin the computationof dilutedClass A
EPS as theconditionsfor conversionto Class Acommon stockwere notmet at December31, 2021 and2020.
Shares ofClass B C commonstock arenot includedin the basicEPS computationas these sharesdo not haveparticipationrights.
Shares ofClass C commonstock arenot includedin the computationof dilutedClass A EPSas the conditionsfor conversionto ClassA
common stock participating were notmet at December31, 2021and convertible into2020.
The tablebelow reconcilesthe numeratorsand denominatorsof the basicand dilutedEPS.
(in thousands, except per-share information)
2021
2020
Basic and diluted EPS per Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. Following the provisions of FASB ASC 260, the Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversionshare:
Income (loss) attributable to Class A common stock were not met at December 31, 2017shares:
Basic and 2016.diluted
$
$
(5,474)
Weighted average 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 shares:
Class A common stock were not metshares outstanding at December 31, 2017the balance sheet date
10,702
11,609
Effect of weighting
496
0
Weighted average shares-basic and 2016.diluted
11,198
Income (loss) per share computations include these unvested incentive plan shares if there is income available to Class A common stock, as they have dividend participation rights. The stock incentive plan shares have no contractual obligation to share share:
Basic and diluted
$
0.02
$
(0.47)
(in losses. Since there is no such obligation, the incentive plan shares would not be included in the basicthousands, except per-share information)
2021
2020
Basic and diluted EPS computations when no income is availableper Class B common share:
Income (loss) attributable to Class AB common stock even though they are considered participating securities.shares:
$
1
$
(15)
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
Effect of weighting
0
| (in thousands, except per-share information) | ||||||||
| 2017 | 2016 | |||||||
| Basic and diluted EPS per Class A common share: | ||||||||
| (Loss) income attributable to Class A common shares: | ||||||||
| Basic and diluted | $ | (16,441 | ) | $ | 3,378 | |||
| Weighted average common shares: | ||||||||
| Class A common shares outstanding at the balance sheet date | 12,661 | 12,632 | ||||||
| Unvested dividend-eligible share based compensation | ||||||||
| outstanding at the balance sheet date | - | 70 | ||||||
| Effect of weighting | (28 | ) | (4 | ) | ||||
| Weighted average shares-basic and diluted | 12,633 | 12,698 | ||||||
| (Loss) income per Class A common share: | ||||||||
| Basic and diluted | $ | (1.30 | ) | $ | 0.27 | |||
0
Weighted average shares-basic and diluted
32
32
Income (loss) per Class B common share:
Basic and diluted
$
0.02
$
(0.47)
| (in thousands, except per-share information) | ||||||||
| 2017 | 2016 | |||||||
| Basic and diluted EPS per Class B common share: | ||||||||
| (Loss) income attributable to Class B common shares: | ||||||||
| Basic and diluted | $ | (42 | ) | $ | 8 | |||
| Weighted average common shares: | ||||||||
| Class B common shares outstanding at the balance sheet date | 32 | 32 | ||||||
| Effect of weighting | - | - | ||||||
| Weighted average shares-basic and diluted | 32 | 32 | ||||||
| (Loss) income per Class B common share: | ||||||||
| Basic and diluted | $ | (1.30 | ) | $ | 0.27 | |||
NOTE 17. 14.FAIR VALUE
- 86 -
Fair value to measure assets and liabilities and defines fair value asis the pricethat wouldbe receivedto sell anasset orpaid to transfera liability (an(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). Afair valuemeasure should
reflect theassumptionsthat marketparticipantswould usein pricingthe assetor liability, includingthe assumptionsabout therisk inherent
in a particularvaluationtechnique,the effectof a restrictionon the saleor use ofan asset andthe risk ofnon-performance.Required
disclosuresinclude stratificationof balancesheet amountsmeasuredat fair valuebased on inputsthe Companyuses to derivefair value
measurements.These stratificationsare:
●
Level 2 valuations,where thevaluationis based onquoted marketprices forsimilar instrumentstraded inactive markets,quoted
prices foridenticalor similarinstrumentsin marketsthat arenot activeand model-basedvaluationtechniquesfor whichall
significantassumptionsare observablein the market,and
●
Level 3 valuations,where thevaluationis generatedfrom model-basedtechniquesthat usesignificantassumptionsnot
observablein the market,but observablebased onCompany-specificdata. Theseunobservableassumptionsreflect the
Company’s ownestimatesfor assumptionsthat marketparticipantswould usein pricingthe assetor liability. Valuation
techniquestypicallyinclude optionpricing models,discountedcash flowmodels andsimilar techniques,but may alsoincludethe
use of marketprices ofassets orliabilitiesthat arenot directlycomparableto the subjectasset orliability.
MBS, Orchidcommon stock,retainedinterestsand TBAsecuritieswere allrecordedat fair valueon a recurringbasis during2021 and
2020. Whendeterminingfair valuemeasurements,the Companyconsidersthe principalor mostadvantageousmarket inwhich itwould
transactand considersassumptionsthat marketparticipantswould usewhen pricingthe asset.When possible,the Companylooks to
active andobservablemarkets toprice identicalassets.When identicalassets arenot tradedin activemarkets, theCompany looksto
market observabledata forsimilar assets.Fair valuemeasurementsfor the retainedinterestsare generatedby a modelthat requires
managementto make asignificantnumber ofassumptions,and thismodel resultedin a valueof zero atboth December31, 2021 and
2020.
The Company'sMBS and TBAsecuritiesare valuedusing Level2 valuations,and such valuationscurrentlyare determinedby the
Company basedon independentpricing sourcesand/or third-partythirdparty brokerquotes, whenavailable.Because theprice estimatesmay vary,
the Companymust makecertain judgmentsand assumptionsabout theappropriateprice touse to calculatethe fairvalues. Alternatively,TheCompany
and the Company could opt independentpricing sourcesuse variousvaluationtechniquesto have determinethe priceof the Company’ssecurities.These
techniquesinclude observingthe mostrecent marketfor likeor identicalassets (includingsecuritycoupon, maturity,yield, andprepayment
speeds), spreadpricing techniquesto determinemarket creditspreads (optionadjusted spread,zero volatilityspread, spreadto the U.S.
Treasury curveor spreadto a benchmarksuch as aTBA security),and modeldriven approaches(the discountedcash flowmethod, Black
Scholes andSABR modelswhich relyupon observablemarket ratessuch as theterm structureof interestrates andthe volatility).The
appropriatespread pricingmethod usedis based onmarket convention.The pricingsource determinesthe spreadof recentlyobserved
trade activityor observablemarkets forassets similarto thosebeing priced.The spreadis then adjustedbased on variancesin certain
characteristicsbetween themarket observationand the assetbeing priced.Those characteristicsinclude: typeof asset,the expectedlife
of the asset,the stabilityand predictabilityof the expectedfuture cashflows ofthe asset,whetherthe couponof the assetis fixedor
adjustable,the guarantorof the securityif applicable,the coupon,the maturity, theissuer, size ofthe underlyingloans, yearin whichthe
underlyingloans wereoriginated,loan to valueratio, statein which theunderlyingloans reside,credit scoreof the underlyingborrowers
and othervariablesif appropriate.The fairvalue of allthesecurity isdeterminedby using theadjustedspread.
The Company’sfutures contractsare Level1 valuations,as they areexchange-tradedinstrumentsand quotedmarket pricesare
readily available.Futures contractsare settleddaily. The Company’sinterestrate swapsand interestrate swaptionsare Level 2
valuations.The fairvalue of its MBS positionsinterestrate swapsis determined by eitherusing a discountedcash flowapproachusing forwardmarket interestrates
and discountrates, whichare observableinputs. Thefair valueof interestrate swaptionsis determinedusing an independent third-party or could do so internally.optionpricing model.
The followingtable presentsMBS, Orchid common stock, retained interestsfinancialassets and futures contracts were all recorded liabilitiesmeasuredat fair valueon a recurring basis during 2017 and 2016. 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.
-87-
The following table presents financial assets and liabilities measured at fair value on a recurring basis as ofDecember31, 2021and
2020:
- 87 -
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
December 31, 2017 and 2016:2021
| (in thousands) | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Measurements | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| December 31, 2017 | ||||||||||||||||
| Mortgage-backed securities | $ | 209,692 | $ | - | $ | 209,692 | $ | - | ||||||||
| Orchid Island Capital, Inc. common stock | 14,106 | 14,106 | - | - | ||||||||||||
| Retained interests | 653 | - | - | 653 | ||||||||||||
| December 31, 2016 | ||||||||||||||||
| Mortgage-backed securities | $ | 130,302 | $ | - | $ | 130,302 | $ | - | ||||||||
| Orchid Island Capital, Inc. common stock | 15,108 | 15,108 | - | - | ||||||||||||
| Retained interests | 1,114 | - | - | 1,114 | ||||||||||||
Mortgage-backed securities
60,803
$
0
$
60,803
$
0
Orchid Island Capital, Inc. common stock
11,679
11,679
0
0
December 31, 2017 and 2016:2020
Mortgage-backed securities
| (in thousands) | ||||||||
| Retained Interests | ||||||||
| 2017 | 2016 | |||||||
| Balances, January 1 | $ | 1,114 | $ | 1,124 | ||||
| Gain included in earnings | 645 | 2,425 | ||||||
| Collections | (1,106 | ) | (2,435 | ) | ||||
| Balances, December 31 | $ | 653 | $ | 1,114 | ||||
$
65,178
$
0
$
65,178
$
0
Orchid Island Capital, Inc. common stock
13,548
13,548
0
0
During theyears endedDecember31, 2017 2021and 2016, 2020,there wereno transfersof financialassets orliabilitiesbetween levels1, 2 or 3.
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
The Company'sCompany’s operations are classified into two principal reportable segments; the assetmanagement segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided byBimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consistof 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, 20172021 and 2016,2020, were approximately $7.4 $
9.8
million and $5.5 $
6.8
million, respectively,
accounting for approximately 46%
70
% and 45%
55
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conductedby 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, 20172021 and 20162020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
9,788
$
0
$
0
$
0
$
9,788
Advisory services, other operating segments
(1)
147
0
0
(147)
0
Interest and dividend income
0
4,262
0
0
4,262
Interest expense
-
(116)
(997)
(2)
0
(1,113)
Net revenues
9,935
4,146
(997)
(147)
12,937
Other (expense) income
0
(4,898)
154
(3)
0
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
0
0
(8,285)
Intercompany expenses
(1)
0
(147)
0
147
0
Income (loss) before income taxes
$
4,259
$
(3,508)
$
(843)
$
0
$
(92)
Assets
$
1,901
$
111,022
$
9,162
$
| (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 |
122,085
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
6,795
$
0
$
0
$
0
$
6,795
- 88 -
Advisory services, other operating segments
(1)
152
0
0
(152)
0
Interest and dividend income
0
5,517
0
0
5,517
Interest expense
0
(1,074)
(1,151)
(2)
0
(2,225)
Net revenues
6,947
4,443
(1,151)
(152)
10,087
Other expense
0
(9,825)
(454)
(3)
0
(10,279)
Operating expenses
(4)
(3,653)
(3,014)
0
0
(6,667)
Intercompany expenses
(1)
0
(152)
0
152
0
Income (loss) before income taxes
$
3,294
$
(8,548)
$
(1,605)
$
0
$
(6,859)
Assets
$
1,469
$
113,764
$
13,468
$
-
$
128,701
(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportionalshare of total revenues.
NOTE 19.16. RELATED PARTY TRANSACTIONS
Other Relationships with Orchid
At both December 31, 20172021 and 2016,2020, the Company owned 1,520,036 and 1,395,036
2,595,357
shares of Orchid common stock representing
approximately
1.5
% and
3.4
%, respectively, representing approximately 2.9% and 4.2% of Orchid'sOrchid’s outstanding common stock.stock, on such dates. During the years ended December
31, 20172021 and 2016,2020, the Company received dividends on this common stockinvestment of approximately $2.5 $
2.0
million and $2.3 million, respectively.$
1.8
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, receivesis eligible to receive compensationfrom 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, receivesiseligible to receive compensation from
Orchid, and owns shares of common stock of Orchid.Robert J. Dwyer and Frank E. Jaumot, our independent directors, eachown
shares of common stock of Orchid.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.
We had nodisagreementswith ourIndependentRegisteredPublic AccountingFirm on anymatter ofaccountingprinciplesor
practicesor financialstatementdisclosure.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
supervision and with the participation of the Company'sCompany’s management, including the Company'sCompany’s ChiefExecutive Officer ("(“the CEO"CEO”)
and Chief Financial Officer ("(“the CFO"CFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosurecontrols and
procedures, as defined in Rule 13a-15(e) under the Exchange Act.Act of 1934 (the “ExchangeAct”). Based on this evaluation, the CEO
and CFO concluded that the Company'sCompany’s disclosure controls and procedures, as designedand implemented, were effective as of the
evaluation date (1) in ensuring that information regarding the Companyand its subsidiaries is accumulated and communicated to our
management, including our CEO and CFO, by our employees, as appropriateto allow timely decisions regarding required disclosure
and (2) in providing reasonable assurance that information the Company must disclosein its periodic reports under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periodsprescribed by the SEC'sSEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
most recent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company'sCompany’s internal control over
financial reporting. In response to the COVID-19 pandemic, Company employeesbegan working from home on March 23, 2020 and
generally returned to the office in June 2021.Management took measures to ensure that the Company’s internal control over financial reporting.
reporting were unchanged during this period.
Management of the Company is responsible for establishing and maintainingadequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) underthe Securities Exchange Act as a process designed by, or
under the supervision of, the Company'sCompany’s principal executive and principal financial officersand effected by the Company'sCompany’s board of
directors, management and other personnel to provide reasonable assurance regardingthe reliability of financial reporting and the
preparation of consolidated financial statements for external purposes inaccordance with generally accepted accounting principles and
includes those policies and procedures that:
●
provide reasonable assurance that transactions are recorded as necessary topermit preparation of consolidated financial statements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordance with authorizations of managementand directors of the Company; and ● provide reasonable assurance regarding prevention or timely detection ofunauthorized 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 maynot prevent or detect misstatements.As a result,
even systems determined to be effective can provide only reasonable assurance regardingthe 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 thatthe degree of compliance with the policies or
procedures may deteriorate.
- 90 -
The Company'sCompany’s management assessed the effectiveness of the Company'sCompany’s internal control over financialreporting as of
December 31, 2017. 2021.In making this assessment, the Company'sCompany’s management used criteriaset 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, 2017,2021, the Company's Company’s
internal control over financial reporting was effective based on those criteria.
ITEM 9B.OTHER INFORMATION.
None.
ITEM 9C.DISCLOSUREREGARDINGFOREIGNJURISDICTIONSTHAT PREVENT INSPECTIONS.
Not applicable.
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below isincorporated herein by reference to the Company's
definitive Proxy Statement relating to the Company's 2018Company’s 2022 Annual Meeting of Stockholders,which the Company expects to file with the
U.S. Securities and Exchange Commission, pursuant to Regulation 14A, notlater than 120 days after December 31, 20172021 (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 RelatedStockholder Matters.
The information required by this Item 12 is incorporated herein by referenceto 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 referenceto the Proxy Statement.
ITEM 14.Principal Accountant Fees Andand Services.
The information required by this Item 14 is incorporated herein by referenceto the Proxy Statement.
- 92 -
PART IV
ITEM 15.Exhibits, Financial Statement Schedules.
a.Financial Statements. The consolidated financial statements of the Company, together with the report of Independent
reference.
The following information is filed as part of this Form 10-K:
Page | |
Report of Independent Registered Public Accounting Firm (BDO USA,LLP;
West Palm Beach, FL; PCAOB ID#243)
63
Consolidated Balance Sheets
65
Consolidated Statements of Operations
66
Consolidated Statements of Equity
67
Consolidated Statements of Cash Flows
68
Notes to Consolidated Financial Statements
69
b.Financial Statement Schedules.
Not applicable.
c.Exhibits.
Exhibit No
3.1
3.2 3.3 3.4 3.5 3.6 3.7 3.8 Amended and Restated Bylaws, incorporated by reference to Exhibit3.2 to the Company’s Current Report - 93 - 4.1 4.2 10.1 10.2 First Amendment to Management Agreementdated as of April 1,2014, incorporated by reference toExhibit 10.3 10.4 to Exhibit 10.1 tothe Company’s Current Reporton Form 8-K, datedNovember 17, 2021, filedwith the SEC 10.5 Investment Allocation Agreementamong the Company, Orchid IslandCapital, Inc. andBimini Advisors, LLC 10.6 .* 10.7 .* 21.1 ** 31.1 Certification ofthe PrincipalExecutive Officer,pursuant toRule 13a-14(a)or 15d-14(a)of theSecurities ** 31.2 ** 32.1 *** 32.2 *** 101.INS Instance Document**** 101.SCH Taxonomy Extension Schema Document**** 101.CAL Taxonomy Extension Calculation Linkbase Document**** 101.DEF Additional Taxonomy Extension Definition Linkbase Document**** 101.LAB Taxonomy Extension Label Linkbase Document**** 101.PRE Taxonomy Extension Presentation Linkbase Document**** 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) *Management compensatory plan or arrangement required to be filed by Item 601of Regulation S-K. **Filed herewith. ***Furnished herewith ****Submitted electronically herewith. ITEM 16.Form 10-K Summary. - 94 - The Company has elected not to provide summary information. | ||
Signatures
Pursuant to the requirementsof Section 13 or 15(d)of the Securities ExchangeAct 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 11, 2022
By:
/s/ Robert E. Cauley | ||||
Robert E. Cauley Chairman and Chief Executive Officer Date:March 11, 2022 By: /s/ G. Hunter Haas, IV G. Hunter Haas,IV President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of
the registrant and in the capacities indicated on March 9, 2018.
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