EDGAR 10-K Filing

Company CIK: 1275477
Filing Year: 2022
Filename: 1275477_10-K_2022_0001275477-22-000006.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital”
and, collectively with its subsidiaries, the “Company,”
“we”, “us” or “our”) is a specialty finance company that operates in two
business segments: investing in mortgage-backed securities
(“MBS”) and Orchid Island Capital, Inc. (“Orchid”) common stock in our own
portfolio, and serving as the external manager of Orchid
which also invests in MBS.
In both cases, the principal and interest payments of these MBS
are guaranteed by Fannie Mae, Freddie
Mac or the Government National Mortgage Association (“Ginnie Mae” and,
collectively with Fannie Mae and Freddie Mac, “GSEs”) and
are backed primarily by single-family residential mortgage loans. We refer to these types of
MBS as “Agency MBS.” The investment
strategy focuses on, and the portfolios consist of, two categories of Agency
MBS: (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 interest only securities (“IOs”), inverse interest only securities
(“IIOs”) and principal only securities (“POs”), among other
types of structured Agency MBS. The Company’s operations are classified into two principal reportable
segments: the asset
management segment and the investment portfolio segment.
The investment portfolio segment includes the investment activities conducted
at Bimini Capital’s wholly-owned subsidiary, Royal
Palm Capital, LLC (“Royal Palm”). The investment portfolio segment receives revenue
in the form of interest and dividend income on its
investments.
References to the general management of the Company’s portfolio of MBS refer
to the operations of 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 management
fees and expense reimbursements.
The
asset management segment includes these investment advisory services
provided 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’s business
activities and day-to-day operations.
Pursuant to the terms of the management agreement, Bimini Advisors
provides Orchid with its
management team, including its officers, along with appropriate support personnel.
Bimini Advisors is at all times subject to the
supervision and oversight of Orchid’s board of directors,
of which a majority of the members are independent, and is only
permitted to
perform such functions
delegated by Orchid’s Board.
Bimini Advisors receives a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Orchid’s equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Orchid’s equity that is greater than $250 million and less than or
equal to $500 million, and
●
One-twelfth of 1.00% of the Orchid’s equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred
on its behalf.
In addition, Bimini Advisors
allocates to Orchid its pro rata portion of certain overhead costs as set forth in the
management agreement.
Should Orchid terminate
the management agreement without cause, it shall pay to Bimini Advisors a termination
fee equal to three times the average annual
management fee, as defined in the management agreement, before or on the
last day of the initial term or automatic renewal term.
The Investment and Capital Allocation Strategy
Investment Strategy
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With respect to our own portfolio, the business objective is to provide attractive
risk-adjusted total returns to our investors over the long
term through a combination of capital appreciation and interest income. We intend to achieve
this objective by investing in and
strategically allocating capital between pass-through Agency MBS and structured Agency
MBS. We seek to generate income from (i)
the net interest margin on the leveraged pass-through Agency MBS portfolio
and the leveraged portion of the structured Agency MBS
portfolio, and (ii) the interest income we generate from the unleveraged portion
of the structured Agency MBS portfolio. We also seek to
minimize the volatility of both the net asset value of, and income from, the portfolio
through 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 through
repurchase agreements. However, we
generally do not employ leverage on the structured Agency MBS that have
no principal balance, such as IOs and IIOs, because those
securities contain structural leverage. We may pledge a portion of these assets to increase
the cash balance, but we do not intend to
invest the cash derived from pledging the assets.
The target asset categories and principal assets in which we intend to invest
are as follows:
Pass-through Agency MBS
We invest in pass-through securities, which are securities secured by residential real property
in 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, net
of fees paid to the loan servicer and the guarantor of the
securities. Pass-through certificates can be divided into various categories
based on the characteristics of the underlying mortgages,
such as the term or whether the interest rate is fixed or variable.
The payment of principal and interest on mortgage pass-through securities
issued by Ginnie Mae, but not the market value, is
guaranteed by the full faith and credit of the federal government. Payment of principal
and 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.
A key feature of most mortgage loans is the ability of the borrower to repay
principal earlier than scheduled. This is called a
prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, foreclosure or accelerated amortization
by
the borrower. Prepayments result in a return of principal to pass-through certificate holders. This may result
in a lower or higher rate of
return upon reinvestment of principal. This is generally referred to as prepayment
uncertainty. If a security purchased at a premium
prepays at a higher-than-expected rate, then the value of the premium would
be eroded at a faster-than-expected rate. Similarly, if a
discount mortgage prepays at a lower-than-expected rate, the amortization towards
par would be accumulated at a slower-than-
expected rate. The possibility of these undesirable effects is sometimes referred to as “prepayment
risk.”
In general, declining interest rates tend to increase prepayments, and
rising interest rates tend to slow prepayments. Like other fixed-
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 extend
the effective maturity of the security beyond
what was anticipated at the time of purchase. If interest rates rise, our holdings
of Agency MBS may experience reduced spreads over
our funding costs if the borrowers of the underlying mortgages pay off their mortgages
later than anticipated. This is generally referred
to as “extension” risk.
The mortgage loans underlying pass-through certificates can generally be classified
into the following categories:
- 3 -
●
Fixed-Rate Mortgages
.
Fixed-rate mortgages are those where the borrower pays an interest rate that
is constant throughout
the term of the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also
referred to as “final maturity dates”) are also common. Because the interest rate
on the loan never changes, even when
market interest rates change, there can be a divergence between the interest rate on
the loan and current market interest
rates over time. This in turn can make fixed-rate mortgages price-sensitive to market
fluctuations in interest rates. In general,
the longer the remaining term on the mortgage loan, the greater the price
sensitivity 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 varies
over the term of the loan. The interest
rate usually resets based on market interest rates, although the adjustment of
such 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 market
conditions, ARMs tend to have interest
rates that do not deviate from current market rates by a large amount. This in turn
can 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, often
three, 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 have
price sensitivity to interest rates similar to
that of a fixed-rate mortgage during the period when the interest rate is fixed
and 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 short
initial 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 most
cases, on a monthly basis. CMOs may be collateralized
by whole mortgage loans, but are more typically collateralized by pools of mortgage
pass-through securities issued directly by or under
the auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structured
into 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 only
after 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 some
limitations. 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. The
payment of principal and interest, as
appropriate, on structured Agency MBS issued by Ginnie Mae, but not the market
value, is guaranteed by the full faith and credit of the
federal government. Payment of principal and interest, as appropriate, on structured
Agency MBS issued by Fannie Mae and Freddie
Mac, but not the market value, is guaranteed by the respective agency
issuing the security. The types of structured Agency MBS in
which we invest are described below.
●
IOs
. 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 depends
primarily on two factors, which are
prepayments and interest rates. Prepayments on the underlying pool of mortgages
reduce the stream of interest payments
going forward, hence IOs are highly sensitive to prepayment rates. IOs are
also sensitive to changes in interest 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 amount of future
interest payments.
●
IIOs
. IIOs represent the stream of interest payments on a pool of mortgages that
underlie MBS, either fixed-rate mortgages or
hybrid ARMs. Holders of IIOs have no claim to any principal payments. The
value of IIOs depends primarily on three factors,
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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 to
prepayment rates. The coupon on IIOs is
derived from both the coupon interest rate on the underlying pool of mortgages and
30-day LIBOR. IIOs are typically created
in conjunction with a floating rate CMO that has a principal balance and which is
entitled to receive all of the principal
payments on the underlying pool of mortgages. The coupon on the floating
rate CMO is also based on 30-day LIBOR.
Typically,
the coupon on the floating rate CMO and the IIO, when combined, equal
the coupon on the pool of underlying
mortgages. The coupon on the pool of underlying mortgages typically represents
a 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 LIBOR
falls, 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 in
interest 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 amount
of 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 time
is known, equaling the principal balance of the
underlying pool of mortgages. The timing of the receipt of the principal payments
is 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 to
the rate at which the mortgages in the pool are
prepaid. POs are also sensitive to changes in interest rates. An increase in
interest 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 principal
payments. 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 to 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 subject to certain limitations we
are not prohibited from doing so in the future.
Our investment strategy consists of the following components:
●
investing in pass-through Agency MBS and certain structured Agency MBS on a
leveraged basis to increase returns on the
capital allocated to this portfolio;
●
investing in certain structured Agency MBS, such as IOs and IIOs, generally on an
unleveraged basis in order to (i) increase
returns due to the structural leverage contained in such securities, (ii) enhance liquidity
due to the fact that these securities will
be unencumbered or, when encumbered, the cash from such borrowings may be retained and (iii) diversify portfolio
interest
rate risk due to the different interest rate sensitivity these securities have compared to pass-through
Agency 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 regulation
as 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 quantitative
significance to
any of these factors, and the weight we give to these factors depends on
market conditions and economic trends.
- 5 -
Over time, we will modify our investment strategy as market conditions
change to seek to maximize the returns from our investment
portfolio.
We believe that this strategy will enable us to provide attractive long-term returns
to our stockholders.
Capital Allocation Strategy
The percentage of capital invested in each of our asset categories will
vary and will be managed in an effort to maintain the level of
income generated by the combined portfolios, the stability of that income
stream 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 appreciation
in 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 same
factors that affect our MBS investments,
We allocate our capital to assist our interest rate risk management efforts. The unleveraged portfolio does not
require 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 typically
decrease because borrowers are not
able to refinance their current mortgage loans with new mortgage loans at lower interest
rates. 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 be
higher 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 may
be able to offset the likely decline in the value of
our pass-through Agency MBS, which are negatively impacted by rising interest
rates.
Financing Strategy
We borrow against our pass-through Agency MBS and certain of our structured Agency
MBS using short-term repurchase agreements.
A repurchase (or "repo") agreement transaction acts as a financing arrangement under
which we effectively pledge our investment
securities as collateral to secure a loan. Our borrowings through repurchase transactions
are generally short-term and have maturities
ranging from one day to one year but may have maturities up to five or more
years. Our financing rates are typically impacted by the
U.S. Federal Funds rate and other short-term benchmark rates and liquidity
in the Agency MBS repo and other short-term funding
markets.
The terms of our master repurchase agreements generally conform to
the 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. In
addition, each lender may require that we include
supplemental terms and conditions to the standard master repurchase agreement
to address such matters as additional margin
maintenance requirements, cross default and other provisions. The specific provisions
may 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 issuances
of 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 be
less than 10 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 portfolio
will be leveraged generally through
repurchase agreement funding. The structured Agency MBS portfolio generally
will not be leveraged. The leverage ratio is calculated
by dividing our total liabilities by total 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 amount
of haircuts required by our lenders on our
borrowings. When the capital allocation to the pass-through Agency MBS
portfolio is high, we expect that the leverage ratio will be high
- 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 because our lenders will lend less against the
value of the capital
deployed to the pass-through Agency MBS portfolio. The allocation of capital
between the two portfolios will be a function of several
factors:
●
The relative durations of the respective portfolios - We generally seek to have a combined
hedged duration at or near zero. If
our pass-through securities have a longer duration, we will allocate more
capital to the structured security portfolio or hedges
to achieve a combined duration close to zero.
●
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 attractive
securities, subject
to the caveat that its combined duration remains at or near zero and subject to
maintaining our qualification for exemption
under the Investment Company Act.
●
Liquidity - We seek to maintain adequate cash and unencumbered securities relative
to our repurchase agreement
borrowings well in excess of anticipated price or prepayment related margin
calls 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-through
Agency
MBS portfolio. Our pass-through Agency MBS portfolio likely will be
our only source of price or prepayment related margin
calls because we generally will not apply leverage to our structured Agency
MBS portfolio. From time to time we may pledge a
portion of our structured securities and retain the cash derived so it can be used
to enhance our liquidity.
Risk Management
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 originator
and other types of concentration risks.
Interest Rate Risk Management
We believe that the risk of adverse interest rate movements represents the most significant
risk to the value of our portfolio. This risk
arises because (i) the interest rate indices used to calculate the interest rates
on the mortgages underlying our assets may be different
from the interest rate indices used to calculate the interest rates on the related
borrowings, and (ii) interest rate movements affecting
our borrowings may not be reasonably correlated with interest rate movements
affecting our assets. We attempt to mitigate our interest
rate risk by using the techniques described below:
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 ARMs
and the related borrowings and (ii) the interest rate
adjustment periods for our Agency MBS backed by ARMs and the interest
rate adjustment periods for our related borrowings. As our
borrowings mature or are renewed, we may adjust the index used to calculate
interest 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 increases
to 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 economically convert our floating-rate borrowings into fixed-rate
borrowings.
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, we
may employ the same hedging strategy that we employ for our
Agency MBS backed by fixed-rate mortgages. Once our Agency MBS backed
by hybrid ARMs convert to floating rate securities, we
may employ the same hedging strategy as we employ for our Agency MBS
backed by ARMs.
- 7 -
Derivative Instruments.
We may enter into derivative instruments to economically hedge against the possibility
that rising rates may
adversely impact the cost of our repurchase agreement liabilities.
The principal
instruments
that the
Company has
used to date
are
Eurodollar,
Fed Funds
and Treasury
Note (“T-Note”)
futures contracts
and options
to enter
into interest
rate swaps
(“interest
rate
swaptions”)
and “to-be-announced”
(“TBA”)
securities
transactions,
but we may
enter into
other derivatives
in the future.
A futures
contract
is a legally
binding agreement
to buy or
sell a financial
instrument
in a designated
future month
at a price
agreed upon
at
the initiation
of the contract
by the buyer
and seller.
A futures
contract
differs from
an option
in that an
option gives
one of the
counterparties
a right,
but not the
obligation,
to buy or
sell, while
a futures
contract
represents
an obligation
of both counterparties
to buy or
sell a financial
instrument
at a specified
price.
Interest rate swaptions provide us the option to enter into an interest rate swap agreement
for a predetermined notional amount, stated
term and pay and receive interest rates in the future. We may enter into swaption agreements
that provide us the option to enter into a
pay fixed rate interest rate swap ("payer swaption"),
or swaption agreements that provide us the option to enter into a receive
fixed
interest rate swap ("receiver swaptions").
Additionally, our structured Agency MBS generally exhibit sensitivities to movements in interest rates different than our pass-through
Agency MBS. To the extent they do so, our structured Agency MBS may protect us against declines in the market value of our
combined portfolio that result from adverse interest rate movements, although we
cannot assure you that this will be the case.
We account for TBA securities as derivative instruments. Gains and losses associated
with TBA securities transactions are reported in
gain (loss) on derivative instruments in the accompanying consolidated statements
of operations.
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 the
coupon rate of
a mortgage, mortgage prepayments are likely to decrease.
When prepayment rates increase, we may not be able to reinvest the money received
from prepayments at yields comparable to those
of the securities prepaid. Additionally, some of our structured Agency MBS, such as IOs and IIOs, may be negatively affected by an
increase in prepayment rates because their value is wholly contingent
on the underlying mortgage loans having an outstanding
principal balance.
A decrease in prepayment rates may also have an adverse effect on our portfolio. For example,
if we invest in POs, the purchase price
of such securities will be based, in part, on an assumed level of prepayments on
the underlying mortgage loan. Because the returns on
POs decrease the longer it takes the principal payments on the underlying
loans to be paid, a decrease in prepayment rates could
decrease our returns on these securities.
Prepayment risk also affects our hedging activities
. When an Agency MBS backed by a fixed-rate mortgage or hybrid ARM
is acquired
with borrowings, we may cap or fix our borrowing costs for a period close
to 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 the
related 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 are
less likely to be prepaid. For example, we invest in Agency
MBS backed by mortgages (i) with loan balances low enough such that a
borrower would likely have little incentive to refinance, (ii)
- 8 -
extended to borrowers with credit histories weak enough to not be eligible to
refinance their mortgage loans, (iii) that are newly
originated fixed-rate or hybrid ARMs or (iv) that have interest rates low enough
such that a borrower would likely have little incentive to
refinance. To protect against decreases in prepayment rates, we may also invest in Agency MBS backed by mortgages with
characteristics opposite to those described above, which would typically be more
likely to be refinanced. We may also invest in certain
types of structured Agency MBS as a means of mitigating our portfolio-wide prepayment risks.
For example, certain tranches of CMOs
are less sensitive to increases in prepayment rates, and we may invest
in those tranches as a means of hedging against increases in
prepayment rates.
Liquidity Management Strategy
Because of our use of leverage, we manage liquidity to meet our lenders’ margin
calls by maintaining cash balances or unencumbered
assets well in excess of anticipated margin calls; and making margin calls
on 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:
●
Deploying capital from our leveraged Agency MBS portfolio to our unleveraged
Agency MBS portfolio;
●
Investing in Agency MBS backed by mortgages that we believe are less likely to be
prepaid to decrease the risk of excessive
margin calls when monthly prepayments are announced. Prepayments are
declared, and the market value of the related
security declines, before the receipt of the related cash flows. Prepayment declarations
give rise to a temporary collateral
deficiency and generally result in margin calls by lenders;
●
Investing in REIT common stock; and
●
Reducing our overall amount of leverage.
To the
extent we are unable to adequately manage our interest rate exposure and
are subjected to substantial margin calls, we may be
forced to sell assets at an inopportune time which in turn could impair our liquidity
and reduce our borrowing capacity and book value.
Investment Company Act Exemption
We operate our business so that we are exempt from registration under the Investment Company
Act. We rely on the exemption
provided by Section 3(c)(5)(C) of the Investment Company Act, which applies
to companies in the business of purchasing or otherwise
acquiring mortgages and other liens on, and interests in, real estate. In order to
rely on the exemption provided by Section 3(c)(5)(C),
we must maintain at least 55% of our assets in qualifying real estate assets. For
the purposes of this test, structured Agency MBS are
non-qualifying real estate assets. We monitor our portfolio periodically and prior to each
investment to confirm that we continue to
qualify for the exemption. To qualify for the exemption, we make investments so that at least 55% of the assets we own consist of
qualifying mortgages and other liens on and interests in real estate, which we
refer to as qualifying real estate assets, and so that at
least 80% of the assets we own consist of real estate-related assets, including
our qualifying real estate assets.
We treat whole-pool pass-through Agency MBS as qualifying real estate assets based on
no-action letters issued by the staff of the
SEC. In August 2011, the SEC, through a concept release, requested comments on interpretations of Section 3(c)(5)(C). To the extent
that the SEC or its staff publishes new or different guidance with respect to these matters,
we may fail to qualify for this exemption. We
manage our pass-through Agency MBS portfolio such that we have sufficient whole-pool pass-through
Agency MBS to ensure we
maintain our exemption from registration under the Investment Company Act. At
present, we generally do not expect that our
investments in structured Agency MBS will constitute qualifying real estate
assets, but will constitute real estate-related assets for
purposes of the Investment Company Act.
Employees and Human Capital Resources
- 9 -
As of December 31, 2021, we had 8 full-time 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, dental
and 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 at
favorable spreads over our borrowing costs. Our net
income also depends on our ability to execute the same investment
strategy for the Orchid portfolio, for which we receive management
fees and expense reimbursement payments. When we invest in Agency MBS
and other investment assets, we compete with a variety
of institutional investors, including mortgage REITs, insurance companies, mutual funds, pension funds, investment banking firms,
banks and other financial institutions that invest in the same types of assets, the Federal
Reserve Bank and other governmental entities
or government sponsored entities. Many of these investors have greater financial resources
and access to lower costs of capital than
we do. The existence of these competitive entities, as well as the possibility of additional
entities forming in the future, may increase the
competition for the acquisition of mortgage related securities, resulting in higher
prices and lower yields on assets.
Available Information
Our investor relations website is
https://ir.biminicapital.com
.
We make available on the website under "Financials/SEC filings," free of
charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our
current reports on Form 8-K and any other reports
(including any amendments to such reports) as soon as reasonably practicable
after we electronically file or furnish such materials to
the SEC. Information on our website, however, is not part of this Report.
In addition, all of our filed reports can be obtained at the
SEC’s website at http://www.sec.gov.
- 10 -

---

ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common
stock speculative or risky. This summary does
not address all of the risks that we face. Additional discussion of the risks summarized
in this risk factor summary, and other risks that
we face, can be found below under the heading “Risk Factors” and should
be carefully considered, together with other information in
this Report and our other filings with the SEC, before making an investment
decision regarding our common stock.
●
Increases in interest rates may negatively affect the value of our investments and increase
the cost of our borrowings, which could
result in reduced earnings or losses.
●
An increase in interest rates may also cause a decrease in the volume of
newly issued, or investor demand for, Agency MBS,
which could materially adversely affect our ability to acquire assets that satisfy our investment
objectives and our business,
financial condition and results of operations.
●
Interest rate mismatches between our Agency MBS and our borrowings may
reduce our net interest margin during periods of
changing interest rates, which could materially adversely affect our business, financial condition
and results of operations.
●
Although structured Agency MBS are generally subject to the same risks as
our pass-through Agency MBS, certain types of risks
may be enhanced depending on the type of structured Agency MBS in which
we invest.
●
Differences in the stated maturity of our fixed rate assets, or in the timing of interest
rate adjustments on our adjustable-rate
assets, and our borrowings may adversely affect our profitability.
●
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 return
associated with Agency MBS
●
Changes in the levels of prepayments on the mortgages underlying our Agency MBS
might decrease net interest income or result
in a net loss, which could materially adversely affect our business, financial condition and
results of operations.
●
Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS may reduce
our net interest margin during periods of
rising interest rates, which could materially adversely affect our business, financial condition
and results of operations.
●
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.
●
Adverse market developments could cause our lenders to require us to pledge
additional assets as collateral. If our assets were
insufficient to meet these collateral requirements, we might be compelled to liquidate particular
assets at inopportune times and at
unfavorable prices, which could materially adversely affect our business, financial condition
and results of operations and our
ability to pay distributions to our stockholders.
●
Hedging against interest rate exposure may not completely insulate us from
interest rate risk and could materially adversely affect
our business, financial condition and results of operations.
●
Our use of leverage could materially adversely affect our business, financial condition
and results of operations.
●
We rely on analytical models and other data to analyze potential asset acquisition and disposition
opportunities and to manage our
portfolio. Such models and other data may be incorrect, misleading or incomplete,
which could cause us to purchase assets that
do not meet our expectations or to make asset management decisions that are not
in line with our strategy.
●
Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods
of time
and may differ from the values that would have been used if a ready market for these assets
existed. As a result, the values of
some of our assets are uncertain.
●
If our lenders default on their obligations to resell the Agency MBS back to us at the
end of the repurchase transaction term, or if
the value of the Agency MBS has declined by the end of the repurchase transaction
term or if we default on our obligations under
the repurchase transaction, we will lose money on these transactions,
which, in turn, may materially adversely affect our business,
financial condition and results of operations.
●
We have issued long-term debt to fund our operations which can increase the volatility of
our earnings and stockholders’ equity.
- 11 -
●
Clearing facilities or exchanges upon which some of our hedging instruments
are traded may increase margin requirements on our
hedging instruments in the event of adverse economic developments.
●
We depend primarily on two individuals to operate our business, and the loss of one
or both of such persons could materially
adversely affect our business, financial condition and results of operations.
●
We 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 would
negatively affect the value of shares of our
common stock.
●
Failure to obtain and maintain an exemption from being regulated as a commodity
pool operator could subject us to additional
regulation and compliance requirements and may result in fines and other penalties
which could materially adversely affect our
business and financial condition.
●
Our ownership limitations and certain other provisions of applicable law
and 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 significantly
reduce our revenues.
●
We cannot predict the effect that government policies, laws and plans adopted in response
to 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 common
stock 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 Report, including our annual
consolidated financial statements and related notes thereto, before making
an investment decision regarding our common stock. Our
business, financial condition or results of operations could be harmed by any
of these risks. Similarly, these risks could cause the
market price of our common stock to decline and you might lose all or part
of your investment. Our forward-looking statements in this
Report are subject to the following risks and uncertainties. Our actual results
could differ materially from those anticipated by our
forward-looking statements as a result of the risk factors below.
Risks Related to Our Business
Increases in interest rates may negatively affect the value of our investments and increase
the cost of our borrowings, which could
result in reduced earnings or losses.
Under normal 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. While
Fannie Mae, Freddie Mac or Ginnie Mae guarantee
the principal and interest payments related to the Agency MBS we own,
this guarantee does not protect us from declines in market
value caused by changes in interest rates. Declines in the market value of our investments
may ultimately result in losses to us, which
may reduce earnings and cash available to fund our operations.
Significant increases in both long-term and short-term interest rates pose a substantial
risk associated with our investment in
Agency MBS. If long-term rates were to increase significantly, the market value of our Agency MBS would decline, and the
duration
and weighted average life of the investments would increase. We could realize a loss
if the securities were sold. At the same time, an
increase in short-term interest rates would increase the amount of interest
owed on our repurchase agreements used to finance the
purchase of Agency MBS, which would decrease cash. Using this business model,
we are particularly susceptible to the effects of an
inverted yield curve, where short-term rates are higher than long-term rates. Although
rare in a historical context, the U.S. and many
countries in Europe have experienced inverted yield curves. Given the volatile nature of
the U.S. economy and potential future
increases in short-term interest rates, there can be no guarantee that
the yield curve will not become and/or remain inverted. If this
occurs, it could result in a decline in the value of our Agency MBS, our business, financial
position and results of operations.
- 12 -
An increase in interest rates may also cause a decrease in the volume of
newly issued, or investor demand for, Agency MBS,
which could materially adversely affect our ability to acquire assets that satisfy our investment
objectives and our business,
financial condition and results of operations.
Rising interest rates generally reduce the demand for consumer credit, including
mortgage loans, due to the higher cost of
borrowing. A reduction in the volume of mortgage loans may affect the volume
of Agency MBS available to us, which could affect our
ability to acquire assets that satisfy our investment objectives. Rising interest rates
may also cause Agency MBS that were issued prior
to an interest rate increase to provide yields that exceed prevailing market interest
rates. If rising interest rates cause us to be unable to
acquire a sufficient volume of Agency MBS or Agency MBS with a yield that exceeds our borrowing
costs, our ability to satisfy our
investment objectives and to generate income, our business, financial
condition and results of operations.
Interest rate mismatches between our Agency MBS and our borrowings may
reduce our net interest margin during periods of
changing interest rates, which could materially adversely affect our business, financial condition
and results of operations.
Our portfolio includes Agency MBS backed by ARMs, hybrid Arms and fixed-rate mortgages,
and the mix of these securities in the
portfolio may be increased or decreased over time. Additionally, the interest rates on ARMs and hybrid ARMs may vary
over time
based on changes in a short-term interest rate index, of which there are many.
We finance our acquisitions of pass-through Agency MBS with short-term financing. During
periods of rising short-term interest
rates, the income we earn on these securities will not change (with respect to Agency
MBS backed by fixed-rate mortgage loans) or will
not increase at the same rate (with respect to Agency MBS backed by ARMs
and hybrid ARMs) as our related financing costs, which
may reduce our net interest margin or result in losses.
We invest in structured Agency MBS, including IOs, IIOs and POs. Although structured Agency
MBS are generally subject to the
same risks as our pass-through Agency MBS, certain types of risks may be
enhanced depending on the type of structured Agency
MBS in which we invest.
The structured Agency MBS in which we invest are securitizations (i) issued
by Fannie Mae, Freddie Mac or Ginnie Mae, (ii)
collateralized by Agency MBS and (iii) divided into various tranches that have different
characteristics (such as different maturities or
different coupon payments).
These securities may carry greater risk than an investment in pass-through Agency
MBS. For example,
certain types of structured Agency MBS, such as IOs, IIOs and POs, are more
sensitive to prepayment risks than pass-through Agency
MBS. If we were to invest in structured Agency MBS that were more sensitive to prepayment
risks relative to other types of structured
Agency MBS or pass-through Agency MBS, we may increase our portfolio-wide prepayment
risk.
Differences in the stated maturity of our fixed rate assets, or in the timing of interest rate adjustments
on our adjustable-rate
assets, and our borrowings may adversely affect our profitability.
We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with
long-term maturities. In
addition, we may have adjustable rate assets with interest rates that vary
over time based upon changes in an objective index, such as
LIBOR, the U.S. Treasury rate or the Secured Overnight Financing Rate (“SOFR”).
These indices generally reflect short-term interest
rates but these assets may not reset in a manner that matches our borrowings.
The relationship between short-term and longer-term interest rates is often
referred to as the "yield curve." Ordinarily, short-term
interest rates are lower than longer-term interest rates. If short-term interest rates rise
disproportionately relative to longer-term interest
rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidly
than the interest income earned on our assets.
Because our investments generally bear interest at longer-term rates than we pay on
our borrowings, a flattening of the yield curve
would tend to decrease our net interest income and the market value
of our investment portfolio. Additionally, to the extent cash flows
- 13 -
from investments that return scheduled and unscheduled principal are reinvested,
the spread between the yields on the new
investments and available borrowing rates may decline, which would likely decrease
our net income. It is also possible that short-term
interest rates may exceed longer-term interest rates (a yield curve "inversion"),
in which event, our borrowing costs may exceed our
interest income and result in operating losses.
The implementation of the Single Security Initiative may adversely affect our results and financial
condition.
The Single Security Initiative is a joint initiative of Fannie Mae and Freddie
Mac (the “Enterprises”), under the direction of the
FHFA, the Enterprises’ regulator and conservator, to develop a common, single mortgage-backed security issued by the Enterprises.
On June 3, 2019, with the implementation of Release 2 of the common
securitization platform, Freddie Mac and Fannie Mae
commenced use of a common, single mortgage-backed security,
known as the Uniform Mortgage-Backed Security (“UMBS”).
Fannie
Mae pools are now eligible for conversion into UMBS pools and Freddie Mac
pools can be exchanged for UMBS pools. The conversion
is not mandatory. UMBS is intended to enhance liquidity in the TBA market as the two GSEs’ floats are combined, eliminating or
reducing the market pricing subsidy that Freddie Mac currently provides
to lenders to pool their loans with Freddie Mac instead of
Fannie Mae, and pave the way for future GSE reform by allowing new entrants
to enter the MBS guarantee market.
The current float of Gold Participation Certificates (“Gold PCs”) issued by
Freddie Mac is materially smaller than the float of
Fannie Mae securities.
To the extent Gold PCs are converted into UMBS, the float will contract further. A further decline could impact
the liquidity of Gold PCs not converted into UMBS.
Secondly, the TBA deliverable has appeared to deteriorate as the Fannie Mae and
Freddie Mac pools with the worst prepayment characteristics are delivered into
new TBA securities, concentrating the poorest pools
into the TBA deliverable, which has negatively impacted their performance.
To the extent investors recognize the relative performance
of Fannie Mae or Freddie Mac pools over the other, they may stipulate that they only wish to be delivered TBA securities
with pools
from the better performing GSE.
By bifurcating the TBA deliverable, liquidity in the TBA market could be negatively
impacted.
Our liquidity is typically reduced each month when we receive margin calls related
to factor changes, and typically increased
each month when we receive payment of principal and interest on Fannie
Mae and Freddie Mac securities. Legacy Freddie Mac
securities pay principal and interest earlier in the month than Fannie Mae and UMBS,
meaning that legacy Freddie Mac positions
reduce the period of time between meeting factor-related margin calls and receiving
principal and interest. The percentage of legacy
Freddie Mac positions in the market and in our portfolio will likely decrease over
time as those securities are converted to UMBS or
paid off.
Purchases and sales of Agency MBS by the Fed may adversely affect the price and return
associated with Agency MBS.
The Fed owned approximately $2.6 trillion of Agency MBS as of December 31,
2021. Although the Fed’s Agency RMBS holdings
nearly doubled as a result of its COVID-19 policy response, growing from $1.4 trillion
in March of 2020 to $2.6 trillion in December of
2021, the minutes of the FOMC meeting in December of 2021 indicate that the Fed likely
intends to begin reducing its Agency RMBS
holdings shortly after it begins to raise the federal funds rate.
On January 26, 2022, the FOMC reaffirmed its intention to phase out its
net asset purchases by early March of 2022 and indicated that it would soon be
appropriate to begin raising the federal funds rate.
While it is very difficult to predict the impact of the Fed portfolio runoff on the prices and liquidity
of Agency MBS, returns on Agency
MBS may be adversely affected.
Increased levels of prepayments on the mortgages underlying our Agency
MBS might decrease net interest income or result in a
net loss, which could materially adversely affect our business, financial condition and results
of operations.
In the case of residential mortgages, there are seldom any restrictions on borrowers’
ability to prepay their loans.
Prepayment
rates generally increase when interest rates fall and decrease when interest rates
rise. Prepayment rates also may be affected by other
factors, including, without limitation, conditions in the housing and financial markets,
governmental action, general economic conditions
and the relative interest rates on ARMs, hybrid ARMs and fixed-rate mortgage loans. With
respect to pass-through Agency MBS,
- 14 -
faster-than-expected prepayments could also materially adversely affect our business,
financial condition and results of operations in
various ways, including, if we are unable to quickly acquire new Agency
MBS that generate comparable returns to replace the prepaid
Agency MBS.
When we acquire structured Agency MBS, we anticipate that the underlying
mortgages will prepay at a projected rate, generating
an expected yield. When the prepayment rates on the mortgages underlying our
structured Agency MBS are higher than expected, our
returns on those securities may be materially adversely affected. For example, the
value of our IOs and IIOs are extremely sensitive to
prepayments because holders of these securities do not have the right to receive
any principal payments on the underlying mortgages.
Therefore, if the mortgage loans underlying our IOs and IIOs are prepaid, such
securities would cease to have any value, which, in
turn, could materially adversely affect our business, financial condition and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk
against other risks and the potential returns of each
investment. No strategy can completely insulate us from prepayment or other
such risks.
A decrease in prepayment rates on the mortgages underlying our Agency
MBS might decrease net interest income or result in a
net loss, which could materially adversely affect our business, financial condition and results
of operations.
Certain of our structured Agency MBS may be adversely affected by a decrease in
prepayment rates. For example, because POs
are similar to zero-coupon bonds, our expected returns on such securities will
be contingent on our receiving the principal payments of
the underlying mortgage loans at expected intervals that assume a certain
prepayment rate. If prepayment rates are lower than
expected, we will not receive principal payments as quickly as we anticipated and,
therefore, our expected returns on these securities
will be adversely affected, which, in turn, could materially adversely affect our business, financial condition
and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk
against other risks and the potential returns of each
investment. No strategy can completely insulate us from prepayment or other
such risks.
Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS may
reduce our net interest margin during periods of
rising interest rates, which
could materially adversely affect our business, financial condition and results
of operations.
ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate
caps. Periodic interest rate caps limit the amount
an interest rate can increase during any given period. Lifetime interest rate
caps limit the amount an interest rate can increase through
the maturity of the loan. Our borrowings typically are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing
interest rates, our financing costs could increase without limitation while
caps could limit the interest we earn on the ARMs and hybrid
ARMs backing our Agency MBS. This problem is magnified for ARMs and
hybrid ARMs that are not fully indexed because such
periodic interest rate caps prevent the coupon on the security from fully
reaching the specified rate in one reset. Further, some ARMs
and hybrid ARMs may be subject to periodic payment caps that result in a portion
of the interest being deferred and added to the
principal outstanding. As a result, we may receive less cash income
on Agency MBS backed by ARMs and hybrid ARMs than
necessary to pay interest on our related borrowings. Interest rate caps on Agency
MBS backed by ARMs and hybrid ARMs could
reduce our net interest margin if interest rates were to increase beyond the level
of the caps, which could materially adversely affect
our business, financial condition and results of operations.
Failure to procure adequate repurchase agreement financing, or to renew or replace existing repurchase agreement
financing as it matures, could materially adversely affect our business, financial condition and results of operations.
We intend to maintain master repurchase agreements with several counterparties. We cannot assure you that
any, or sufficient,
repurchase agreement financing will be available to us in the future on terms that are
acceptable to us. Any decline in the value of
Agency MBS, or perceived market uncertainty about their value, would
make it more difficult for us to obtain financing on favorable
terms or at all, or maintain our compliance with the terms of any financing arrangements
already in place. We may be unable to
- 15 -
diversify the credit risk associated with our lenders. In the event that we
cannot obtain sufficient funding on acceptable terms, our
business, financial condition and results of operations may be adversely affected.
Furthermore, because we intend to rely primarily on short-term borrowings to fund
our acquisition of Agency MBS, our ability to
achieve our investment objectives
will depend not only on our ability to borrow money in sufficient amounts and on
favorable terms, but
also on our ability to renew or replace on a continuous basis our maturing short-term
borrowings. If we are not able to renew or replace
maturing borrowings, we will have to sell some or all of our assets, possibly under
adverse market conditions. In addition, if the
regulatory capital requirements imposed on our lenders change, they may be required
to significantly increase the cost of the financing
that they provide to us. Our lenders also may revise their eligibility requirements
for the types of assets they are willing to finance or the
terms of such financings, based on, among other factors, the regulatory environment and
their management of perceived risk.
Adverse market developments could cause our lenders to require us to pledge
additional assets as collateral. If our assets were
insufficient to meet these collateral requirements, we might be compelled to liquidate particular
assets at inopportune times and at
unfavorable prices, which could materially adversely affect our business, financial condition
and results of operations.
Adverse market developments, including a sharp or prolonged rise
in interest rates, a change in prepayment rates or increasing
market concern about the value or liquidity of one or more types of Agency
MBS, might reduce the market value of our portfolio, which
might cause our lenders to initiate margin calls. A margin call means that the
lender requires us to pledge additional collateral to re-
establish the ratio of the value of the collateral to the amount of the borrowing. The
specific collateral value to borrowing ratio that
would trigger a margin call is not set in the master repurchase agreements and not
determined until we engage in a repurchase
transaction under these agreements. Our fixed-rate Agency MBS generally are more
susceptible to margin calls as increases in
interest rates tend to more negatively affect the market value of fixed-rate securities. If we
are unable to satisfy margin calls, our
lenders may foreclose on our collateral. The threat or occurrence of a margin
call could force us to sell, either directly or through a
foreclosure, our Agency MBS under adverse market conditions. Because of the
significant leverage we expect to have, we may incur
substantial losses upon the threat or occurrence of a margin call, which could materially
adversely affect our business, financial
condition and results of operations. This risk is magnified given that the Company’s equity
capital, particularly its tangible equity, is
relatively small.
Hedging against interest rate exposure may not completely insulate us from
interest rate risk and could materially adversely affect
our business, financial condition and results of operations.
We may enter into interest rate cap or swap agreements or pursue other hedging strategies,
including the purchase of puts, calls
or other options and futures contracts in order to hedge the interest rate risk of our
portfolio. In general, our hedging strategy depends
on our view of our entire portfolio consisting of assets, liabilities and derivative instruments,
in light of prevailing market conditions. We
could misjudge the condition of our investment portfolio or the market. Our
hedging activity will vary in scope based on the level and
volatility of interest rates and principal prepayments, the type of Agency MBS we
hold and other changing market conditions. Hedging
may fail to protect or could adversely affect us because, among other things:
●
hedging can be expensive, particularly during periods of rising and volatile interest
rates;
●
available interest rate hedging may not correspond directly with the interest rate risk
for which protection is sought;
●
the duration of the hedge may not match the duration of the related liability;
●
certain types of hedges may expose us to risk of loss beyond the fee
paid to initiate the hedge;
●
the credit quality of the counterparty on the hedge may be downgraded to
such an extent that it impairs our ability to sell
or assign our side of the hedging transaction; and
●
the counterparty in the hedging transaction may default on its obligation to pay.
There are no perfect hedging strategies, and interest rate hedging may fail to protect
us from loss. Alternatively, we may fail to
properly assess a risk to our investment portfolio or may fail to recognize a risk entirely, leaving us exposed to losses without the
- 16 -
benefit of any offsetting hedging activities. The derivative financial instruments we
select may not have the effect of reducing our
interest rate risk. The nature and timing of hedging transactions may influence
the effectiveness of these strategies. Poorly designed
strategies or improperly executed transactions could actually increase our risk
and losses. In addition, hedging activities could result in
losses if the event against which we hedge does not occur. 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 affect
our business, financial condition and results
of operations.
Our use of certain hedging techniques may expose us to counterparty risks.
To the
extent that our hedging instruments are not traded on regulated exchanges,
guaranteed by an exchange or its
clearinghouse, or regulated by any U.S. or foreign governmental authorities, there
may not be requirements with respect to record
keeping, financial responsibility or segregation of customer funds and positions. Furthermore,
the enforceability of agreements
underlying hedging transactions may depend on compliance with applicable statutory, exchange and other regulatory requirements
and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if any of these issues causes
a counterparty to fail to perform under a derivative agreement we could incur a
significant loss.
For example, if a swap exchange utilized in an interest rate swap agreement that
we enter into as part of our hedging strategy
cannot perform under the terms of the interest rate swap agreement, we
may not receive payments due under that agreement, and,
thus, we may lose any potential benefit associated with the interest rate swap.
Additionally, we may also risk the loss of any collateral
we have pledged to secure our obligations under these swap agreements if
the exchange becomes insolvent or files for bankruptcy.
Similarly, if an interest rate swaption counterparty fails to perform under the terms of the interest rate swaption agreement,
in addition
to not being able to exercise or otherwise cash settle the agreement, we
could also incur a loss for the premium paid for that swaption.
Our use of leverage could materially adversely affect our business, financial condition and results of operations.
We calculate our leverage ratio by dividing our total liabilities by total equity at the end of each period.
Under normal market
conditions, we generally expect our leverage ratio to be less than 10 to 1, although
at times our borrowings may be above or below this
level. We incur this indebtedness by borrowing against a substantial portion of the market
value of our pass-through Agency 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 operations. For example, our borrowings are
secured by our pass-through Agency MBS and a portion of our structured Agency
MBS under repurchase agreements. A decline in the
market value of the pass-through 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.
It may be uneconomical to "roll" our TBA dollar roll transactions or we may be
unable to meet margin calls on our TBA contracts,
which could negatively affect our financial condition and results of operations.
We may utilize TBA dollar roll transactions as a means of investing in and financing Agency
MBS securities. TBA contracts enable
us to purchase or sell, for future delivery, Agency MBS with certain principal and interest terms and certain types of collateral, but the
particular Agency MBS to be delivered are not identified until shortly before
the TBA settlement date. Prior to settlement of the TBA
contract we may choose to move the settlement of the securities out to a later date by
entering into an offsetting position (referred to as
- 17 -
a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similar
TBA contract for a later settlement
date, collectively referred to as a "dollar roll." The Agency MBS purchased for a forward
settlement date under the TBA contract are
typically priced at a discount to Agency MBS for settlement in the current month.
This difference (or discount) is referred to as the "price
drop." The price drop is the economic equivalent of net interest income earned
from carrying the underlying Agency MBS over the roll
period (interest income less implied financing cost). 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 negative
carry income whereby the Agency MBS
purchased for a forward settlement date under the TBA contract are priced at a premium
to Agency MBS for settlement in the current
month. Additionally, sales of some or all of the Fed's holdings of Agency MBS or declines in purchases of Agency MBS by
the Fed
could adversely impact the dollar roll market. Under such conditions, it may
be uneconomical to roll our TBA positions prior to the
settlement date and we could have to take physical delivery of the underlying
securities and settle our obligations for cash. We may not
have sufficient funds or alternative financing sources available to settle such obligations.
In addition, pursuant to the margin provisions
established by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income
Clearing Corporation, we are subject to margin
calls on our TBA contracts. Further, our clearing and custody agreements may require us to post additional margin above
the levels
established by the MBSD. Negative carry income on TBA dollar roll transactions
or failure to procure adequate financing to settle our
obligations or meet margin calls under our TBA contracts could result in
defaults or force us to sell assets under adverse market
conditions and adversely affect our financial condition and results of operations.
Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial markets
can result in a
significant contraction in liquidity for mortgages and mortgage-related assets, which
may adversely affect the value of the assets in
which we invest.
Our results of operations are materially affected by conditions in the markets for mortgages
and mortgage-related assets,
including Agency RMBS, as well as the broader financial markets and the
economy generally.
Significant adverse changes in financial market conditions can result in a
deleveraging 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 Ukraine
and Russia, policy priorities of a new U.S.
presidential administration, trade wars, unemployment, the availability and cost
of financing, the mortgage market and a declining real
estate market or prolonged government shutdown may contribute to increased
volatility and diminished expectations for the economy
and markets.
Increased volatility and deterioration in the markets for mortgages and mortgage-related
assets as well as the broader financial
markets may adversely affect the performance and market value of our Agency RMBS and
our investment in Orchid common stock.
If
these conditions exist, institutions from which we seek financing for our investments
may tighten their lending standards, increase
margin calls or become insolvent, which could make it more difficult for us to obtain
financing on favorable terms or at all.
Our
profitability and financial condition may be adversely affected if we are unable to obtain cost-effective financing
for our investments.
The Russian invasion of Ukraine has created market volatility and economic uncertainty
that 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 significant
market
volatility and growing economic uncertainty.
Should the situation deteriorate further and military action lead to
a protracted war, there
would likely be a material adverse economic impact on Europe and therefore
indirectly in the U.S., potentially slowing economic activity
and possibly lessening the need for the Fed to remove monetary policy
as 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
- 18 -
government infrastructure have already occurred, and cyber-attacks could potentially spread
to a broader network of countries and
networks.
These events may have an adverse effect on our results of operations, financial condition and
the value of our common
stock.
Our forward settling transactions, including TBA transactions, subject us to
certain risks, including price risks and counterparty
risks.
We purchase some of our Agency MBS through forward settling transactions, including
TBAs. In a forward settling transaction,
we enter into a forward purchase agreement with a counterparty to purchase
either (i) an identified Agency MBS, or (ii) a TBA, or to-be-
issued, Agency MBS with certain terms. As with any forward purchase contract,
the value of the underlying Agency MBS may decrease
between the trade date and the settlement date. Furthermore, a transaction
counterparty may fail to deliver the underlying Agency MBS
at the settlement date. If any of these risks were to occur, our financial condition and results of operations may be materially adversely
affected.
We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities
and to manage our
portfolio. Such models and other data may be incorrect, misleading or incomplete,
which could cause us to purchase assets that
do not meet our expectations or to make asset management decisions that are not
in line with our strategy.
We rely on analytical models, and information and other data supplied by third parties.
These models and data may be used to
value assets or potential asset acquisitions and dispositions and in connection
with our asset management activities. If our models and
data prove to be incorrect, misleading or incomplete, any decisions made in
reliance thereon could expose us to potential risks.
Our reliance on models and data may induce us to purchase certain assets
at prices that are too high, to sell certain other assets
at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models
and data may prove to be unsuccessful.
Some models, such as prepayment models, may be predictive in nature. The
use of predictive models has inherent risks. For
example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the
predictive models used by
us may differ substantially from those models used by other market participants, resulting in
valuations based on these predictive
models that may be substantially higher or lower for certain assets than actual
market prices. Furthermore, because predictive models
are usually constructed based on historical data supplied by third parties, the success
of relying on such models may depend heavily
on the accuracy and reliability of the supplied historical data, and, in the case of
predicting performance in scenarios with little or no
historical precedent (such as extreme broad-based declines in home prices, or deep
economic recessions or depressions), such
models must employ greater degrees of extrapolation and are therefore
more speculative and less reliable.
All valuation models rely on correct market data
input. If incorrect market data is entered into even a well-founded valuation model,
the resulting valuations will be incorrect. However, even if market data is inputted correctly, “model prices” will often differ substantially
from market prices, especially for securities with complex characteristics or whose
values are particularly sensitive to various factors. If
our market data inputs are incorrect or our model prices differ substantially from market prices, our
business, financial condition and
results of operations could be materially adversely affected.
Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time
and may differ from the values that would have been used if a ready market for these assets
existed. As a result, the values of
some of our assets are uncertain.
While in many cases our determination of the fair value of our assets is
based on valuations provided by third-party dealers and
pricing services, we can and do value assets based upon our judgment, and
such valuations may differ from those provided by third-
party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are unreliable. In general, dealers and
pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation
and
without special compensation, and so they may disclaim any and all liability for
any direct, incidental or consequential damages arising
- 19 -
out of any inaccuracy or incompleteness in valuations, including any act of negligence
or breach of any warranty. Depending on the
complexity and illiquidity of an asset, valuations of the same asset can vary substantially
from one dealer or pricing service to another.
The valuation process during times of market distress can be particularly difficult and unpredictable
and during such time the disparity
of valuations provided by third-party dealers can widen.
Our business, financial condition and results of operations could be materially
adversely affected if our fair value determinations of
these assets were materially higher than the values that would exist if a ready
market existed for these assets.
Because the assets that we acquire might experience periods of illiquidity, we might be prevented from selling our Agency MBS at
favorable times and prices, which could materially adversely affect our business, financial
condition and results of operations.
Agency MBS generally experience periods of illiquidity. Such conditions are more likely to occur for structured Agency
MBS
because such securities are generally traded in markets much less liquid than
the pass-through Agency MBS market. As a result, we
may be unable to dispose of our Agency MBS at advantageous times and prices
or in a timely manner. The lack of liquidity might result
from the absence of a willing buyer or an established market for these assets as
well as legal or contractual restrictions on resale. The
illiquidity of Agency MBS could materially adversely affect our business, financial condition
and results of operations.
Our use of repurchase agreements may give our lenders greater rights in
the event that either we or any of our lenders file for
bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.
Our borrowings under repurchase agreements may qualify for special treatment
under the bankruptcy code, giving our lenders the
ability to avoid the automatic stay provisions of the bankruptcy code and to
take possession of and liquidate our collateral under the
repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreements
under the
bankruptcy code may make it difficult for us to recover our pledged assets in the event that
any of our lenders files for bankruptcy.
Thus, the use of repurchase agreements exposes our pledged assets to risk in the
event of a bankruptcy filing by either our lenders or
us. In addition, if the lender is a broker or dealer subject to the Securities Investor
Protection Act of 1970, or an insured depository
institution subject to the Federal Deposit Insurance Act, our ability to exercise
our rights to recover our investment under a repurchase
agreement or to be compensated for any damages resulting from the
lender’s insolvency may be further limited by those statutes.
If a repurchase agreement counterparty defaults on their obligations to resell the Agency
MBS back to us at the end of the
repurchase term,
or if the value of the Agency MBS has declined by the end of the repurchase
transaction term or if we default on
our obligations under the repurchase transaction, we will lose money on these
transactions, which, in turn, may materially
adversely affect our business, financial condition and results of operations.
When we engage in a repurchase transaction, we initially sell securities to the
financial institution under one of our master
repurchase agreements in exchange for cash, and our counterparty is obligated
to resell the securities to us at the end of the term of
the transaction, which is typically from 24 to 90 days but may be up to 364 days
or more. The cash we receive when we initially sell the
securities is less than the value of those securities, which is referred to as the “haircut.”
Many financial institutions from which we may
obtain repurchase agreement financing have increased their haircuts in the past and
may do so again in the future. If these haircuts are
increased, we will be required to post additional cash or securities as collateral for
our Agency MBS. If our counterparty defaults on its
obligation to resell the securities to us, we would incur a loss on the transaction
equal to the amount of the haircut (assuming there was
no change in the value of the securities). We would also lose money on a repurchase
transaction if the value of the underlying
securities had declined as of the end of the transaction term, as we would have
to repurchase the securities for their initial value but
would receive securities worth less than that amount. Any losses we incur on our
repurchase transactions could materially adversely
affect our business, financial condition and results of operations.
If we default on one of our obligations under a repurchase transaction, the
counterparty can terminate the transaction and cease
entering into any other repurchase transactions with us. In that case, we would
likely need to establish a replacement repurchase
- 20 -
facility with another financial institution in order to continue to leverage
our portfolio and carry out our investment strategy. There is no
assurance we would be able to establish a suitable replacement facility on
acceptable terms or at all.
We have issued long-term debt to fund our operations which can increase the volatility of our
earnings and stockholders’ equity.
In October 2005, Bimini Capital completed a private offering of trust preferred securities
of Bimini Capital Trust II, of which $26.8
million are still outstanding.
The Company must pay interest on these junior subordinated notes on a quarterly
basis at a rate equal to
current three month LIBOR rate plus 3.5%.
To the extent the Company’s does not generate sufficient earnings to cover the interest
payments on the debt, our earnings and stockholders’ equity may be negatively impacted.
The Company considers the junior subordinated notes as part of its long-term capital
base.
Therefore, for purposes of all
disclosure in this report concerning our capital or leverage, the Company considers
both stockholders’ equity and the $26.8 million of
junior subordinated notes to constitute capital.
The Company has also elected to account for its investments in MBS under the
fair value option and, therefore, will report MBS on
our financial statements at fair value with unrealized gains and losses included
in earnings.
Changes in the value of the MBS do not
impact the outstanding balance of the junior subordinated notes but rather our
stockholders’ equity.
Therefore, changes in the value of
our MBS will be absorbed solely by our stockholders’ equity.
Because our stockholders’
equity is small in relation to our total capital,
such changes may result in significant changes in our stockholders’ equity.
Clearing facilities or exchanges upon which some of our hedging instruments
are traded may increase margin requirements on our
hedging instruments in the event of adverse economic developments.
In response to events having or expected to have adverse economic consequences
or which create market uncertainty, clearing
facilities or exchanges upon which some of our hedging instruments, such as
T-Note, Fed Funds and Eurodollar futures contracts, are
traded may require us to post additional collateral against our hedging instruments.
In the event that future adverse economic
developments or market uncertainty result in increased margin requirements
for our hedging instruments, it could materially adversely
affect our liquidity position, business, financial condition and results of operations.
We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which
may result in riskier investments.
Our Board of Directors has the authority to change our investment strategy
or asset allocation at any time without notice to or
consent from our stockholders. To the extent that our investment strategy changes in the future, we may make investments that are
different from, and possibly riskier than, the investments described in this Report. A change
in our investment strategy may increase
our exposure to interest rate and real estate market fluctuations. Furthermore,
a change in our asset allocation could result in our
allocating assets in a different manner than as described in this Report.
Competition might prevent us from acquiring Agency MBS at favorable yields,
which could materially adversely affect our business,
financial condition and results of operations.
We operate in a highly competitive market for investment opportunities. Our net income
largely depends on our ability to acquire
Agency MBS at favorable spreads over our borrowing costs. In acquiring Agency
MBS, we compete with a variety of institutional
investors, including mortgage REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual
funds, other lenders, other entities that purchase Agency MBS, the Federal Reserve,
other governmental entities and government-
sponsored entities, many of which have greater financial, technical, marketing and
other resources than we do. Some competitors may
have a lower cost of funds and access to funding sources that may not be available
to us, such as funding from the U.S. government.
Additionally, many of our competitors are required to maintain an exemption from the Investment Company Act. In addition,
some of
our competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of
- 21 -
investments. Furthermore, competition for investments in Agency MBS may
lead the price of such investments to increase, which may
further limit our ability to generate desired returns. As a result, we may
not be able to acquire sufficient Agency MBS at favorable
spreads over our borrowing costs, which would materially adversely affect our
business, financial condition and results of operations.
The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those
of any of our third-party service providers could
negatively impact our business by causing a disruption to our operations, a
compromise or corruption of our confidential
information or damage to our business relationships or reputation, all of which
could negatively impact our business and results of
operations.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information
resources or the information resources of our third-party service providers. More
specifically, a cyber-incident is an intentional attack or
an unintentional event that can include gaining unauthorized access to systems
to disrupt operations, corrupt data, or steal confidential
information. As our reliance on technology has increased, so have the risks posed
to our systems, both internal and those we have
outsourced. The primary risks that could directly result from the occurrence
of a cyber-incident include operational interruption and
private data exposure. We have implemented processes, procedures and controls to help
mitigate these risks, but these measures, as
well as our focus on mitigating the risk of a cyber-incident, do not guarantee that
our business and results of operations will not be
negatively impacted by such an incident.
We are highly dependent on communications and information systems operated by third parties,
and systems failures could
significantly disrupt our business, which may, in turn, adversely affect our business, financial condition and results of operations.
Our business is highly dependent on communications and information systems that
allow us to monitor, value, buy, sell, finance
and hedge our investments. These systems are operated by third parties
and, as a result, we have limited ability to ensure their
continued operation. In the event of a systems failure or interruption, we will have limited
ability to affect the timing and success of
systems restoration. Any failure or interruption of our systems could cause
delays or other problems in our securities trading activities,
including Agency MBS trading activities, which could have a material adverse
effect on our business, financial condition and results of
operations.
Computer malware, ransomware, viruses, and computer hacking and
phishing attacks have become more prevalent in the
financial services industry and may occur on our or certain of our third party service
providers' systems in the future. We rely heavily on
our financial, accounting and other data processing systems. Although we have
not detected a breach to date, financial services
institutions have reported breaches of their systems, some of which have
been 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 may
increase our
exposure to cybersecurity risks. Even with all reasonable security efforts, not every breach
can be prevented or even detected. It is
possible that we, or certain of our third-party service providers have experienced
an undetected breach, and it is likely that other
financial institutions have experienced more breaches than have been detected
and reported. There is no assurance that we, or certain
of the third parties that facilitate our business activities, have not or will not experience
a breach. It is difficult to determine what, if any,
negative impact may directly result from any specific interruption or cyber-attacks or
security 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 both
of such persons could materially
adversely affect our business, financial condition and results of operations.
We depend substantially on two individuals, Robert E. Cauley, our Chairman and Chief Executive Officer, and G. Hunter Haas, our
President, Chief Investment Officer and Chief Financial Officer, to manage our business.
We depend on the diligence, experience and
skill of Mr. Cauley and Mr. Haas in managing all aspects of our business, including the selection, acquisition, structuring and monitoring
of securities portfolios and associated borrowings. Although we
have entered into contracts and compensation arrangements with
- 22 -
Mr. Cauley and Mr. Haas that encourage their continued employment, those contracts may not prevent either Mr. Cauley or Mr. Haas
from leaving our company. The loss of either of them could materially adversely affect our business, financial condition and results of
operations.
If we issue debt securities, our operations may be restricted and we
will be exposed to additional risk.
If we decide to issue debt securities in the future, it is likely that such securities
will be governed by an indenture or other
instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we
issue in the future may have rights, preferences and privileges more favorable
than those of our Class A Common Stock. We, and
indirectly our stockholders, will bear the cost of issuing and servicing such
securities. Holders of debt securities may be granted specific
rights, including but not limited to, the right to hold a perfected security
interest in certain of our assets, the right to accelerate payments
due under the indenture, rights to restrict dividend payments, and rights
to approve the sale of assets. Such additional restrictive
covenants and operating restrictions could have a material adverse effect on our business,
financial condition and results of operations.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuant
to which LIBOR is determined may adversely
affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject
of national, international, and other regulatory guidance
and proposals for reform. Some of these reforms are already effective while others are
still to be implemented. These reforms may
cause such benchmarks to perform differently than in the past, or have other consequences
which cannot be predicted. In particular,
regulators and law enforcement agencies in the U.K. and elsewhere are conducting
criminal and civil investigations into whether the
banks that contributed information to the British Bankers’ Association (“BBA”)
in connection with the daily calculation of LIBOR may
have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR.
A number of BBA member banks have
entered into settlements with their regulators and law enforcement agencies with
respect to this alleged manipulation of LIBOR. Actions
by the regulators or law enforcement agencies, as well as ICE Benchmark Administration
(the current administrator of LIBOR), may
result in changes to the manner in which LIBOR is determined or the
establishment of alternative reference rates.
The development of alternative reference rates is complex.
In the United States, a committee was formed in 2014 to study the
process and develop an alternative reference rate. The Alternative Reference
Rate Committee (the “ARRC”) selected the SOFR, an
overnight secured U.S. Treasury repo rate,
as the new rate and adopted a Paced Transition Plan (“PTP”), which provides a framework
for the transition from LIBOR to SOFR. SOFR is published daily at 8:00 a.m. Eastern Time by the NY Federal
Reserve Bank for the
previous business day’s trades. However, since SOFR is an overnight rate and many forms of loans or instruments used
for hedging
have much longer terms, there is a need for a term structure for the new reference
rate. Various central banks, including the Fed, and
the ARRC,
are in the process of developing term rates to support cash markets that currently use LIBOR.
Examples of the cash market
would be floating rate notes, syndicated and bilateral corporate loans, securitizations,
secured funding transactions and various
mortgage and consumer loans - including many of the securities the Company owns
from time to time such as IIOs.
The Company
also uses derivative securities tied to LIBOR to hedge its funding costs.
Development of term rates for derivatives is being conducted
by the International Swaps and Derivatives Association (“ISDA”).
However, ARRC and ISDA may utilize different mechanisms to
develop term rates which may cause potential mismatches between cash products
or assets of the Company and hedge instruments.
The process for determining term rates by both ARRC and ISDA is not finalized
at this time.
On December 31, 2021 the one week and two month USD LIBOR
tenors phased out, and on June 30, 2023 all other USD LIBOR
tenors will phase out. On November 30, 2020. the United States Federal Reserve
concurrently issued a statement advising banks to
stop new USD LIBOR issuances by the 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 entering
into 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 determined
or regulatory activity related to LIBOR’s phaseout
could cause LIBOR to perform differently than in the past or cease to exist. Although regulators
and IBA have clarified that the recent
- 23 -
announcements should not be read to say that LIBOR has ceased or
will cease, in the event LIBOR does cease to exist, the risks
associated with the transition to an alternative reference rate will be accelerated
and magnified.
As of December 31, 2020, Fannie Mae and Freddie Mac stopped issuing most LIBOR-indexed
products and stopped purchasing
LIBOR-based loans. On August 3, 2020, Fannie Mae started accepting whole loan and
MBS deliveries of ARMs indexed to SOFR, and
Freddie Mac announced that it priced its first SOFR linked offering on October 16, 2020. On
October 19, 2021, Fannie Mae priced its
first credit risk transfer transaction linked to SOFR, and on January 19, 2022
it 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” as
a result of
international, national or other proposals for reform or other initiatives or investigations,
or any further uncertainty in relation to the
timing and manner of implementation of such changes, could have a material adverse
effect on the value of and return on any
securities based on or linked to a “benchmark.”
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 RMBS.
The interest and principal payments we expect to receive on the Agency MBS
in which we invest are guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Mae
certificates are directly guaranteed by the U.S.
government. Principal and interest payments relating to the securities issued by
Fannie Mae and Freddie Mac are only guaranteed by
each respective GSE.
In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship
of the FHFA, their federal regulator,
pursuant to its powers under The Federal Housing Finance Regulatory Reform
Act 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 Mae
and 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 their
financial 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 retained
equity
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 in
excess 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 retain
capital up to their regulatory minimums, including
buffers, as prescribed in the December rule.
These letter agreements provide, in part, (i) there will be no exit from
conservatorship until
all material litigation is settled and the GSEs have common equity Tier 1 capital of at least 3%
of their assets, (ii) the GSEs will comply
with the FHFA’s
regulatory 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.
On September 14, 2021, the U.S.
Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired
for cash
consideration, multifamily loans, loans with higher risk characteristics and
second homes and investment properties.
On September
15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose 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 in
the U.S. housing finance market should be re-examined. The
future roles of Fannie Mae and Freddie Mac could be significantly reduced and
the nature of their guarantees could be eliminated or
considerably limited relative to historical measurements. The U.S. Treasury could also stop
providing credit support to Fannie Mae and
Freddie Mac in the future. Any changes to the nature of the guarantees provided
by Fannie Mae and Freddie Mac could redefine what
constitutes an Agency MBS and could have broad adverse market implications.
If Fannie Mae or Freddie Mac was eliminated, or their
- 24 -
structures were to change in a material manner that is not compatible with
our 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 and
performance of our investment in Orchid
common stock and the amount of management fees and expense reimbursements
we receive from Orchid.
On June 23, 2021, the Supreme Court ruled in Collins v. Mnuchin, a case presenting a question of the constitutionality
of the FHFA
and its director’s protection from being replaced at will by the
President.
The Supreme Court held that the FHFA did not exceed its
powers or functions as a conservator under the Recovery Act, and that the President
may replace the director at will. On June 23,
2021, President Biden appointed Sandra Thompson as acting director of the
FHFA.
Our investment in Orchid Island Capital, Inc. or other mortgage REIT common
stock may fluctuate in value which materially
adversely affect our business, financial condition and results of operations.
Investments in the securities of companies that own Agency MBS will be
subject to all of the risks associated with the direct
ownership of Agency MBS discussed above that could adversely affect the market price of
the investment and the ability of the REIT to
pay dividends. In addition, the market value of the common stock could be affected by
market conditions beyond the Company’s
control, such as limited liquidity in trading market for the common stock. A decrease
in the dividend payment rate or the market value of
the common stock could have a material adverse effect on our business, financial condition
and results of operations.
In addition, the Company’s ability to dispose of the common stock investment because
selling investments in Orchid’s common
equity securities may be hindered due to its relationship as Orchid’s manager and the
possession of inside information. Also, if we or
other significant investors sell or are perceived as intending to sell a substantial
number of shares in a short period of time, the market
price of our remaining shares could be adversely affected.
The termination of our management agreement with Orchid could significantly
reduce our revenues.
Orchid is externally managed and advised by Bimini Advisors. As Manager, Bimini Advisors is responsible for administering
Orchid’s business activities and day-to-day operations.
Pursuant to the terms of the management agreement, Bimini
Advisors provides
Orchid with its management team, including its officers, along with appropriate
support personnel.
In exchange for these services, Bimini Advisors receives a monthly management
fee.
In addition, Orchid is obligated to reimburse
Bimini Advisors for any direct expenses incurred on its behalf and Bimini Advisors
allocates to Orchid its pro rata portion of certain
overhead costs. The significance of these management fees and overhead reimbursements
has increased, and is expected to continue
to increase, as Orchid’s capital base continues to grow. If Orchid were to terminate the management agreement without
cause, it would
be obligated to pay to Bimini Advisors a termination fee equal to three times the
average annual management fee, as defined in the
management agreement, before or on the last day of the initial term
or automatic renewal term.
The loss of these revenues, if it were
to occur, would have a severe and immediate impact on the Company.
We may be subject to adverse legislative or regulatory changes that could reduce the market
price of our common stock.
At any time, laws or regulations, or the administrative interpretations of those
laws or regulations, which impact our business and
Maryland corporations may be amended. In addition, the markets for MBS and
derivatives, including interest rate swaps, have been the
subject of intense scrutiny in recent years. We cannot predict when or if any new law, regulation or administrative interpretation,
or any
amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will
become effective.
Additionally, revisions to these laws, regulations or administrative interpretations could cause us to change our investments.
We could
be materially adversely affected by any such change to any existing, or any new, law, regulation or administrative interpretation, which
could reduce the market price of our common stock.
- 25 -
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of
a pandemic and acts of
terrorism.
The occurrence of unforeseen or catastrophic events, including the emergence
of a pandemic, such as coronavirus, or other
widespread health emergency (or concerns over the possibility of such an emergency)
terrorist attacks could create economic and
financial disruptions, and could lead to operational difficulties that could impair our
ability to manage our businesses.
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 diversity
and inclusion, environmental stewardship, support for
local communities, corporate governance and transparency and considering ESG
factors in our investment processes. Adverse
incidents with respect to ESG activities could impact the cost of our operations and
relationships 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 would
negatively affect the value of shares of our
common stock.
We have operated and intend to continue to operate our business so as to be exempt from
registration under the Investment
Company Act, because we are “primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on
and interests in real estate.” Specifically, we invest and intend to continue to invest so that at least 55% of the assets that
we own on
an unconsolidated basis consist of qualifying mortgages and other liens
and interests in real estate, which are collectively referred to as
“qualifying real estate assets,” and so that at least 80% of the assets we own on an unconsolidated
basis consist of real estate-related
assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac
and Ginnie Mae whole-pool residential
mortgage pass-through securities issued with respect to an underlying pool of
mortgage loans in which we hold all of the certificates
issued by the pool as qualifying real estate assets based on no-action letters issued
by the SEC. To the extent that the SEC publishes
new or different guidance with respect to these matters, we may fail to qualify for this exemption.
If we fail to qualify for this exemption and for any other exemption, we could be required
to restructure our activities in a manner
that, or at a time when, we would not otherwise choose to do so, which could negatively
affect the value of shares of our common stock
and our ability to distribute dividends. For example, if the market value of
our investments in CMOs or structured Agency MBS, neither
of which are qualifying real estate assets for Investment Company Act purposes, were
to increase by an amount that resulted in less
than 55% of our assets being invested in pass-through Agency MBS, we might have
to sell CMOs or structured Agency MBS in order
to maintain our exemption from the Investment Company Act. The sale could occur
during adverse market conditions, and we could be
forced to accept a price below that which we believe is acceptable.
Alternatively, if we fail to qualify for this exemption and for any other exemption,
we may have to register under the Investment
Company Act and we could become subject to substantial regulation with respect
to our capital structure (including our ability to use
leverage), management, operations, transactions with affiliated persons (as defined
in the Investment Company Act), portfolio
composition, including restrictions with respect to diversification and industry concentration,
and other matters.
We may be required at times to adopt less efficient methods of financing certain of our securities, and we
may be precluded from
acquiring certain types of higher yielding securities. The net effect of these factors would be
to lower our net interest income. If we fail
to qualify for an exemption from registration as an investment company or an exclusion
from the definition of an investment company,
our ability to use leverage would be substantially reduced, and we would not be able
to conduct our business as described in this
- 26 -
prospectus. Our business will be materially and adversely affected if we fail to qualify for and
maintain an exemption from regulation
pursuant to the Investment Company Act.
Failure to obtain and maintain an exemption from being regulated as a commodity
pool operator could subject us to additional
regulation and compliance requirements and may result in fines and other penalties
which could materially adversely affect our
business and financial condition.
The Dodd-Frank Act established a comprehensive regulatory framework for derivative
contracts commonly referred to as “swaps.”
As a result, any investment fund that trades in swaps may be considered
a “commodity pool,” which would cause its operators (in some
cases the fund’s directors) to be regulated as “commodity pool operators,” (“CPOs”).
Under new rules adopted by the U.S. Commodity
Futures Trading Commission, (the “CFTC”), those funds that become commodity pools solely because
of their use of swaps must
register with the National Futures Association (the “NFA”). Registration requires compliance with the CFTC’s regulations and the NFA’s
rules with respect to capital raising, disclosure, reporting, recordkeeping and
other business conduct.
We use hedging instruments in conjunction with our investment portfolio and related borrowings
to reduce or mitigate risks
associated with changes in interest rates, mortgage spreads, yield curve shapes
and market volatility. These hedging instruments may
include interest rate swaps, interest rate futures and options on interest rate
futures. We do not currently engage in any speculative
derivatives activities or other non-hedging transactions using swaps, futures
or options on futures. We do not use these instruments for
the purpose of trading in commodity interests, and we do not consider the Company or
its operations to be a commodity pool as to
which CPO registration or compliance is required. We have received a no-action letter from
the CFTC for relief from registration as a
commodity pool operator and commodity trading advisor.
The CFTC has substantial enforcement power with respect to violations of the laws
over which it has jurisdiction, including their
anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend
or revoke the registration of or the no-action relief
afforded to a person who fails to comply with commodities laws and regulations, prohibit such
a person from trading or doing business
with registered entities, impose civil money penalties, require restitution
and seek fines or imprisonment for criminal violations. In the
event that the CFTC asserts that we are not entitled to the no-action letter relief
claimed, we may be obligated to furnish additional
disclosures and reports, among other things. Further, a private right of action exists against those who
violate the laws over which the
CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure
a violation of those laws. In the event that we fail to comply
with statutory requirements relating to derivatives or with the CFTC’s rules thereunder, including the no-action letter described above,
we may be subject to significant fines, penalties and other civil or governmental
actions or proceedings, any of which could have a
materially adverse effect on our business, financial condition and results of operations.
Our Rights Plan could inhibit a change in our control that would otherwise
be favorable to our stockholders.
In December 2015, our Board of Directors adopted a Rights Agreement (the “Rights
Plan”) in an effort to protect against a possible
limitation on our ability to use our net operating losses “(NOLs”) and
net capital losses (“NCLs”) by discouraging investors from
aggregating ownership of our Class A Common Stock and triggering an “ownership
change” for purposes of Sections 382 and 383 of
the Code.
Under the terms of the Rights Plan, in general, if a person or group
acquires ownership of 4.9% or more of the outstanding
shares of our Class A Common Stock without the consent of our Board of Directors
(an “Acquiring Person”), all of our other
stockholders will have the right to purchase securities from us at a discount to
such securities’ fair market value, thus causing
substantial dilution to the Acquiring Person.
As a result, the Rights Plan may have the effect of inhibiting or impeding
a change in
control not approved by our Board of Directors and, notwithstanding its purpose,
could adversely affect our shareholders’ ability to
realize a premium over the then-prevailing market price for our common
stock in connection with such a transaction.
In addition,
because our Board of Directors may consent to certain transactions, the Rights
Plan gives our Board of Directors significant discretion
over whether a potential acquirer’s efforts to acquire a large interest
in us will be successful.
There can be no assurance that the
Rights Plan will prevent an “ownership change” within the meaning of Sections
382 and 383 of the Code, in which case we may lose all
or most of the anticipated tax benefits associated with our prior losses.
- 27 -
Certain provisions of applicable law and our charter and bylaws may restrict
business combination opportunities that would
otherwise be favorable to our stockholders.
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other
transaction that might involve a premium price for our common stock or otherwise
be in the best interests of our stockholders, including
business combination provisions, supermajority vote and cause requirements for
removal of directors, provisions that vacancies on our
Board of Directors may be filled only by the remaining directors, for the full
term of the directorship in which the vacancy occurred, the
power of our Board of Directors to increase or decrease the aggregate number
of authorized shares of stock or the number of shares of
any class or series of stock, to cause us to issue additional shares of stock
of any class or series and to fix the terms of one or more
classes or series of stock without stockholder approval, the restrictions
on ownership and transfer of our stock and advance notice
requirements for director nominations and stockholder proposals. These provisions,
along with the restrictions on ownership and
transfer contained in our charter and certain provisions of Maryland law described
below, could discourage unsolicited acquisition
proposals or make it more difficult for a third party to gain control of us, which could adversely
affect the market price of our securities.
Our rights and the rights of our stockholders to take action against our directors and officers
are limited, which could limit your
recourse in the event of actions that may be considered to be not in
your best interests.
Our charter limits the liability of our directors and officers to us and our stockholders for money
damages, except for liability
resulting from:
●
actual receipt of an improper benefit or profit in money, property or services; or
●
a final judgment based upon a finding of active and deliberate dishonesty by
the director or officer that was material to the
cause of action adjudicated.
We have entered into indemnification agreements with our directors and executive officers that obligate
us to indemnify them to
the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnify
our
present and former directors and officers for actions taken by them in those and other
capacities to the maximum extent permitted by
Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present and former director
or officer in the defense of any proceeding to which he or she is made, or threatened to
be made, a party by reason of his or her
service to us. In addition, we may be obligated to advance the defense costs
incurred by our directors and officers. As a result, we and
our stockholders may have more limited rights against our directors and officers than
might otherwise exist absent the provisions in our
charter, bylaws and indemnification agreements or that might exist with other companies.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law ( the “MGCL”),
may have the effect of inhibiting a third party from
making a proposal to acquire us or impeding a change of control under
circumstances that otherwise could provide our stockholders
with the opportunity to realize a premium over the then-prevailing market price of
our common stock, including:
●
“business combination” provisions that, subject to limitations, prohibit certain
business combinations between us and an
“interested stockholder” (defined generally as any person who beneficially owns 10%
or more of the voting power of our
outstanding voting stock or an affiliate or associate of ours who, at any time within the
two-year period immediately prior
to the date in question, was the beneficial owner of 10% or more of the voting power
of our then-outstanding stock) or an
affiliate of an interested stockholder for five years after the most recent date on which the stockholder
became an
interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination;
and
●
“control share” provisions that provide that a holder of “control shares” of the
Company (defined as voting shares of stock
which, when aggregated with all other shares of stock owned by the acquiror or
in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a revocable
proxy), entitle the acquiror to
exercise one of three increasing ranges of voting power in electing directors)
acquired in a “control share acquisition”
- 28 -
(defined as the direct or indirect acquisition of ownership or control of issued and outstanding
“control shares,” subject to
certain exceptions) generally has no voting rights with respect to the control
shares except to the extent approved by our
stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast
on the matter, excluding all interested
shares.
We have elected to opt-out of these provisions of the MGCL, in the case of the business
combination provisions, by resolution of
our Board of Directors (provided that such business combination is first approved
by our Board of Directors, including a majority of our
directors who are not affiliates or associates of such person), and in the case of the
control share provisions, pursuant to a provision in
our bylaws. However, our Board of Directors may
by resolution elect to repeal the foregoing opt-out from the business combination
provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
U.S. Federal Income Tax Risks
An investment in our common stock has various income tax risks.
This summary is limited to the U.S. federal income tax risks addressed below. Additional risks or issues may exist
that are not
addressed in this Form 10-K and that could affect the U.S. federal and state income tax treatment of
us or our stockholders.
This
summary is not intended to be used and cannot be used by any stockholder to avoid
penalties that may be imposed on stockholders
under the Code. Management strongly urges shareholders to seek advice based
on their particular circumstances from their tax
advisor concerning the effects of federal, state and local income tax law on an investment
in our common stock.
Our ability to use net operating loss (“NOL”) carryovers and net capital
loss (“NCL”) carryovers to reduce our taxable income may
be limited.
We must have taxable income or net capital gains to benefit from our NOL and NCL, as
well as certain other tax attributes.
Although we believe that a significant portion of our NOLs will be available to use
to offset the future taxable income of Bimini Capital
and Royal Palm, no assurance can be provided that we will have taxable income
or gains in the future to apply against our remaining
NOLs and NCLs.
In addition, our NOL and NCL carryovers may be limited by Sections 382
and 383 of the Code if we undergo an “ownership
change.” Generally, an “ownership change” occurs if certain persons or groups increase their aggregate ownership in our
company by
more than 50 percentage points looking back over the relevant testing period. If
an ownership change occurs, our ability to use our
NOLs and NCLs to reduce our taxable income in a future year would be
limited to a Section 382 limitation equal to the fair market value
of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt
interest rate in effect for the month of the
ownership change. In the event of an ownership change, NOLs and NCLs that
exceed the Section 382 limitation in any year will
continue to be allowed as carryforwards for the remainder of the carryforward period
and such losses can be used to offset taxable
income for years within the carryforward period subject to the Section 382 limitation
in each year. However, if the carryforward period
for any NOL or NCL were to expire before that loss had been fully utilized, the
unused portion of that loss would be lost. The
carryforward period for NOLs is 20 years from the year in which the losses
giving rise to the NOLs were incurred, and the carryforward
period for NCL is five years from the year in which the losses giving rise
to the NCL were incurred. Our use of new NOLs or NCLs
arising after the date of an ownership change would not be affected by the Section 382 limitation
(unless there were another ownership
change after those new losses arose).
Based on our knowledge of our stock ownership, we do not believe that
an ownership change has occurred since our losses were
generated. Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs
and NCLs to
reduce future taxable income. The determination of whether an ownership change
has occurred or will occur is complicated and
depends on changes in percentage stock ownership among stockholders. We adopted the
Rights Plan described above in order to
discourage or prevent an ownership change.
However, there can be no assurance that the Rights Plan will prevent an ownership
change. In addition, we have not obtained, and currently do not plan to obtain, a ruling
from the Internal Revenue Service, or IRS,
- 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 ownership
change. Therefore, no assurance can be
provided as to whether an ownership change has occurred or will occur in the
future.
Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise
attractive opportunities.
Limitations imposed by Sections 382 and 383 of the Internal Revenue Code may
discourage us from, among other things,
redeeming our stock or issuing additional stock to raise capital or to acquire
businesses or assets. Accordingly, our desire to preserve
our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Changes in tax laws could adversely affect our future results.
We have recorded a deferred tax asset in the consolidated balance sheet based on the differences
between the financial
statement and income tax bases of assets using enacted tax rates.
When U.S. corporate income tax rates change, we are required to
reevaluate our deferred tax assets using the new tax rate.
Changes in enacted tax rates require an adjustment to the carrying value of
our deferred tax assets with a corresponding charge or benefit to earnings in the
period of the tax rate change.
Based on the size of
our deferred tax assets, any such adjustment could be significant.
Risks Related to Conflicts of Interest in Our Relationship with Orchid
Bimini Capital and Orchid may compete for opportunities to acquire assets, which
are allocated in accordance with the Investment
Allocation Agreement by and among Orchid and Bimini Advisors.
From time to time we may seek to purchase for Bimini Capital the same or similar
assets that we seek to purchase for Orchid. In
such an instance, we may allocate such opportunities in a manner that preferentially
favors Orchid. We will make available to either
Bimini Capital or Orchid opportunities to acquire assets that we determine, in
our reasonable and good faith judgment, based on the
objectives, policies and strategies, and other relevant factors, are appropriate
for either entity in accordance with the Investment
Allocation Agreement among Bimini Capital, Orchid and Bimini Advisors.
Because many of Bimini Capital’s targeted assets are typically available only in specified
quantities and because many of our
targeted assets are also targeted assets for Orchid, we may not be able to buy as much
of any given asset as required to satisfy the
needs of both Bimini Capital and Orchid. In these cases, the Investment Allocation Agreement
will require the allocation of such assets
to both accounts in proportion to their needs and available capital. The Investment Allocation
Agreement will permit departure from
such proportional allocation when (i) allocating purchases of whole-pool Agency
MBS, because those securities cannot be divided into
multiple parts to be allocated among various accounts, and (ii) such allocation would
result in an inefficiently small amount of the
security being purchased for an account. In that case, the Investment Allocation
Agreement allows for a protocol of allocating assets so
that, on an overall basis, each account is treated equitably.
There are conflicts of interest in our relationships with Orchid, which
could result in decisions that may be considered as being not
in the best interests of Bimini Capital’s stockholders.
We are subject to conflicts of interest arising out of Bimini Advisors relationship as Manager
of Orchid. All of our executive officers
may have conflicts between their duties to Bimini Capital and their duties
to Orchid as its Manager.
Bimini Capital may acquire or sell assets in which Orchid may have an interest.
Similarly, Orchid may acquire or sell assets in
which Bimini Capital has or may have an interest. Although such acquisitions
or dispositions may present conflicts of interest, we
nonetheless may pursue and consummate such transactions. Additionally, Bimini Capital may engage in transactions directly with
Orchid, including the purchase and sale of all or a portion of a portfolio asset.
- 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 and
Orchid. During turbulent conditions in the mortgage industry,
distress in the credit markets or other times when we will need focused support
and assistance from employees, Orchid and other
entities for which we may act as manager in the future will likewise require greater focus
and attention, placing personnel resources in
high demand. In such situations, Bimini Capital may not receive the necessary
support and assistance it requires or would otherwise
receive if it were not acting as manager of one or more other entities.
Mr. Cauley,
our Chief Executive Officer and Chairman of our Board of Directors, also
serves as Chief Executive Officer and
Chairman of the Board of Directors of Orchid and owns shares of common stock of Orchid
at the time of this filing and may continue to
hold shares in the future. Mr. Haas, our Chief Financial Officer, Chief Investment Officer and President, is a member of the Board of
Directors of Orchid, serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Orchid and owns shares of
common stock of Orchid at the time of this filing and may continue to hold
shares in the future.
Mr. Dwyer and Mr. Jaumot, the two
independent members of our Board of Directors, own shares of common stock
of Orchid at the time of this filing and may continue to
own shares in the future.
Accordingly, Messrs. Cauley, Haas, Dwyer and Jaumot may have a conflict of interest with respect to actions
by Bimini Capital or Bimini Advisors that relate to Orchid as its Manager.
Bimini continues to hold an investment in the common stock of Orchid. In evaluating
opportunities for ourselves and Orchid, this
may lead us to emphasize certain asset acquisition, disposition or management objectives
over others, such as balancing risk or
capital preservation objectives against return objectives. This could increase
the risks or decrease the returns of your investment in our
common stock.
Orchid may elect not to renew the management agreement without cause which may
adversely affect our business, financial
condition and results of operations.
Orchid may elect not to renew the management agreement, even without cause.
The management agreement is automatically
renewed in accordance with the terms of the agreement, each year, on February 20. However, with the consent of the majority of
Orchid’s independent directors, and upon providing 180-days’ prior written notice, Orchid may elect not
to renew the management
agreement. If Orchid elects to not renew the agreement because of a decision by
its Board of Directors that the management fee is
unfair, Bimini Advisors will have the right to renegotiate a mutually agreeable management fee. If Orchid
elects to not renew the
management agreement without cause, it is required to pay Bimini Advisors a
termination fee equal to three times the average annual
management fee incurred during the prior 24-month period immediately preceding
the most recently completed calendar quarter prior
to the effective date of termination. Notwithstanding the termination fee, nonrenewal of the
management agreement may adversely
affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives
may result in a high amount of risk when compared to
alternative investment options and volatility or loss of principal. Our investments may
be highly speculative and aggressive, and
therefore an investment in our common stock may not be suitable for someone
with lower risk tolerance.
There is a limited market for our Class A Common Stock.
Our Class A Common Stock trades on the OTCQB under the symbol “BMNM”.
We may apply to list our Class A Common Stock
on a national securities market if, in the future, we qualify for such a listing.
However, even if listed on a national securities market, the
ability to buy and sell our Class A Common Stock may be limited due to our small
public float, and significant sales may depress or
result in a decline in the market price of our Class A Common Stock.
Additionally, until such time that our Class A Common Stock is
- 31 -
approved for listing on a national securities market, our ability to raise capital
through the sale of additional securities may be limited.
Accordingly, no assurance can be given as to:
●
the likelihood that an actual market for our common stock will develop, or
be continued once developed;
●
the liquidity of any such market;
●
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 distributions
to our stockholders since 2011.
Our Board of Directors has not authorized the payment of any cash dividends to
our stockholders since 2011.
All distributions will
be made at the discretion of our Board of Directors out of funds legally available
therefor and will depend on our earnings, our financial
condition and such other factors as our Board of Directors may deem relevant from
time to time. As a result of the termination of our
REIT status effective as of January 1, 2015, we are planning to retain any available funds
and future earnings to fund the development
and growth of our business. As a result, for the foreseeable future, we do not expect
to make distributions.
Future offerings of debt securities, which would be senior to our common stock upon liquidation,
or equity securities, which would
dilute our existing stockholders and may be senior to our common stock for the
purposes of distributions, may harm the value of
our common stock.
In the future, we may attempt to increase our capital resources by making additional
offerings of debt or equity securities, including
commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common
stock, as well as
warrants to purchase shares of common stock or convertible preferred stock.
Upon the liquidation of the Company, holders of our debt
securities and shares of preferred stock and lenders with respect to other borrowings
will receive a distribution of our available assets
prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings
of our existing stockholders or
reduce the market value of our common stock, or both. Furthermore, our Board of Directors
may, without stockholder approval, amend
our charter to increase the aggregate number of shares or the number of shares
of any class or series that we have the authority to
issue, and to classify or reclassify any unissued shares of common stock or preferred
stock. Because our decision to issue securities in
any future offering will depend on market conditions and other factors beyond our control,
we cannot predict or estimate the amount,
timing or nature of our future securities offerings. Our stockholders are therefore subject to
the risk of our future securities offerings
reducing the market price of our common stock and diluting their common stock.
The market value of our common stock may be volatile.
The market value of shares of our common stock may be highly volatile and subject
to wide price fluctuations. In addition, the
trading volume in our common stock may fluctuate and cause significant price
variations to occur. Some of the factors that could
negatively affect the share price or trading volume of our common stock include:
●
actual or anticipated variations in our operating results;
●
changes in our earnings estimates or publication of research reports about us
or the real estate or specialty finance
industry;
●
increases in market interest rates that affect the value of our MBS portfolios;
●
changes in our book value;
●
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 fluctuate
or decline significantly in the future.
Sales of our common stock may harm our share price.
There is very limited liquidity in the trading market for our common stock. Sales of
substantial amounts of shares of our common
stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock.
Risks Related to COVID-19
The market and economic disruptions caused by COVID-19 have negatively impacted
our business.
The COVID-19 pandemic has caused and continues to cause significant disruptions
to 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 control
its spread, including restrictions on freedom of movement and
business operations such as travel bans, border closings, closing non-essential
businesses, quarantines and shelter-in-place orders.
The market and economic disruptions caused by COVID-19 have negatively impacted
and could further negatively impact our
business.
Beginning in mid-March 2020, Agency MBS markets experienced significant volatility
and sharp declines in liquidity, which
negatively impacted our portfolio. Our portfolio was pledged as collateral under
daily mark-to-market repurchase agreements.
Fluctuations in the value of our Agency MBS resulted in margin calls, requiring us to post
additional collateral with our lenders under
these repurchase agreements. These fluctuations and requirements to post additional
collateral were material.
The Agency MBS market largely stabilized after the Fed announced on
March 23, 2020 that it would purchase Agency MBS and
U.S. Treasuries in the amounts needed to support smooth market functioning. The Fed continued to increase its
holdings 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 response
changes 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 available
could have a material adverse effect on our financial
condition, particularly in light of ongoing market dislocations resulting from the COVID-19
pandemic.
Our ability to fund our operations, meet financial obligations and finance
asset acquisitions is dependent upon our ability to secure
and maintain our repurchase agreements with our counterparties. Because repurchase
agreements are short-term commitments of
capital, lenders may respond to market conditions in ways that make it
more difficult for us to renew or replace on a continuous basis
our maturing short-term borrowings and have imposed and may continue to impose
more onerous terms when rolling such financings.
If we are not able to renew our existing repurchase agreements or arrange for
new financing on terms acceptable to us, or if we are
required to post more collateral or face larger haircuts, we may have to curtail
our asset acquisition activities and/or dispose of assets.
Issues related to financing are exacerbated in times of significant dislocation
in the financial markets, such as those experienced
related to the COVID-19 pandemic. It is possible our lenders will become unwilling
or unable to provide us with financing, and we could
be forced to sell our assets at an inopportune time when prices are depressed.
In addition, if the regulatory capital requirements
imposed on our lenders change, they may be required to significantly increase
the cost of the financing that they provide to us. Our
lenders also 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 environment
and their management of actual and perceived risk.
- 33 -
Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our
lenders’ valuation of our
assets that collateralize the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to re-
evaluate the fair market value of the assets that cover outstanding borrowings
at 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 margin
call. These valuations may be different than the
values that we ascribe to these assets and may be influenced by recent asset sales at
distressed levels by forced sellers. A margin call
requires us to transfer additional assets to a lender without any advance of funds from
the lender for such transfer or to repay a portion
of the outstanding borrowings. Significant margin calls could have a
material adverse effect on our results of operations, financial
condition, business, and liquidity, and could cause the value of our common stock to decline. In addition, we experienced an increase
in haircuts on financings we have rolled. As haircuts are increased, we
are required to post additional collateral. We may also be forced
to sell assets at significantly depressed prices to meet such margin calls and to maintain
adequate liquidity. As a result of the ongoing
COVID-19 pandemic, we experienced margin calls in 2020 well beyond
historical norms. As of December 31, 2021, we had met all
margin call requirements, but a sufficiently deep and/or rapid increase in margin
calls 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-19
pandemic and the
global recessionary economic conditions will have on us.
Governments have adopted, and may continue to adopt, policies, laws and plans
intended to address the COVID-19 pandemic
and adverse developments in the economy and continued functioning of
the financial markets. We cannot assure you that these
programs will be effective, sufficient or will otherwise have a positive 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 will
affect the efficiency,
liquidity and stability of the financial and mortgage markets or prepayments
on Agency MBS. To the extent the financial or mortgage
markets do not respond favorably to any of these actions, such actions do not function
as intended, or prepayments increase materially
as a result of these actions, our business, results of operations and financial
condition may continue to be materially adversely affected.
Measures intended to prevent the spread of COVID-19 may disrupt our ability
to operate our business.
In response to the outbreak of COVID-19 and the federal and state mandates implemented
to control its spread, some of our
employees are worked remotely until June of 2021. If our employees are
unable to work effectively as a result of COVID-19, including
because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures
or limitations, our
operations could be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity
incidents, data
breaches or cyber-attacks, which could have a material adverse effect on our business and
results of operations, due to, among other
things, the loss of proprietary data, interruptions or delays in the operation of
our business and damage to our reputation.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.

---

ITEM 2. PROPERTIES
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 subsidiaries
and Orchid. This property is suitable and adequate
for our business as currently conducted.

---

ITEM 3. LEGAL PROCEEDINGS
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 additional
indemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
in the related MLPA’s.
The Company
believes the demands are without merit and intends to defend against the demands
vigorously.
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 103
of Regulation S-K.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY
DISCLOSURES.
Not Applicable.
- 35 -
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET
FOR REGISTRANT'S
COMMON EQUITY, RELATED
STOCKHOLDER
MATTERS AND ISSUER
PURCHASES
OF
EQUITY SECURITIES.
Market Information
Our Class A Common Stock is traded over-the-counter under the symbol “BMNM”.
As of March 11, 2022, we had 10,531,772
shares of Class A Common Stock issued and outstanding, which were held
by 102 shareholders of record and
912 beneficial owners
whose shares were held in “street name” by brokers and depository institutions.
As of March 11, 2022, we had 31,938 shares of Class B Common Stock outstanding, which were held by 2 holders of record
and
31,938 shares of Class C Common Stock outstanding, which were held by one
holder of record. There is no established public trading
market for our Class B Common Stock or Class C Common Stock.
Dividend Distribution Policy
We have not made a distribution to stockholders since 2011. We are planning to retain any available funds and future earnings to
fund the development and growth of our business.
As a result, for the foreseeable future, we do not expect to make
distributions.
Preferred Stock
Our charter authorizes us to issue preferred stock that could have a
preference over our common stock with respect to
distributions. If we were to issue any preferred stock, the distribution preference
on the preferred stock could limit our ability to make
distributions to the holders of our common stock.
Securities Authorized For Issuance Under Equity Compensation
Plans
None.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On March 26,
2018, the
Board of
Directors
of the Company
(the “Board”)
approved
a Stock Repurchase
Plan (the
“2018 Repurchase
Plan”).
Pursuant
to the 2018
Repurchase
Plan, the
Company could
purchase
up to 500,000
shares of
its Class
A Common
Stock from
time to time,
subject to
certain limitations
imposed by
Rule 10b-18
of the Securities
Exchange Act
of 1934.
The 2018
Repurchase
Plan
was terminated
on September
16, 2021.
On September
16, 2021,
the Board
authorized
a share repurchase
plan pursuant
to Rule 10b5-1
of the Securities
Exchange
Act of
1934 (the
“2021 Repurchase
Plan”). Pursuant
to the 2021
Repurchase
Plan, the
Company may
purchase
shares of
its Class
A Common
Stock from
time
to time for
an aggregate
purchase
price not
to exceed
$2.5 million.
The table
below presents
the Company’s
share repurchase
activity
for the three
months ended
December
31, 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, 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
ITEM 6.
[RESERVED]
- 37 -

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF
OPERATIONS.
The following discussion of our financial condition and results of operations should
be read in conjunction with the financial
statements and notes to those statements included in Item 8 of this Form 10-K.
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements
are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in this Form 10-K,
our actual results may differ materially from those
anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding
company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital,
LLC. We operate in two business segments: the
asset management segment, which includes (a) the investment advisory services provided
by Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which
includes the investment activities conducted
by Royal Palm.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered
with the
Securities and Exchange Commission), are collectively referred to as
“Bimini Advisors.”
Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement,
the Company receives management fees and
expense reimbursements.
As manager, Bimini Advisors is responsible for administering Orchid's business activities and
day-to-day
operations.
Pursuant to the terms of the management agreement, Bimini Advisors
provides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all times
subject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated to
it.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS")
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our
investment strategy focuses on, and our
portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency
MBS, such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”)
and collateralized mortgage obligations (“CMOs”) issued
by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest
only securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types of
structured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock Repurchase
Plans
On March 26,
2018, the
Board of
Directors
of the Company
approved
a Stock Repurchase
Plan the
“2018 Repurchase
Plan”).
Pursuant
to the 2018
Repurchase
Plan, we
could purchase
up to 500,000
shares of
the Company’s
Class A Common
Stock from
time to
time, subject
to certain
limitations
imposed by
Rule 10b-18
of the Securities
Exchange
Act of 1934.
The 2018
Repurchase
Plan was
terminated
on September
16, 2021.
During the
period beginning
January 1,
2021 through
September
16, 2021,
the Company
repurchased
a total of
1,195 shares
under
the 2018
Repurchase
Plan at an
aggregate
cost of approximately
$2,298, including
commissions
and fees,
for a weighted
average price
of
$1.92 per
share. From
commencement
of the 2018
Repurchase
Plan, through
its termination,
the Company
repurchased
a total of
71,598
shares at
an aggregate
cost of approximately
$169,243,
including
commissions
and fees,
for a weighted
average price
of $2.36
per share.
On September
16, 2021,
the Board
authorized
a share repurchase
plan pursuant
to Rule 10b5-1
of the Securities
Exchange
Act of
1934 (the
“2021 Repurchase
Plan”). Pursuant
to the 2021
Repurchase
Plan, we
may purchase
shares of
our Class
A Common
Stock from
time to time
for an aggregate
purchase price
not to exceed
$2.5 million.
Share repurchases
may be executed
through various
means,
- 38 -
including,
without limitation,
open market
transactions.
The 2021
Repurchase
Plan does
not obligate
the Company
to purchase
any
shares, and
it expires
on September
16, 2023.
The authorization
for the 2021
Repurchase
Plan may be
terminated,
increased
or
decreased
by the Company’s
Board of
Directors
in its discretion
at any time.
From the
commencement
of the 2021
Repurchase
Plan,
through December
31, 2021,
we repurchased
a total of
92,287 shares
at an aggregate
cost of approximately
$192,905,
including
commissions
and fees,
for a weighted
average price
of $2.09
per share.
Subsequent
to December
31, 2021,
and through
March 10,
2022,
the Company
repurchased
a total of
170,422 shares
at an aggregate
cost of approximately
$343,732,
including
commissions
and fees,
for
a weighted
average price
of $2.02
per share.
Tender Offer
In July 2021,
we completed
a “modified
Dutch auction”
tender offer
and paid
$1.5 million,
excluding
fees and
related expenses,
to
repurchase
812,879 shares
of our Class
A common
stock, which
were retired,
at a price
of $1.85 per
share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (in addition to those related to the COVID-19
pandemic) may impact our results of
operations and financial condition. These factors include:
●
interest rate trends;
●
increases in our cost of funds resulting from increases in the Federal Funds rate
that are controlled by the Fed and are likely
to occur in 2022;
●
the difference between Agency MBS yields and our funding and hedging costs;
●
competition for, and supply of, investments in Agency MBS;
●
actions taken by the U.S. government, including the presidential administration,
the U.S. Federal Reserve (the “Fed”), the
Federal Open Market Committee (the “FOMC”), The Federal Housing Finance
Agency (the “FHFA”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency MBS, and credit trends
insofar as they affect prepayment rates;
●
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 crisis
in Ukraine; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments;
●
the requirements to qualify for a registration exemption under the Investment Company Act;
●
our ability to use net operating loss carryforwards and net capital loss carryforwards
to reduce our taxable income;
●
the impact of possible future changes in tax laws or tax rates; and
●
our ability to manage the portfolio of Orchid and maintain our role as manager.
Results
of Operations
Described
below are
the Company’s
results of
operations
for the
year ended
December
31, 2021,
as compared
to the year
ended
December
31, 2020.
- 39 -
Net Income
(Loss) Summary
Consolidated
net income
for the year
ended December
31, 2021
was $0.3
million, or
$0.02 basic
and diluted
income per
share of
Class A Common
Stock, as
compared
to consolidated
net loss
of $5.5 million,
or $0.47
basic and
diluted loss
per share
of Class A
Common Stock,
for the year
ended December
31, 2020.
The components
of net income
(loss) for
the years
ended December
31, 2021
and 2020,
along with
the changes
in those components
are presented
in the table
below:
(in thousands)
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)
$
$
(5,489)
$
5,764
GAAP and
Non-GAAP
Reconciliation
Economic Interest
Expense and
Economic Net
Interest
Income
We use derivative
instruments,
specifically
Eurodollar
and Treasury
Note (“T-Note”)
futures contracts
and TBA
short positions
to
hedge a portion
of the interest
rate risk
on repurchase
agreements
in a rising
rate environment.
We have not
designated
our derivative
financial
instruments
as hedge
accounting
relationships,
but rather
hold them
for economic
hedging purposes.
Changes in
fair value
of these
instruments
are presented
in a separate
line item
in our consolidated
statements
of
operations
and not included
in interest
expense. As
such, for
financial
reporting
purposes,
interest
expense and
cost of funds
are not
impacted by
the fluctuation
in value
of the derivative
instruments.
For the purpose
of computing
economic net
interest
income and
ratios relating
to cost of
funds measures,
GAAP interest
expense has
been adjusted
to reflect
the realized
and unrealized
gains or
losses on
certain derivative
instruments
the Company
uses that
pertain to
each period
presented.
We believe
that adjusting
our interest
expense for
the periods
presented
by the gains
or losses
on these
derivative
instruments
would not
accurately
reflect our
economic interest
expense for
these periods.
The reason
is that these
derivative
instruments
may cover
periods that
extend into
the future,
not just the
current period.
Any realized
or unrealized
gains or
losses on
the instruments
reflect the
change in
market value
of the instrument
caused by
changes in
underlying
interest
rates applicable
to the term
covered by
the
instrument,
not just the
current period.
For each
period presented,
we have combined
the effects
of the derivative
financial
instruments
in place for
the respective
period with
the actual
interest
expense incurred
on our borrowings
to reflect
total economic
interest
expense for
the applicable
period. Interest
expense, including
the effect
of derivative
instruments
for the period,
is referred
to as economic
interest
expense. Net
interest income,
when calculated
to include
the effect
of derivative
instruments
for the period,
is referred
to as economic
net interest
income.
We believe
that economic
interest
expense and
economic
net interest
income provide
meaningful
information
to consider, in
addition
to the respective
amounts prepared
in accordance
with GAAP. The non-GAAP
measures help
management
to evaluate
our financial
position and
performance
without the
effects of
certain transactions
and GAAP
adjustments
that are
not necessarily
indicative
of our
- 40 -
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 we
believe that
the calculation
of the economic
value of our
hedging
strategy
described
above helps
to present
our financial
position
and
performance,
it may be
of limited
usefulness
as an analytical
tool. Therefore,
the economic
value of
our investment
strategy should
not be
viewed in
isolation
and is not
a substitute
for interest
expense and
net interest
income computed
in accordance
with GAAP.
The tables
below present
a reconciliation
of the adjustments
to interest
expense shown
for each
period relative
to our derivative
instruments,
and the consolidated
statements
of operations
line item,
gains (losses)
on derivative
instruments,
calculated
in accordance
with GAAP
for the years
ended December
31, 2021
and 2020
and for each
quarter during
2021 and
2020. As
a result
of the market
turmoil
during the
first quarter
of 2020 several
hedge positions
where closed.
However, the
hedges closed
were hedges
that covered
periods well
beyond the
first quarter
of 2020.
Accordingly, the
open equity
at the time
these hedges
were closed
will result
in adjustments
to economic
interest
expense through
the balance
of their respective
original
hedge periods.
Since the
Company’s portfolio
was significantly
reduced
during the
first quarter
of 2020, the
effect of applying
the open
equity at
the time
of closure
of these
hedge instruments
to the current,
and
much smaller,
repurchase
agreement
interest
expense amounts
has materially
impacted
the economic
interest
amounts reported
below.
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, 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 thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Junior
Junior
Statement
Repurchase
Subordinated
Repurchase
Subordinated
of
Three Months Ended
Agreements
Debt
Total
Agreements
Debt
Total
Operations
December 31, 2021
$
(707)
$
(60)
$
(767)
$
$
$
$
-
September 30, 2021
(709)
(57)
(766)
-
June 30, 2021
(708)
(58)
(766)
-
March 31, 2021
(708)
(58)
(766)
-
December 31, 2020
(615)
(40)
(655)
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
1,105
-
June 30, 2020
(456)
(40)
(496)
(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
$
$
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 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
$
$
$
(707)
$
$
$
(217)
September 30, 2021
(709)
(196)
June 30, 2021
(708)
(161)
March 31, 2021
(708)
(137)
December 31, 2020
(615)
(61)
September 30, 2020
(1,065)
1,108
(504)
June 30, 2020
(456)
March 31, 2020
2,040
(456)
1,384
1,112
Years Ended
December 31, 2021
$
2,237
$
$
(2,832)
$
2,948
$
2,121
$
(711)
December 31, 2020
3,764
1,074
(2,592)
3,666
2,690
(1)
Reflects the effect of derivative instrument hedges for only the period
presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income
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
$
$
(217)
$
$
(60)
$
$
$
(526)
September 30, 2021
(196)
(57)
(501)
June 30, 2021
(161)
(58)
(469)
March 31, 2021
(137)
(58)
(445)
December 31, 2020
(61)
(40)
(358)
September 30, 2020
(504)
(40)
(805)
June 30, 2020
(40)
(315)
March 31, 2020
1,112
(40)
Years Ended
December 31, 2021
$
2,121
$
(711)
$
$
(233)
$
1,230
$
1,124
$
(1,941)
December 31, 2020
2,690
1,150
(160)
1,310
1,540
(1,212)
(1)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
(2)
Reflects the effect of derivative instrument hedges for only the period
presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP net interest income.
Segment Information
- 42 -
We have two operating segments. The asset management segment includes the investment
advisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment portfolio segment includes the
investment activities conducted by Royal Palm.
Segment information for the years ended December 31, 2021 and 2020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
-
-
(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)
(3)
-
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
-
-
(8,285)
Intercompany expenses
(1)
-
(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
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
Advisory services, other operating segments
(1)
-
-
(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)
-
-
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 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 proportional
share of total revenues.
Asset Management
Segment
Advisory Services
Revenue
Advisory services
revenue
consists
of management
fees and
overhead
reimbursements
charged
to Orchid
for the management
of its
portfolio
pursuant
to the terms
of a management
agreement.
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses
incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management
agreement. The management agreement has been
- 43 -
renewed through February 2023 and provides for automatic one-year extension
options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee equal
to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue received from
Orchid for the years ended December 31, 2021 and
2020 and each quarter during 2021 and 2020.
($ 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
$
$
3,030
September 30, 2021
5,136,331
672,384
2,157
2,547
June 30, 2021
4,504,887
542,679
1,791
2,186
March 31, 2021
4,032,716
456,687
1,621
2,025
December 31, 2020
3,633,631
387,503
1,384
1,826
September 30, 2020
3,422,564
368,588
1,252
1,629
June 30, 2020
3,126,779
361,093
1,268
1,615
March 31, 2020
3,269,859
376,673
1,377
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 define
net portfolio
interest
income as
interest
income on
MBS less
interest
expense on
repurchase
agreement
funding.
During
the year
ended December
31, 2021,
we generated
$2.1 million
of net portfolio
interest
income, consisting
of $2.2 million
of interest
income
from MBS
assets offset
by $0.1 million
of interest
expense on
repurchase
liabilities.
For the year
ended December
31, 2020,
we
generated
$2.7 million
of net portfolio
interest
income, consisting
of $3.8 million
of interest
income from
MBS assets
offset by
$1.1 million
of interest
expense on
repurchase
liabilities.
The $1.5
million
decrease
in interest
income for
the year
ended December
31, 2021
was due
to a $13.2
million decrease
in average
MBS balances,
combined
with a 136
basis point
("bp") decrease
in yields
earned on
the portfolio.
The $1.0
million decrease
in interest
expense for
the year
ended December
31, 2021
was due to
a 121 bp
decrease
in cost of
funds,
combined with
a $10.6 million
decrease
in average
repurchase
liabilities.
Our economic
interest
expense
on repurchase
liabilities
for the
years ended
December
31, 2021
and 2020
was $2.9
million and
$3.7
million, respectively,
resulting
in ($0.7)
million and
$0.1 million
of economic
net portfolio
interest
income, respectively.
The tables
below provide
information
on our portfolio
average balances,
interest
income, yield
on assets,
average repurchase
agreement
balances,
interest
expense,
cost of funds,
net interest
income and
net interest
rate spread
for each
quarter in
2021 and
and for the
years ended
December
31, 2021
and 2020
on both a
GAAP and
economic basis.
($ in thousands)
Average
Yield on
Average
Interest Expense
Average Cost of Funds
MBS
Interest
Average
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Held
(1)
Income
(2)
MBS
Agreements
(1)
Basis
Basis
(2)
Basis
Basis
(3)
December 31, 2021
$
62,597
$
3.27%
$
61,019
$
$
0.14%
4.77%
September 30, 2021
66,692
3.22%
67,253
0.14%
4.36%
June 30, 2021
70,925
3.26%
72,241
0.17%
4.09%
March 31, 2021
69,017
3.54%
69,104
0.23%
4.33%
- 44 -
December 31, 2020
69,161
3.45%
67,878
0.25%
3.88%
September 30, 2020
62,981
3.84%
61,151
1,108
0.28%
7.25%
June 30, 2020
53,630
3.90%
51,987
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
1,384
2.83%
4.22%
Years Ended
December
31, 2021
$
67,308
$
2,237
3.32%
$
67,404
$
$
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
$
$
(217)
3.13%
(1.50)%
September 30, 2021
(196)
3.08%
(1.14)%
June 30, 2021
(161)
3.09%
(0.83)%
March 31, 2021
(137)
3.31%
(0.79)%
December 31, 2020
(61)
3.20%
(0.43)%
September 30, 2020
(504)
3.56%
(3.41)%
June 30, 2020
3.44%
(0.07)%
March 31, 2020
1,112
3.16%
1.77%
Years Ended
December 31, 2021
$
2,121
$
(711)
3.15%
(1.05)%
December 31, 2020
2,690
3.30%
(0.02)%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the
tables on pages 43 and 44 are calculated based on the
average balances of the underlying investment portfolio/repurchase
agreement balances and are annualized for the periods presented.
(2)
Economic interest expense and economic net interest income
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 derivative
instrument hedges attributed to the period related to hedging
activities divided by average MBS held.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest
income was
$2.2 million
for the year
ended December
31, 2021
and $3.8
million for
year ended
December
31, 2020.
Average MBS
holdings were
$67.3 million
and $80.5
million for
the years
ended December
31, 2021
and 2020,
respectively. The
$1.5
million decrease
in interest
income was
due to a
$13.2 million
decrease
in average
MBS holdings,
combined with
a 136 bp
decrease
in
yields.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
MBS
and pass-through
MBS (“PT
MBS”) for
the years
ended December
31, 2021
and 2020
and each
quarter during
2021 and
2020.
($ 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
$
$
$
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
3.30%
0.91%
3.22%
June 30, 2021
70,207
70,925
(1)
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
69,017
3.53%
6.54%
3.54%
December 31, 2020
68,842
69,161
(1)
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
62,981
3.76%
15.35%
3.84%
- 45 -
June 30, 2020
53,101
53,630
3.78%
16.12%
3.90%
March 31, 2020
135,044
1,098
136,142
2,029
2,040
6.01%
3.93%
5.99%
Years Ended
December 31, 2021
$
65,813
$
1,495
$
67,308
$
2,217
$
$
2,237
3.37%
1.39%
3.32%
December 31, 2020
79,888
80,479
3,717
3,764
4.65%
7.98%
4.68%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
outstanding
repurchase
agreements
were $67.4
million and
$78.0 million,
generating
interest
expense of
$0.1 million
and
$1.1 million
for the years
ended December
31, 2021
and 2020,
respectively.
Our average
cost of funds
was 0.17%
and 1.38%
for the
years ended
December
31, 2021 and
2020, respectively.
There was
a 121 bp
decrease
in the average
cost of funds
and a $10.6
million
decrease
in average
outstanding
repurchase
agreements
during the
year ended
December
31, 2021 as
compared
to the year
ended
December
31, 2020.
Our economic
interest
expense
was $2.9
million
and $3.7
million
for the
years ended
December
31, 2021
and 2020,
respectively.
There
was a 33 bp
decrease
in the average
economic cost
of funds to
4.37% for the
year ended
December
31, 2021 from
4.70% for
the previous
year. The $0.8 million
decrease
in economic
interest
expense was
due to the
decrease
in interest
expense on
the repurchase
agreements,
partially
offset by the
negative
performance
of our hedging
agreements
attributed
to the current
period.
Since all
of our repurchase
agreements
are short-term,
changes in
market rates
directly affect
our interest
expense.
Our average
cost
of funds
calculated
on a GAAP
basis was
5 bps above
average
one-month
LIBOR and
9 bps below
average six-month
LIBOR for
the
quarter ended
December
31, 2021.
Our average
economic cost
of funds
was 468 bps
above average
one-month
LIBOR and
454 bps
above average
six-month LIBOR
for the quarter
ended December
31, 2021.
The average
term to maturity
of the outstanding
repurchase
agreements
decreased
from 33
days at December
31, 2020
to 16 days
at December
31, 2021.
The tables
below present
the average
outstanding
balance under
all repurchase
agreements,
interest
expense and
average
economic
cost of funds,
and average
one-month
and six-month
LIBOR rates
for each
quarter in
2021 and
2020 and
for the years
ended December
31, 2021
and 2020
on both a
GAAP and
economic basis.
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
December 31, 2021
$
61,019
$
$
0.14%
4.77%
September 30, 2021
67,253
0.14%
4.36%
June 30, 2021
72,241
0.17%
4.09%
March 31, 2021
69,104
0.23%
4.33%
December 31, 2020
67,878
0.25%
3.88%
September 30, 2020
61,151
1,108
0.28%
7.25%
June 30, 2020
51,987
0.46%
3.97%
March 31, 2020
131,156
1,384
2.83%
4.22%
Years Ended
December 31, 2021
$
67,404
$
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 1,075,321
additional shares during
the year ended December 31, 2020, bringing our total ownership to 2,595,357 shares
as of December 31, 2021 and 2020. Orchid paid
total dividends of $0.78 per share during 2021 and $0.79 per share during 2020.
During the years ended December 31, 2021 and
2020, we received dividends on this common stock investment of approximately
$2.0 million and $1.8 million, respectively.
Long-Term Debt
Junior Subordinated
Debt
Interest
expense on
our junior
subordinated
debt securities
was approximately
$1.0 million
and $1.1
million for
the years
ended
December
31, 2021
and 2020,
respectively.
The average
rate of
interest
paid for
the year
ended December
31, 2021
was 3.66%
compared
to 4.22%
for the year
ended December
31, 2020.
The junior
subordinated
debt securities
pay interest
at a floating
rate.
The
rate is adjusted
quarterly
and set
at a spread
of 3.50%
over the
prevailing
three-month
LIBOR rate
on the determination
date.
As of
December
31, 2021,
the interest
rate was
3.70%.
Note Payable
On October 30, 2019,
the Company borrowed $680,000 from a bank. The note is payable in equal
monthly principal and interest
installments of approximately $4,500 through October 30, 2039. Interest accrues
at 4.89% through October 30, 2024. Thereafter,
interest accrues based on the weekly average yield to the United States Treasury securities adjusted to
a constant maturity of 5 years,
plus 3.25%.
The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $152,000 through the Paycheck
Protection Program (“PPP”) of the
CARES Act in the form of a low interest loan.
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 table
below presents
our gains
or losses
and other
income for
the years
ended December
31, 2021
and 2020.
(in thousands)
- 47 -
Change
Realized gains (losses) on sales of MBS
$
$
(5,745)
$
5,814
Unrealized (losses) gains on MBS
(3,099)
(3,211)
Total losses on
MBS
(3,030)
(5,633)
2,603
Losses on derivative instruments
-
(5,293)
5,293
Gains on retained interests in securitizations
-
(59)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,869)
(2,453)
We invest in
MBS with
the intent
to earn net
income from
the realized
yield on those
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from trading
in these securities.
However, we
have sold,
and may continue
to
sell, existing
assets to
acquire
new assets,
which our
management
believes might
have higher
risk-adjusted
returns in
light of current
or
anticipated
interest
rates, federal
government
programs
or general
economic conditions
or to manage
our balance
sheet as
part of our
asset/liability
management
strategy.
During the
year ended
December 31,
2021, we
received proceeds
of $13.1
million from
the sales
of
MBS compared
to $176.2
million for
the year
ended December
31, 2020.
Most of the
2020 sales
occurred
during the
second half
of March
2020 as we
sold assets
in order
to maintain
our leverage
ratio at
prudent levels,
maintain sufficient
cash and liquidity
and reduce
risk
associated
with the
market turmoil
brought about
by COVID-19.
The fair
value of our
MBS portfolio
and derivative
instruments,
and the gains
(losses) reported
on those
financial
instruments,
are
sensitive
to changes
in interest
rates.
The table
below presents
historical
interest
rate data
as of each
quarter end
during
2021 and
2020.
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 10
Year Treasury
Rates are obtained from quoted end of day prices on the Chicago Board Options
Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s
Primary Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration
Ltd.
Operating Expenses
For the year
ended December
31, 2021,
our total
operating
expenses were
approximately
$8.3 million
compared
to approximately
$6.7 million
for the year
ended December
31, 2020.
The table
below presents
a breakdown
of operating
expenses for
the years
ended
December
31, 2021
and 2020.
(in thousands)
Change
Compensation and benefits
$
5,721
$
4,235
$
1,486
Legal fees
(8)
Accounting, auditing and other professional fees
(54)
Directors’ fees and liability insurance
Administrative and other expenses
1,287
1,165
$
8,285
$
6,667
$
1,618
- 48 -
The increase
in compensation
and benefits
in 2021 compared
to 2020 reflects
an evaluation
performed
by the Company’s
Board of
Directors
of the performance
of the Company’s
executive
officers,
particularly
the increase
in advisory
services
revenue.
Financial
Condition:
Mortgage-Backed Securities
As of December
31, 2021,
our MBS portfolio
consisted
of $60.8
million of
agency or
government
MBS at fair
value and
had a
weighted
average coupon
of 3.41%.
During the
year ended
December 31,
2021,
we received
principal
repayments
of $14.5
million
compared
to $13.9
million for
the year
ended December
31, 2020.
The average
prepayment
speeds for
the quarters
ended December
31,
2021 and
2020 were
21.1% and
14.4%,
respectively.
The following
table presents
the three-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT MBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction
of the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three
month prepayment
rate of the
securities
in the respective
asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
The following
tables summarize
certain characteristics
of our PT
MBS and structured
MBS as of
December
31, 2021
and 2020:
($ 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%
1-Sep-51
Interest-Only Securities
2,759
4.6%
2.86%
15-May-51
Inverse Interest-Only Securities
0.0%
5.90%
15-May-39
Total Mortgage Assets
$
60,803
100.0%
3.41%
1-Sep-51
December 31, 2020
Fixed Rate PT MBS
$
64,902
99.6%
3.89%
1-Aug-50
Interest-Only Securities
0.4%
3.56%
15-Jul-48
Inverse Interest-Only Securities
0.0%
5.84%
15-May-39
Total Mortgage Assets
$
65,178
100.0%
3.89%
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 price
for 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 value
of the MBS in our investment portfolio at December
31, 2021.
An effective duration of 3.309 indicates that an interest rate increase
of 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 figures
include the structured securities in the portfolio but do include
the effect of our funding cost hedges. Effective duration quotes
for individual investments are obtained from The Yield
Book, Inc.
The following
table presents
a summary
of our portfolio
assets acquired
during the
years ended
December
31, 2021
and 2020.
($ in thousands)
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 portfolio
of PT MBS
is typically
comprised
of adjustable-rate
MBS, fixed-rate
MBS and hybrid
adjustable-rate
MBS. We generally
seek to acquire
low duration
assets that
offer high
levels of
protection
from mortgage
prepayments
provided
that they
are reasonably
priced by
the market.
The stated
contractual
final maturity
of the mortgage
loans underlying
our portfolio
of PT MBS
generally ranges
up
to 30 years.
However, the
effect of prepayments
of the underlying
mortgage
loans tends
to shorten
the resulting
cash flows
from our
investments
substantially.
Prepayments
occur for
various reasons,
including
refinancing
of underlying
mortgages,
loan payoffs
in
connection
with home
sales, and
borrowers
paying more
than their
scheduled
loan payments,
which accelerates
the amortization
of the
loans.
The duration
of our IO
and IIO portfolio
will vary
greatly depending
on the structural
features
of the securities.
While prepayment
activity will
always affect
the cash
flows associated
with the
securities,
the interest
only nature
of IO’s may
cause their
durations
to become
extremely
negative when
prepayments
are high,
and less negative
when prepayments
are low. Prepayments
affect the
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
- 50 -
MBS or liabilities,
including
our hedging
instruments.
Accordingly, we
assess our
interest
rate risk
by estimating
the duration
of our assets
and the duration
of our liabilities.
We generally
calculate
duration
and effective
duration
using various
third-party
models or
obtain these
quotes from
third-parties.
However, empirical
results and
various third-party
models may
produce
different duration
numbers for
the same
securities.
The following
sensitivity
analysis
shows the
estimated
impact on
the fair
value of our
interest
rate-sensitive
investments
and hedge
positions
as of December
31, 2021,
assuming rates
instantaneously
fall 100 bps,
rise 100
bps and
rise 200
bps, adjusted
to reflect
the
impact of
convexity, which
is the
measure of
the sensitivity
of our hedge
positions
and Agency
MBS’ effective
duration to
movements
in
interest
rates.
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
58,029
$
1,830
$
(2,594)
$
(5,654)
3.15%
(4.47)%
(9.74)%
Interest-Only MBS
2,759
(813)
(29.48)%
23.59%
36.21%
Inverse Interest-Only MBS
(2)
(4)
5.51%
(14.75)%
(29.76)%
Total MBS
Portfolio
$
60,803
$
1,018
$
(1,945)
$
(4,659)
1.67%
(3.20)%
(7.66)%
In addition
to changes
in interest
rates, other
factors impact
the fair
value of our
interest
rate-sensitive
investments
and hedging
instruments,
such as the
shape of
the yield
curve, market
expectations
as to future
interest
rate changes
and other
market conditions.
Accordingly, in
the event
of changes
in actual
interest
rates, the
change in
the fair
value of our
assets would
likely differ
from that
shown
above and
such difference
might be
material and
adverse to
our stockholders.
Repurchase Agreements
As of December
31, 2021,
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.
As of December
31, 2021,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$58.9 million
with a net
weighted
average borrowing
cost of 0.14%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
6 to
45 days, with
a weighted
average maturity
of 16 days.
Securing
the repurchase
agreement
obligation
as of December
31, 2021
are MBS
with an estimated
fair value,
including
accrued interest,
of $61.0 million
and a weighted
average maturity
of 330 months,
and cash
posted
as collateral
of $1.4 million.
Through
March 11, 2022,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to
those that
existed at
December
31, 2021
with maturities
through May
16, 2022.
The table below presents information about our period-end and average repurchase
agreement obligations for each quarter in
2021 and 2020.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
December 31, 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 quarter
ended 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 quarter
ended 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 is
our ability
to turn non-cash
assets into
cash, purchase
additional
investments,
repay principal
and interest
on borrowings,
fund overhead
and fulfill
margin calls.
We have both
internal
and external
sources of
liquidity. However,
our material
unused sources
of
liquidity
include cash
balances,
unencumbered
assets and
our ability
to sell encumbered
assets to
raise cash.
At the onset
of the COVID-
19 pandemic
in the spring
of 2020,
the markets
the Company
operates
in were severely
disrupted
and the Company
was forced
to rely on
these sources
of liquidity. Our
balance sheet
also generates
liquidity
on an on-going
basis through
payments of
principal
and interest
we
receive on
our MBS
portfolio
and dividends
we receive
on our investment
in Orchid
common stock.
Internal
Sources of
Liquidity
Our internal
sources of
liquidity
include our
cash balances,
unencumbered
assets and
our ability
to liquidate
our encumbered
security
holdings.
Our balance
sheet also
generated
liquidity
on an ongoing
basis through
payments
of principal
and interest
we receive
on our
MBS portfolio
and dividends
we receive
on our investment
in Orchid
common stock.
We have previously,
and may
again in the
future, employ
a hedging
strategy
that typically
involves
taking short
positions
in Eurodollar
futures,
T-Note futures,
TBAs or other
instruments.
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.
External
Sources of
Liquidity
Our primary
external
sources of
liquidity
are our ability
to (i) borrow
under master
repurchase
agreements
and (ii)
use the TBA
security
market. Our
borrowing
capacity will
vary over
time as the
market value
of our interest
earning assets
varies. Our
master repurchase
agreements
have no stated
expiration,
but can be
terminated
at any time
at our option
or at the
option of
the counterparty.
However, once
a definitive
repurchase
agreement
under a master
repurchase
agreement
has been
entered into,
it generally
may not be
terminated
by
either party.
A negotiated
termination
can occur, but
may involve
a fee to be
paid by the
party seeking
to terminate
the repurchase
agreement
transaction.
Under our
repurchase
agreement
funding arrangements,
we are required
to post margin
at the initiation
of the borrowing.
The margin
posted represents
the haircut,
which is a
percentage
of the market
value of the
collateral
pledged.
To the extent the
market value
of the
asset collateralizing
the financing
transaction
declines,
the market
value of our
posted margin
will be insufficient
and we will
be required
to
post additional
collateral.
Conversely, if
the market
value of the
asset pledged
increases
in value,
we would
be over collateralized
and we
would be
entitled to
have excess
margin returned
to us by the
counterparty.
Our lenders
typically
value our
pledged securities
daily to
ensure the
adequacy of
our margin
and make margin
calls as
needed, as
do we.
Typically, but not always,
the parties
agree to
a minimum
threshold
amount for
margin calls
so as to avoid
the need
for nuisance
margin calls
on a daily
basis. Our
master repurchase
agreements
do not specify
the haircut;
rather haircuts
are determined
on an individual
repurchase
transaction
basis.
- 52 -
As discussed
above, we
invest a
portion of
our capital
in structured
MBS.
We generally
do not apply
leverage
to this portion
of our
portfolio.
The leverage
inherent
in structured
securities
replaces
the leverage
obtained by
acquiring
PT securities
and funding
them in the
repurchase
market.
This structured
MBS strategy
has been
a core element
of the Company’s
overall investment
strategy
since 2008.
However, we
have and
may continue
to pledge
a portion
of our structured
MBS in order
to raise our
cash levels,
but generally
will not
pledge these
securities
in order
to acquire
additional
assets.
In future
periods we
expect to
continue to
finance our
activities
through repurchase
agreements.
As of December
31, 2021,
we had
cash and cash
equivalents
of $8.4
million.
We generated
cash flows
of $16.7
million from
principal
and interest
payments on
our MBS
portfolio
and had average
repurchase
agreements
outstanding
of $67.4
million during
the year
ended December
31, 2021.
In addition,
during the
year ended
December
31, 2021,
we received
approximately
$9.4 million
in management
fees and
expense reimbursements
as
manager of
Orchid and
approximately
$2.0 million
in dividends
from our
investment
in Orchid
common stock.
In order
to generate
additional
cash to be
invested in
our MBS
portfolio,
on October
30, 2019,
we obtained
a $680,000
loan secured
by a mortgage
on the Company’s
office property.
The loan
is payable
in equal monthly
principal
and interest
installments
of approximately
$4,500 through
October 30,
2039. Interest
accrued at
4.89%, through
October 30,
2024. Thereafter,
interest
accrued based
on the weekly
average yield
to the United
States Treasury
securities
adjusted
to a constant
maturity of
five years,
plus 3.25%.
Net loan
proceeds
were
approximately
$651,000.
In addition,
during 2020,
we completed
the sale of
real property
that was
not used
in the Company’s
business.
The net proceeds
from this
sale were
approximately
$462,000 and
were invested
in our MBS
portfolio.
Outlook
Orchid Island
Capital Inc.
To the extent Orchid
is able to
increase
its capital
base over
time, we
will benefit
via increased
management
fees.
In addition,
Orchid
is obligated
to reimburse
us for direct
expenses paid
on its behalf
and to pay
to us Orchid’s
pro rata
share of
overhead
as defined
in the
management
agreement.
As a stockholder
of Orchid,
we will also
continue to
share in
distributions,
if any, paid by
Orchid to
its
stockholders.
Our operating
results are
also impacted
by changes
in the market
value of our
holdings of
Orchid common
shares,
although
these market
value changes
do not impact
our cash
flows from
Orchid.
The independent
Board of
Directors
of Orchid
has the ability
to terminate
the management
agreement
and thus
end our ability
to
collect management
fees and
share overhead
costs.
Should Orchid
terminate
the management
agreement
without cause,
it will be
obligated
to pay us
a termination
fee equal
to three
times the
average annual
management
fee, as
defined in
the management
agreement,
before or
on the last
day of the
current automatic
renewal term.
Economic Summary
COVID-19 continued to impact the United States and the rest of the world during
the fourth quarter of 2021 and into the first
quarter of 2022.
The most recent variant, Omicron, spreads much more readily
than 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 U.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 the 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 also
rose well above estimates at 3.8%, causing the
markets and the Fed to meaningfully revise expectations for the path of monetary
policy in 2022 and beyond.
The rationale for the shift in expectations for monetary policy was found
in the economic data that was released during the fourth
quarter of 2021.
There were several economic indicators that reached milestone
levels and made it clear the economy had more than
recovered from the pandemic.
The Fed focuses on two areas of economic performance - inflation and the labor 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 the 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-year
to 4.85% between September and
December of 2021. In the latter case, this was the highest reading since the
early 1980s.
The producer price index was also increasing
rapidly - approaching 7% year over year in December of 2021.
This led the Fed to formally declare that their assessment of inflation
as “transitory” was no longer the case.
Labor market indicators also reached new milestones. Initial claims for
unemployment insurance breached the 200,000 level
during the fourth quarter of 2021-
the first time this happened since the late 1960s.
Continuing claims for unemployment insurance
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 but
below the Fed’s long-term target level and their proxy for full
employment.
The final piece of information was gross domestic product growth
of 6.9% for the fourth quarter, released in January of
2022.
The Fed’s outlook for monetary policy pivoted materially beginning in November
of 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 category
of goods and services are accelerating.
The employment
data has also been very strong, exhibiting little effect from the Omicron variant. The
combination 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 react
aggressively soon. The Fed has
signaled they are about to start an accelerated removal of the extreme monetary accommodation
necessitated by the pandemic.
In
January of 2022 the FOMC announced they would end their asset purchases
in 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 their
first rate hike. The first
rate hike is likely to be in March as well. Current pricing in the futures market
indicates 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 aggressively
remove 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 protracted
war, there
would likely be an economic impact on Europe and therefore indirectly in the U.S., potentially
slowing economic activity at the margin
and possibly lessening the need for the Fed to remove monetary policy
as aggressively as expected otherwise.
Legislative Response and the Federal Reserve
Congress passed the CARES Act (described below) quickly in response to
the pandemic’s emergence during the spring of 2020.
As provisions of the CARES Act expired and the effects of the pandemic continued
to 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 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 September 6, 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 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 2020, the Fed unveiled a new monetary policy framework
focused on average inflation rate targeting
that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target
level. Further, the
Fed stated they would look past the 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 unemployment
rate 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 a
considerable period but
longer-term rates could rise given the Fed’s intention to let inflation potentially run above
2% in the future as the economy more fully
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recovers.
As mentioned above, this policy shift will not likely have an effect on current
monetary policy as inflation is now running
considerably higher than the Fed’s 2% target level and the Fed appears likely to move quickly
to remove the extreme monetary
accommodation they provided as the pandemic emerged in the U.S. in the
spring of 2020.
Interest Rates
At the beginning of 2021, interest rates were still close to the lowest levels
ever observed.
As the country and economy emerged
from the effects of the pandemic and the federal government and the Fed took unprecedented
actions to buttress the economy from
the effects of the pandemic, interest rates increased over the course of the year.
Increases in interest rates were not uniform over the
year as shorter maturity rates, typically more sensitive to anticipated increases in
short 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
2022, this trend
intensified and the spread between certain intermediate rates - such as 5-year
and 7-year maturities - trade at yields only marginally
below longer-term rates such as 10-year U.S. Treasuries.
This flattening of the rates curve is typical as the economy strengthens
and
the market anticipates increases in short-term rates by the Fed. As economic and/or
inflation data strengthen and the market
anticipates progressively more increases in short-term rates, this flattening effect
intensifies as well. Eventually the rates curve could
actually invert, whereby the intermediate rates mentioned above actually yield
more than longer-term rates.
This would occur when the
market anticipates the increases to short-term rates by the Fed will actually slow the
economy 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 of
a “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 supercharged
effect on the economy, the current recovery and pending
rate increase cycle will be even more difficult to manage by the Fed and we expect that such
an 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 accelerated
pace of accommodation removal
and in December of 2021, and again in January of 2022, the Fed announced
revised schedules for tapering.
This means a material
source of demand for Agency MBS is 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 source
for Agency MBS, may also be buying fewer securities.
However, the securities that were the focus of the Fed and bank buying, namely production coupon securities, performed
relatively well
during the fourth quarter of 2021.
Total
returns for Agency MBS for the quarter and year ended December 31, 2021
were -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 absolute
terms and relative to
comparable duration U.S. Treasuries for the fourth quarter of 2021.
Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 until
July 2020 to address disruptions in the U.S.
Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully
tamed volatile funding costs that had threatened to cause disruption across the
financial system.
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The Fed has taken a number of other actions to stabilize markets as a result
of the impacts of the COVID-19 pandemic. On March
15, 2020, the Fed announced a $700 billion asset purchase program to provide
liquidity to the U.S. Treasury and Agency MBS
markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of
Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% - 0.25%,
after having already lowered the Fed Funds rate
by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell announced
expectations to maintain interest rates at this level
until the Fed is confident that the economy has weathered recent events
and is on track to achieve maximum employment and price
stability goals. The Federal Open Market Committee (“FOMC”) continued to reaffirm this commitment
at all subsequent meetings
through December of 2021, as well as an intention to allow inflation to climb modestly
above their 2% target and maintain that level for
a period sufficient for inflation to average 2% long term. On January 26, 2022, the FOMC reiterated
its goals of maximum employment
and a 2% long-run inflation rate and stated that, with a strong labor market
and 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 its
impact resulted in the deterioration of the markets for
U.S. Treasuries, Agency MBS and other mortgage and fixed income markets. As a result, investors liquidated
significant holdings in
these assets. In response, on March 23, 2020, the Fed announced a program
to acquire U.S. Treasuries and Agency MBS in the
amounts needed to support smooth market functioning. With these purchases, market
conditions improved substantially, and in early
April, the Fed began to gradually reduce the pace of these purchases. Through
November 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 $40
billion of U.S. Treasuries and $35 billion, $30 billion and
$20 billion of Agency MBS in November of 2021, December of 2021 and January
of 2022, respectively.
On January 26, 2022, the
FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20
billion per month and its holdings of Agency
MBS by $10 billion per month for February of 2022 and would end its net asset
purchases 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 the
steep decline in economic activity.
This over $2
trillion COVID-19 relief bill, among other things, provided for direct payments to
each American making up to $75,000 a year, increased
unemployment benefits for up to four months (on top of state benefits), funding
to hospitals and health providers, loans and
investments to businesses, states and municipalities and grants to the airline
industry. On April 24, 2020, President Trump signed an
additional funding bill into law that provides an additional $484 billion of funding
to individuals, small businesses, hospitals, health care
providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a
moratorium on evictions (July 25, 2020), expanded unemployment benefits (July
31, 2020), and a moratorium on foreclosures (August
31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the Department
of 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 package
as part of the
Consolidated Appropriations Act, 2021, providing for extensions of
many 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 less
than $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 foreclosure
moratorium
begun under the CARES Act for loans backed by Fannie Mae and Freddie
Mac 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 moratoria
to July 31, 2021 and September 30, 2021, respectively.
Despite the expirations of these foreclosure moratoria, a final rule adopted by
the 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 September
6, 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 September
6, 2021.
In January 2019, the Trump administration made statements of its plans to work with Congress
to overhaul Fannie Mae and
Freddie Mac and expectations to announce a framework for the development of
a policy for comprehensive housing finance reform
soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed
to increase their capital buffers
to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and
Freddie Mac being privatized and represents the first concrete step on the road to
GSE reform.
On June 30, 2020, the FHFA released
a proposed rule on a new regulatory framework for the GSEs which seeks to implement
both a risk-based capital framework and
minimum leverage capital requirements. The final rule on the new capital framework
for 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 December
rule.
These letter agreements
provide, in part, (i) there will be no exit from conservatorship until all
material litigation is settled and the GSE has common equity Tier 1
capital of at least 3% of its assets, (ii) the GSEs will comply with
the FHFA’s
regulatory 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 respect
to ending the
conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs
in 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 risk
characteristics and second homes and investment properties.
On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December
rule to,
among other things, reduce the Tier 1 capital and risk-weight floor requirements.
In 2017, policymakers announced that LIBOR would be replaced by December
31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying
transactions on which to base levels and the
liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in its
capacity as administrator of
USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other
than one-week and two-month tenors) by 18
months to June 2023.
Notwithstanding this possible extension, a joint statement by key regulatory
authorities calls on banks to cease
entering into new contracts that use USD LIBOR as a reference rate by no
later than December 31, 2021. The ARRC, a steering
committee comprised of large U.S. financial institutions, has proposed replacing
USD-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 complete
the transition to SOFR, despite the December 31, 2021
deadline. We will monitor the emergence of SOFR carefully as it appears likely to 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 may become accepted alternatives
to
LIBOR.
On December 7, 2021, the CFPB released a final rule that amends Regulation
Z, which implemented the Truth in Lending Act,
aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and
open-end (e.g., home equity line of credit)
products. The rule, which mostly becomes effective in April of 2022, establishes requirements
for the selection of replacement indices
for existing LIBOR-linked consumer loans. Although the rule does not mandate
the 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 products
to replace the one-month, three-month, or six-month
USD LIBOR index “have historical fluctuations that are substantially similar to
those of the LIBOR indices that they are intended to
replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement
index to replace the one-year USD
LIBOR until it obtained additional information.
- 57 -
On December 8, 2021, the House of Representatives passed the Adjustable Interest
Rate (LIBOR) Act of 2021 (H.R. 4616) (the
“LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts
that use LIBOR as a benchmark and do not
contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR
Act, SOFR becomes the new benchmark rate by
operation of law for any such contract. The LIBOR Act establishes a safe harbor from
litigation for claims arising out of or related to the
use of SOFR as the recommended benchmark replacement. The LIBOR Act
makes 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 impairing
contracts. It provides that the discontinuance of LIBOR and
the automatic statutory transition to a replacement rate neither impairs or
affects the rights of a party to receive payment under such
contracts, nor allows a party to discharge their performance obligations or to declare
a breach of contract. It amends the Trust
Indenture Act of 1939 to state that the “the right of any holder of any
indenture security to receive payment of the principal of and
interest on such indenture security shall not be deemed to be impaired or
affected” by application of the LIBOR Act to any indenture
security.
On December 9, 2021, the United States Senate referred the LIBOR Act to
the Committee on Banking, Housing and Urban
Affairs.
One-week and two-month U.S. dollar LIBOR rates phased out on December
31, 2021, but other U.S. dollar tenors may continue
until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely
to 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 may
become accepted
alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe for
its 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 was
first 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 of
a pool of mortgage loans, the removal of the loan from the
pool is the same as a total prepayment 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 following
exceptions listed below.
•
a loan that is paid in full, or where the related lien is released and/or the
note debt is satisfied or forgiven;
•
a loan repurchased by a seller/servicer under applicable selling and
servicing requirements;
•
a loan entering a permanent modification, which generally requires it to
be 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 assumptions
and market conditions this change will have only
a marginal impact on prepayment speeds, in aggregate. Cohort level impacts
may 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 will
ultimately undertake are unknown and will continue to
evolve.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in
many 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 our
costs (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure
of Agency
MBS may cause us to change our investment strategy to focus on non-Agency
MBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest rate
and prepayment risks.
Lower long-term interest rates can affect the value of our Agency MBS in a number of ways.
If prepayment rates are relatively low
(due, in part, to the refinancing problems described above), lower long-term
interest rates can increase the value of higher-coupon
Agency MBS. This is because investors typically place a premium on assets with yields
that are higher than market yields. Although
lower long-term interest rates may increase asset values in our portfolio, we
may not be able to invest new funds in similarly-yielding
assets.
If prepayment levels increase, the value of our Agency MBS affected by such prepayments
may decline. This is because a
principal prepayment accelerates the effective term of an Agency MBS, which would shorten the period
during which an investor would
receive above-market returns (assuming the yield on the prepaid asset is higher than
market yields). Also, prepayment proceeds may
not be able to be reinvested in similar-yielding assets. Agency MBS backed
by mortgages with high interest rates are more susceptible
to prepayment risk because holders of those mortgages are most likely to refinance
to a lower rate. IOs and IIOs, however, may be the
types of Agency MBS most sensitive to increased prepayment rates. Because the
holder of an IO or IIO receives no principal
payments, the values of IOs and IIOs are entirely dependent on the existence of a principal
balance on the underlying mortgages. If the
principal balance is eliminated due to prepayment, IOs and IIOs essentially become
worthless. Although increased prepayment rates
can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs
act like zero-coupon bonds,
meaning they are purchased at a discount to their par value and have an effective
interest rate based on the discount and the term of
the underlying loan, an increase in prepayment rates would reduce the effective term
of our POs and accelerate the yields earned on
those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency MBS.
As long-term rates rise, rates available to borrowers also
rise.
This tends to cause prepayment activity to slow and extend the expected
average life of mortgage cash flows.
As the expected
average life of the mortgage cash flows increases, coupled with higher discount
rates, the value of Agency MBS declines.
Some of the
instruments the Company may use to hedge our Agency MBS assets, such as interest rate
futures, swaps and swaptions, are stable
average life instruments.
This means that to the extent we use such instruments to hedge
our Agency MBS assets, our hedges may
not adequately protect us from price declines, and therefore may negatively impact our
book value.
It is for this reason we use interest
only securities in our portfolio. As interest rates rise, the expected average
life of these securities increases, causing generally positive
price movements as the number and size of the cash flows increase the
longer the underlying mortgages remain outstanding. This
makes interest only securities desirable hedge instruments for pass-through
Agency MBS.
As described above, the Agency MBS market began to experience severe
dislocations in mid-March 2020 as a result of the
economic, health and market turmoil brought about by COVID-19. On March 23, 2020,
the Fed announced that it would purchase
Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely
stabilized the Agency
MBS market. However, in November 2021 the Fed announced a tapering of these purchases. The Fed’s reduction of these purchases
could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions
described above will likely
delay potential defaults on loans that would otherwise be bought out of Agency MBS
pools as described above.
Depending on the
ultimate resolution of the foreclosures
or 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 assets were acquired at a premium to
par, this will tend to increase the realized yield on
the asset in question.
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Because we base our investment decisions on risk management principles
rather than anticipated movements in interest rates, in
a volatile interest rate environment we may allocate more capital to structured Agency
MBS with shorter durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than other
asset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs and
IIOs, which typically have different sensitivities to changes in
long-term interest rates than PT MBS, particularly PT MBS backed
by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balances
through the use of short-
term repurchase agreement transactions. The interest rates on our debt
are determined by the short term interest rate markets. An
increase in the Fed Funds rate or LIBOR would increase our borrowing costs, which
could affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would be
most prevalent with respect to our Agency MBS backed by
fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not
change even though market rates may
change.
In order to protect our net interest margin against increases in short-term interest rates, we
may enter into interest rate swaps,
which economically convert our floating-rate repurchase
agreement debt to fixed-rate debt, or utilize other hedging instruments
such as
Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The country and economy currently appear to be on the verge of recovering from
the COVID-19 pandemic.
While the virus
continues to infect people and often results in hospitalizations and deaths,
the effect on economic activity has decreased materially.
Coupled with unprecedented 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 unsustainable
levels, resulting in very tight labor markets and the
highest levels of inflation in decades. The Fed has begun the rapid transformation
from accommodation to constraint and will likely
begin raising short-term rates at their meeting in March of 2022.
Currently the market anticipates the Fed will continue to raise rates
throughout the year and into 2023, possibly by as much as 200 basis points.
Further, they are rapidly winding down their asset
purchases and will likely stop asset purchases altogether - possibly by the
end of the year - as they begin the process of “normalizing”
the size of their balance sheet.
Market experts estimate the Fed may have to shrink the size of their balance
sheet by up to $4 trillion,
and over a much shorter time frame than the last time they did so over the
period from 2017 to 2019.
The effect of these developments
on the level of interest rates has been a material flattening of the U.S.
Treasury curve, whereby short and intermediate term rates rise
and more so relative to longer maturity U.S. Treasuries.
For the Company, this means our funding costs are likely to rise materially over the course of 2022 and possibly into 2023.
While
longer-term maturities have not risen as much as short and intermediate term rates,
they have risen and refinancing and purchase
activity in the residential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency
MBS securities. The net effect of higher funding costs and slower premium amortization
will depend on the extent and timing of both,
but may reduce the Company’s net interest income, and perhaps materially
so, over this period.
These developments will likely impact Orchid Island Capital in a 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 to
pressure Orchid’s MBS assets.
This
could slow the growth of or reduce the Company’s advisory service revenues and could reduce
the amount of dividends paid by Orchid
on its common stock.
All of the above developments are being impacted by the geo-political events in
the Ukraine which may cause the Fed to alter their
monetary policy decisions over the course of 2022 and beyond.
However, given the level of inflation and strength of the economy at
- 60 -
present, such developments would likely have to be severe in order to meaningfully
impact the path of monetary policy over the near-
term.
Critical Accounting Estimates
Our consolidated
financial
statements
are prepared
in accordance
with GAAP. GAAP requires
our management
to make some
complex and
subjective
decisions
and assessments.
Our most
critical accounting
policies
involve decisions
and assessments
which could
significantly
affect reported
assets, liabilities,
revenues
and expenses.
Management
has identified
the following
as its most
critical
accounting
estimates:
Mortgage-Backed
Securities
Our investments
in MBS are
accounted
for at fair
value. We acquire
our MBS
for the purpose
of generating
long-term
returns,
and not
for the short-term
investment
of idle capital.
As discussed
in Note 14
to the financial
statements,
our MBS
are valued
using Level
2 valuations,
and such valuations
currently
are
determined
based on
independent
pricing sources
and/or third
party broker
quotes, when
available.
Because the
price estimates
may vary,
management
must make
certain
judgments
and assumptions
about the
appropriate
price to
use to calculate
the fair
values. Alternatively,
the Company
could opt
to have the
value of all
of our positions
in MBS determined
by either
an independent
third-party
or do so
internally.
In managing
our portfolio,
the Company
employs the
following
four-step
process at
each valuation
date to determine
the fair
value of our
MBS.
●
First, the
Company obtains
fair values
from subscription-based
independent
pricing services.
●
Second, the
Company requests
non-binding
quotes from
one to four
broker-dealers
for certain
MBS in order
to validate
the
values obtained
by the pricing
service. The
Company requests
these quotes
from broker-dealers
that actively
trade and
make
markets in
the respective
asset class
for which
the quote
is requested.
●
Third, the
Company reviews
the values
obtained
by the pricing
source and
the broker-dealers
for consistency
across similar
assets.
●
Finally, if the
data from
the pricing
services and
broker-dealers
is not homogenous
or if the
data obtained
is inconsistent
with
management’s
market observations,
the Company
makes a judgment
to determine
which price
appears the
most consistent
with
observed
prices from
similar assets
and selects
that price.
To the extent management
believes
that none
of the prices
are
consistent
with observed
prices for
similar assets,
which is typically
the case for
only an immaterial
portion of
our portfolio
each
quarter, the
Company may
use a third
price that
is consistent
with observed
prices for
identical
or similar
assets. In
the case
of
assets that
have quoted
prices such
as Agency
MBS backed
by fixed-rate
mortgages,
the Company
generally
uses the quoted
or
observed
market price.
For assets
such as Agency
MBS backed
by ARMs or
structured
Agency MBS,
the Company
may
determine
the price
based on
the yield
or spread
that is identical
to an observed
transaction
or a similar
asset for
which a dealer
mark or subscription-based
price has
been obtained.
Management
believes its
pricing methodology
to be consistent
with the
definition
of fair value
described
in Financial
Accounting
Standards
Board (the
“FASB”) Accounting
Standards
Codification
(“ASC”)
Topic 820, Fair Value Measurements.
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
- 61 -
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 taxable
income projections
which include
forecasts of
management
fees, Orchid
dividends and
net interest
income, and
the subsequent
reinvestment of
those amounts
into the
MBS portfolio.
However,
management reassesses its valuation allowance conclusions whenever there is a material
change in taxable income projections.
Capital Expenditures
At December 31, 2021, we had no material commitments for capital expenditures.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK.
Not Applicable.
- 62 -

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial
Statements
and Supplementary
Data.
Report of
Independent
Registered
Public Accounting
Firm (
BDO USA, LLP
:
West Palm Beach, FL
; PCAOB ID#
)
Consolidated
Balance Sheets
Consolidated
Statements
of Operations
Consolidated
Statements
of Equity
Consolidated
Statements
of Cash Flows
Notes to
Consolidated
Financial
Statements
- 63 -
Report of Independent Registered Public
Accounting Firm
Stockholders and Board of Directors
Bimini Capital Management, Inc.
Vero Beach, Florida
Opinion on the Consolidated Financial
Statements
We
have
audited
the
accompanying
consolidated
balance
sheets
of
Bimini
Capital
Management,
Inc.
(the
“Company”) as of December 31, 2021 and 2020, the
related consolidated statements of operations, stockholders’
equity,
and cash
flows for
each of
the two
years in
the period
ended December 31,
2021, 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
at December
31, 2021 and
2020, and the results of its operations and its
cash flows for each of the two years
in the period ended December
31, 2021
,
in conformity with accounting principles
generally accepted in the United States
of America.
Basis for Opinion
These consolidated financial
statements are the
responsibility of the
Company’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.
Critical Audit Matters
The
critical
audit
matters
communicated
below
are
matters
arising
from
the
current
period
audit
of
the
consolidated
financial
statements that
were communicated
or required
to be
communicated
to the
audit committee
and that: (1)
relate to accounts
or disclosures that
are material to
the consolidated financial statements
and (2)
involved
our
especially challenging,
subjective,
or
complex
judgments. The
communication of the critical
audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are
not,
by
communicating
the
critical
audit
matters
below,
providing separate
opinions
on
the
critical
audit
matters or on the accounts or disclosures
to which they relate.
Realizability of deferred tax assets
As described in Note 12 to the consolidated
financial statements, the Company has recorded
$64.8 million in gross
deferred tax
assets as
of December
31, 2021
and recorded
a valuation
allowance of
$29.8 million.
Management
applies
significant
judgment
in
assessing
the
projections
of
future
taxable
income
in
the
determination
of
the
amount
of
deferred
tax
assets
that
were
more-likely-than-not
to
be
realized
in
the
future.
In
assessing
the
realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or
all of the deferred tax assets will not be
realized.
- 64 -
We identified assessing
the realizability of
deferred tax assets
as a critical
audit matter. Specifically, we identified
there is significant judgment required by management in formulating the forecast of taxable income over the net
operating loss expiration periods
to determine the
amount of deferred
tax assets that were
more-likely-than-not
to be realized
in the future. Auditing
these forecasts involved especially challenging
auditor judgment, including
the need for specialized knowledge and skill
in assessing these elements.
The primary procedures we performed
to address this critical audit matter included:
●
Evaluating the design
and implementation
of controls relating
to the projection
of taxable income
in future
periods, including controls over management’s process to select the
assumptions utilized.
●
Evaluating the positive and negative evidence in assessing whether the deferred
tax 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 market
information (such as interest yield curves).
●
Assessing the
reasonableness
of management’s
historical ability
to make
forecasts of
future taxable
income,
by performing a retrospective review of the
prior year’s estimates.
●
Utilizing personnel with specialized
knowledge and skill in
income taxes to
assist in the
evaluation of the
appropriateness of the Company’s positions and analysis of the realizability
of the deferred tax assets.
Valuation of Investments in Mortgage-Backed Securities
As described
in Notes
and
to the
consolidated financial
statements, the
Company
accounts for
its
  
mortgage-
backed
securities
at
fair
value,
which
totaled
$60.8
 m
illion
at
December
31,
2021.
  
The
fair
value
of
mortgage-
backed
securities
is
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
based
on
various
techniques
including
observing
the
most
recent
market
for
like
or
identical
assets
(including security
coupon
rate,
maturity,
yield,
prepayment speed),
market credit spreads, and model driven approaches.
  
We identified
the valuation of mortgage-backed securities
as
a critical audit matter.
  
The principal considerations
for our
determination
are: (i)
the potential
for bias
in how
management subjectively
selects the
price from
multiple
pricing sources
to determine
the fair
value of
the mortgage-backed
securities and
(ii)
the audit
effort involved,
including the use of
valuation professionals with specialized skill
and knowledge.
   
The primary procedures we performed
to address this critical audit matter included:
  
●
Evaluating
the
design
and
implementation
of
controls
relating
to
the
valuation
of
mortgaged-backed
securities,
including
controls
over
management’s
process to
select
the
price from
multiple
pricing
sources.
  
●
Reviewing
the
range
of
values
used
for
each
investment
position,
and
assessing
the
price
selected
for
management bias by comparing
the price
to the high, low and
average of the range
of pricing sources.
   
●
Testing
the
reasonableness of
fair
values
determined by
management by
comparing the
fair
value of
certain securities to recent transactions,
if applicable.
●
Utilizing personnel
with specialized
knowledge and
skill in valuation
to
develop an independent
estimate
of
the
fair
value
of
each
investment
position
by
considering
the stated
security
coupon
rate,
yield,
maturity,
and prepayment speeds, and comparing
to the fair value used by management.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2008.
West Palm Beach, Florida
March 11, 2022
- 65 -
BIMINI CAPITAL MANAGEMENT,
INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 and 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
60,788,129
$
65,153,274
Unpledged
15,015
24,957
Total mortgage
-backed securities
60,803,144
65,178,231
Cash and cash 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 equipment, 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 Contingencies (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
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
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 Liabilities
and Equity
$
122,084,641
$
128,700,569
See Notes to Consolidated Financial Statements
- 66 -
BIMINI CAPITAL MANAGEMENT,
INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
For the Years Ended December 31, 2021
and 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
-
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 STATEMENTS
OF 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
-
-
-
(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
-
-
-
275,414
275,414
Class A common shares repurchased and retired
(906,361)
(907)
(1,762,506)
-
(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 STATEMENTS
OF CASH FLOWS
Years Ended December 31, 2021 and 2020
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)
$
275,414
$
(5,489,142)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
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
-
(58,735)
Gain from disposition of real property held for sale
-
(11,591)
PPP loan forgiveness
(153,724)
-
Realized losses on forward settling to-be-announced securities
-
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
1,290,797
48,469
NET CASH PROVIDED BY OPERATING
ACTIVITIES
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
-
58,735
Net settlement of forward settling TBA contracts
-
(1,500,000)
Purchases of Orchid Island Capital, Inc. common stock
-
(4,071,592)
Proceeds from disposition of real property held for sale
-
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
-
152,165
Principal repayments on long-term debt
(21,640)
(20,505)
Class A common shares repurchased and retired
(1,763,413)
-
NET CASH USED IN FINANCING ACTIVITIES
(7,978,167)
(144,751,227)
NET DECREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
(1,098,947)
(1,473,760)
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, beginning of the year
10,911,357
12,385,117
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, end of the year
$
9,812,410
$
10,911,357
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest
$
1,164,780
$
2,762,026
Income taxes
$
-
$
(1,581,828)
See Notes to Consolidated Financial Statements
- 69 -
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 operates in two business segments through its principal wholly-owned
operating subsidiary,
Royal
Palm Capital, LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC
(
an investment advisor registered with the
Securities and Exchange Commission), are collectively referred to as "Bimini Advisors."
Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.
("Orchid") and receives fees for providing these services.
Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily
of MBS investments and shares of Orchid common
stock, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries
are collectively referred to as "Royal Palm."
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini
Capital, Bimini Advisors and Royal Palm.
All
inter-company accounts and transactions have been eliminated from the
consolidated financial statements.
Variable Interest Entities (VIEs)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed
the primary beneficiary of the VIE. Bimini Capital
has a common share investment in a trust used in connection with the issuance
of Bimini Capital's junior subordinated notes. See Note
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 financial
interest in these VIEs in the future. As a result, we do not
consolidate these VIEs and we account for our interests in these VIEs as mortgage-backed
securities. See Note 3 for additional
information regarding our investments in mortgage-backed securities. Our maximum
exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Basis of Presentation
The accompanying consolidated financial statements are prepared on the accrual
basis of accounting in accordance with
accounting principles generally accepted in the United States (“GAAP”).
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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
- 70 -
those estimates.
Significant estimates affecting the accompanying consolidated financial statements include
determining 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 accounting
period.
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 15.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid investments with original maturities
of three months or less at the time of purchase.
Restricted
cash includes
cash pledged
as collateral
for repurchase
agreements
and
derivative
instruments.
The following
table presents
the Company’s
cash, cash
equivalents
and restricted
cash as of
December
31, 2021
and 2020.
Cash and cash equivalents
$
8,421,410
$
7,558,342
Restricted cash
1,391,000
3,353,015
Total cash, cash equivalents
and restricted cash
$
9,812,410
$
10,911,357
The Company
maintains
cash balances
at several
banks and
excess margin
with an exchange
clearing member.
At times,
balances
may exceed
federally
insured
limits. The
Company has
not experienced
any losses
related to
these balances.
The Federal
Deposit
Insurance
Corporation
insures eligible
accounts up
to $250,000
per depositor
at each financial
institution.
Restricted
cash balances
are
uninsured,
but are held
in separate
accounts that
are segregated
from the
general funds
of the counterparty.
The Company
limits
uninsured
balances to
only large,
well-known
banks and
exchange clearing
members and
believes
that it is
not exposed
to significant
credit risk
on cash and
cash equivalents
or restricted
cash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms
of a management agreement. Under the terms
of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly
management fee and a pro rata portion of certain
overhead costs and to reimburse the Company for any direct expenses incurred
on its behalf. Revenues
from management fees are
recognized over the period of time in which the service is performed.
Mortgage-Backed Securities
The Company invests primarily in pass-through (“PT”) mortgage-backed certificates
issued by Freddie Mac, Fannie Mae or Ginnie
Mae (“MBS”), collateralized mortgage obligations (“CMOs”),
interest-only (“IO”) securities and inverse interest-only (“IIO”) securities
representing interest in or obligations backed by pools of mortgage-backed loans.
We refer to MBS and CMOs as PT MBS. We refer to
IO and IIO securities as structured MBS. The Company has elected to account
for its investment in MBS under the fair value option.
Electing the fair value option requires the Company to record changes in fair
value in the consolidated statement of operations, which,
in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with
the underlying economics and how the portfolio is managed.
- 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 sold
that have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid
to transfer the liability in an orderly transaction
between market participants at the measurement date.
The fair value measurement assumes that the transaction to sell
the asset or
transfer the liability either occurs in the principal market for the asset
or liability, or in the absence of a principal market, occurs in the
most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or
third-party broker quotes, when available.
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase
are
not amortized.
Premium lost and discount accretion resulting from monthly principal repayments
are reflected in unrealized gains and
losses on MBS in the consolidated statements
of operations.
For IO securities, the income is accrued based on the carrying value and
the effective yield. The difference between income accrued and the interest received on the security is
characterized as a return of
investment and serves to reduce the asset’s carrying value. At each reporting date, the
effective yield is adjusted prospectively for
future reporting periods based on the new estimate of prepayments and the contractual
terms of the security.
For IIO securities,
effective yield and income recognition calculations also take into account the index
value applicable to the security.
Changes in fair
value of MBS during each reporting period are recorded in earnings and reported
as unrealized gains or losses on mortgage-backed
securities in the accompanying consolidated statements of operations. The
amount reported as unrealized gains or losses on
mortgage-backed securities thus captures the net effect of changes in the fair market
value of securities caused by market
developments and any premium or discount lost as a result of principal repayments
during the period.
Orchid Island Capital, Inc. Common Stock
The Company
accounts for
its investment
in Orchid
common shares
at fair value.
The change
in the fair
value and
dividends
received
on this investment
are reflected
in the consolidated
statements
of operations.
We estimate
the fair
value of our
investment
in Orchid
on a
market approach
using “Level
1” inputs
based on
the quoted
market price
of Orchid’s
common stock
on a national
stock exchange.
Retained Interests in Securitizations
The Company holds retained interests in the subordinated tranches of securities
created in securitization transactions.
These
retained interests currently have a recorded fair value of zero, as the prospect
of future cash flows being received is uncertain. Any
cash received from the retained interests is reflected as a gain in the consolidated
statements of operations.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk,
facilitate asset/liability strategies and manage other
exposures, and it may continue to do so in the future. The principal instruments
that the Company has used to date are Treasury Note
(“T-Note”) and Eurodollar futures contracts,
and “to-be-announced” (“TBA”) securities, but it may enter into other
derivatives in the
future.
The Company accounts for TBA securities as derivative instruments. Gains
and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying
consolidated statements of operations.
Derivative instruments are carried at fair value, and changes in fair value are recorded
in the consolidated statements of
operations for each period. The Company’s derivative financial instruments are not designated
as hedge accounting relationships, but
rather are used as economic hedges of its portfolio assets and liabilities. Gains and losses
on derivatives, except those that result in
cash receipts or payments, are included in operating activities on the statements
of cash flows. Cash payments and cash receipts from
- 72 -
settlements of derivatives,
including current period net cash settlements on interest rate swaps, is classified
as an investing activity on
the statements of cash flows.
Holding derivatives creates exposure to credit risk related to the potential
for failure by counterparties to honor their commitments.
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.
The Company’s derivative agreements require it to post or receive collateral to mitigate
such risk. In addition,
the Company uses only registered central clearing exchanges and well-established
commercial banks as
counterparties, monitors positions with individual counterparties and adjusts
posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that
value is disclosed either in the body of the
consolidated financial statements or in the accompanying notes. MBS, Orchid
common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods
and assumptions used to estimate fair value for these
instruments are presented in Note 14 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest
receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates
their carrying value due to the short-term nature of
these financial instruments.
It is impractical to estimate the fair value of the Company’s junior subordinated notes.
Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates
would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in
Note 9 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable
life of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings
and improvements with depreciable lives of 30
years.
Property and equipment is recorded at acquisition cost and depreciated
to their respective salvage values using the straight-line
method over the estimated useful lives of the assets. Depreciation is included in administrative
and other expenses in the consolidated
statement of operations.
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS through
the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized
financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Earnings Per Share
Basic EPS is calculated as income available to common stockholders divided
by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class
method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result
is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible
into Class A Common Stock, are entitled to receive
dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock. Accordingly, shares of the
Class B Common Stock are included in the computation of basic EPS using
the two-class method and, consequently, are presented
separately from Class A Common Stock.
- 73 -
The shares of Class C Common Stock are not included in the basic EPS computation
as these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stock
are not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A Common
Stock were not met.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax
assets and liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities using
enacted tax rates. The measurement of net
deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation,
it is more likely than not that they will
not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31,
2018 remain open for examination.
Although management believes its calculations for tax returns are correct and the
positions taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company.
For tax filing purposes, Bimini Capital and its includable subsidiaries,
and Royal Palm and
its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain
tax positions will be sustained upon
examination based on the facts, circumstances and information available at the
end of each period.
The measurement of uncertain tax
positions is adjusted when new information is available, or when an event
occurs that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely than
not that the position will be sustained upon
examination by the relevant taxing authority based on the technical merits
of the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realized
upon settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as
an unrecognized tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,
if applicable, within the income tax
provision.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848): Facilitation
of the Effects of Reference Rate Reform on Financial Reporting.”
ASU 2020-04 provides optional expedients and exceptions to GAAP
requirements for modifications on debt instruments, leases, derivatives, and other
contracts, related to the expected market transition
from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark
indices, or collectively, IBORs, to
alternative reference rates. ASU 2020-04 generally considers contract modifications
related to reference rate reform to be an event that
does not require contract remeasurement at the modification date nor a reassessment
of a previous accounting determination. The
guidance in ASU 2020-04 is optional and may be elected over time, through December
31, 2022, as reference rate reform activities
occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply
certain 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 expedients
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
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 consolidated
financial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the
terms of a management agreement.
As Manager,
Bimini Advisors is responsible for administering Orchid's business activities and
day-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its management
team, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervision
and oversight of Orchid's board of directors and
has only
such functions and authority as delegated to it. Bimini Advisors receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Orchid’s month-end equity that is greater than $250 million and
less than or equal to $500 million,
and
●
One-twelfth of 1.00% of the Orchid’s month-end equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred
on its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in
the management agreement. The management
agreement has been renewed through February 20, 2023 and provides for automatic
one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated to
pay Bimini Advisors a termination fee equal to three
times the average annual management fee, as defined in the management agreement,
before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue from
Orchid for the years ended December 31, 2021 and 2020.
(in thousands)
Management fee
$
8,156
$
5,281
Allocated overhead
1,632
1,514
Total
$
9,788
$
6,795
At December 31, 2021 and 2020, the net amount due from Orchid was approximately
$
1.1
million and $
0.6
million, respectively.
NOTE 3.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
MBS portfolio
as of December
31, 2021
and 2020:
(in thousands)
Fixed-rate Mortgages
$
58,029
$
64,902
Interest-Only Securities
2,759
Inverse Interest-Only Securities
Total
$
60,803
$
65,178
The following
table is a
summary of
our net gain
(loss) from
the sale of
MBS for
the years
ended December
31, 2021 and
2020:
(in thousands)
Proceeds from sales of MBS
$
13,063
$
176,250
- 75 -
Carrying value of MBS sold
12,994
181,995
Net gain (loss) on sales of MBS
$
$
(5,745)
Gross gain sales of MBS
$
$
Gross loss on sales of MBS
-
(5,805)
Net gain (loss) on sales of MBS
$
$
(5,745)
NOTE 4.
PROPERTY AND EQUIPMENT, NET
The composition
of property
and equipment
at December
31, 2021
and 2020
follows:
(in thousands)
Land
$
1,185
$
1,185
Buildings and improvements
1,827
1,827
Computer equipment and software
Office furniture and equipment
Total cost
3,231
3,391
Less accumulated depreciation and amortization
1,207
1,298
Property and equipment, net
$
2,024
$
2,093
Depreciation
of property
and equipment
totaled approximately
$
69,000
and $
70,000
for the years
ended December
31, 2021
and
2020, respectively.
NOTE 5.
OTHER ASSETS
The composition of other assets at December 31, 2021 and 2020 follows:
(in thousands)
Investment in Bimini Capital Trust II
$
$
Prepaid expenses
Servicing advances
Other
Total other
assets
$
1,437
$
1,467
Receivables
are carried
at their
estimated
collectible
amounts.
The Company
maintains
an allowance
for credit
losses for
expected
losses, if
any. Management
considers
the following
factors when
determining
the expected
losses of
specific
accounts:
past transaction
activity, current
economic
conditions,
changes in
payment terms
and reasonable
and supportable
forecasts.
Adjustments
to the allowance
for credit
losses are
recorded
with a corresponding
adjustment
included in
the consolidated
statement
of operations.
As of December
31,
2021 and
2020, management
determined
that no allowance
for credit
losses was
necessary.
Collections
on amounts
previously
written off
are included
in income
as received.
NOTE 6.
REPURCHASE AGREEMENTS
The Company
pledges certain
of its RMBS
as collateral
under repurchase
agreements
with financial
institutions.
Interest
rates are
generally
fixed based
on prevailing
rates corresponding
to the terms
of the borrowings,
and interest
is generally
paid at the
termination
of a
borrowing.
If the fair
value of the
pledged securities
declines,
lenders
will typically
require the
Company to
post additional
collateral
or pay
down borrowings
to re-establish
agreed upon
collateral
requirements,
referred
to as "margin
calls." Similarly,
if the fair
value of
the pledged
securities
increases,
lenders
may release
collateral
back to the
Company. As of December
31, 2021,
the Company
had met all
margin call
requirements.
- 76 -
As of December
31, 2021
and December
31, 2020,
the Company’s
repurchase
agreements
had remaining
maturities
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
December 31, 2021
Fair value of securities pledged, including accrued
interest receivable
$
-
$
60,859
$
$
-
$
61,018
Repurchase agreement liabilities associated with
these securities
$
-
$
58,793
$
$
-
$
58,878
Net weighted average borrowing rate
-
0.14%
0.70%
-
0.14%
December 31, 2020
Fair value of securities pledged, including accrued
interest receivable
$
-
$
49,096
$
8,853
$
7,405
$
65,354
Repurchase agreement liabilities associated with
these securities
$
-
$
49,120
$
8,649
$
7,302
$
65,071
Net weighted average borrowing rate
-
0.25%
0.23%
0.30%
0.25%
In addition,
cash pledged
to counterparties
as collateral
for repurchase
agreements
was approximately
$
1.4
million and
$
3.4
million as
of December
31, 2021
and 2020,
respectively.
If, during
the term
of a repurchase
agreement,
a lender
files for
bankruptcy, the
Company might
experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender,
including the accrued interest receivable,
and cash posted by the Company as collateral, if any.
At December
31, 2021
and December
31, 2020,
the Company
had an aggregate
amount at
risk (the
difference
between the
amount loaned
to the Company,
including
interest
payable, and
the fair
value of securities
and
cash pledged
(if any),
including
accrued interest
on such securities)
with all
counterparties
of approximately
$
3.5
million and
$
3.6
million,
respectively.
The Company
did not
have an amount
at risk with
any individual
counterparty
greater
than 10%
of the Company’s
equity at
December
31, 2021
and December
31, 2020.
NOTE 7. PLEDGED ASSETS
Assets Pledged
to Counterparties
The table
below summarizes
Bimini’s assets
pledged
as collateral
under its
repurchase
agreements
and derivative
agreements
as of
December
31, 2021
and 2020.
($ in thousands)
December 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
58,029
$
-
$
58,029
$
64,902
$
-
$
64,902
Structured MBS - at fair value
2,759
-
2,759
-
Accrued interest on pledged securities
-
-
Cash
1,391
-
1,391
3,352
3,353
Total
$
62,409
$
-
$
62,409
$
68,706
$
$
68,707
Assets Pledged
from Counterparties
- 77 -
The table
below summarizes
assets pledged
to Bimini
from counterparties
under repurchase
agreements
as of December
31, 2021
and 2020.
Cash received
as margin
is recognized
in cash and
cash equivalents
with a corresponding
amount recognized
as an increase
in
repurchase
agreements
in the consolidated
balance sheets.
($ in thousands)
Assets Pledged to Bimini
Cash
$
$
Total
$
$
NOTE 8. OFFSETTING ASSETS AND LIABILITIES
The Company’s
repurchase
agreements
are subject
to underlying
agreements
with master
netting or
similar arrangements,
which
provide for
the right
of offset in
the event
of default
or in the
event of
bankruptcy
of either
party to
the transactions.
The Company
reports
its assets
and liabilities
subject to
these arrangements
on a gross
basis.
The following
table presents
information
regarding
those assets
and liabilities
subject to
such arrangements
as if the
Company had
presented
them on a
net basis
as of December
31, 2021
and 2020.
(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, 2021
Repurchase Agreements
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
December 31, 2020
Repurchase Agreements
$
65,071
$
-
$
65,071
$
(61,719)
$
(3,352)
$
-
$
65,071
$
-
$
65,071
$
(61,719)
$
(3,352)
$
-
The amounts
disclosed
for collateral
received by
or posted
to the same
counterparty
are limited
to the amount
sufficient
to reduce
the
asset or
liability
presented
in the consolidated
balance sheet
to zero.
The fair
value of the
actual collateral
received by
or posted
to the
same counterparty
typically
exceeds the
amounts presented.
See Note
7 for a discussion
of collateral
posted for, or
received against,
repurchase
obligations
and derivative
instruments.
NOTE 9.
LONG-TERM DEBT
Long-term
debt at December
31, 2021
and 2020
is summarized
as follows:
(in thousands)
Junior subordinated debt
$
26,804
$
26,804
Note payable
Paycheck Protection Plan ("PPP") loan
-
Total
$
27,439
$
27,613
Junior Subordinated
Debt
During 2005,
Bimini Capital
sponsored
the formation
of a statutory
trust, known
as Bimini
Capital Trust
II (“BCTII”)
of which 100%
of
- 78 -
the common
equity is owned
by Bimini
Capital.
It was formed
for the purpose
of issuing
trust preferred
capital securities
to third-party
investors
and investing
the proceeds
from the
sale of such
capital securities
solely in
junior subordinated
debt securities
of Bimini
Capital.
The debt
securities
held by BCTII
are the sole
assets of
BCTII.
As of December
31, 2021
and 2020,
the outstanding
principal
balance on
the junior
subordinated
debt securities
owed to BCTII
was
$
26.8
million.
The BCTII
trust preferred
securities
and Bimini
Capital's
BCTII Junior
Subordinated
Notes have
a rate of
interest that
floats
at a spread
of
3.50
% over the
prevailing
three-month
LIBOR rate.
As of December
31, 2021,
the interest
rate was
3.70
%. The BCTII
trust
preferred
securities
and Bimini
Capital's
BCTII Junior
Subordinated
Notes require
quarterly
interest
distributions
and are redeemable
at
Bimini Capital's
option, in
whole or
in part and
without penalty.
Bimini Capital's
BCTII Junior
Subordinated
Notes are
subordinate
and junior
in right
of payment
to all present
and future
senior indebtedness.
BCTII is
a VIE because
the holders
of the equity
investment
at risk do
not have
substantive
decision
making ability
over BCTII’s
activities.
Since Bimini
Capital's
investment
in BCTII's
common equity
securities
was financed
directly by
BCTII as
a result
of its loan
of the
proceeds
to Bimini
Capital,
that investment
is not considered
to be an
equity investment
at risk.
Since Bimini
Capital's
common share
investment
in BCTII
is not a variable
interest,
Bimini Capital
is not the
primary beneficiary
of BCTII.
Therefore,
Bimini Capital
has not
consolidated
the financial
statements
of BCTII
into its consolidated
financial
statements
and this
investment
is accounted
for on the
equity
method.
The accompanying
consolidated
financial
statements
present
Bimini Capital's
BCTII Junior
Subordinated
Notes issued
to BCTII
as a
liability
and Bimini
Capital's
investment
in the common
equity securities
of BCTII
as an asset
(included
in other
assets).
For financial
statement
purposes,
Bimini Capital
records payments
of interest
on the Junior
Subordinated
Notes issued
to BCTII
as interest
expense.
Note Payable
On October
30, 2019,
the Company
borrowed
$
680,000
from a bank.
The note
is payable
in equal
monthly principal
and interest
installments
of approximately
$
5,000
through October
30, 2039.
Interest
accrues at
4.89
% through
October 30,
2024. Thereafter,
interest
accrues based
on the weekly
average
yield to the
United States
Treasury securities
adjusted to
a constant
maturity of
5 years,
plus
3.25
%.
The note
is secured
by a mortgage
on the Company’s
office building.
Paycheck Protection
Plan Loan
On April
13, 2020,
the Company
received approximately
$
152,000
through the
Paycheck Protection
Program (“PPP”)
of the CARES
Act in the
form of a
low interest
loan.
The PPP
loan had
a fixed rate
of
1.00
% and a term
of two years,
if not forgiven,
in whole or
in part.
The Small
Business Administration
notified the
Company that,
effective April
22, 2021,
all principal
and accrued
interest
under the
PPP
loan was
forgiven.
The table
below presents
the future
scheduled
principal
payments
on the Company’s
long-term
debt.
(in thousands)
Year Ending December
31,
Amounts
$
Thereafter
27,313
Total
$
27,439
NOTE 10.
CAPITAL STOCK
- 79 -
Authorized
Shares
The total
number of
shares of
capital stock
which the
Company
has the authority
to issue is
110,000,000 shares,
classified
as
100,000,000
shares of
common stock,
and
10,000,000
shares of
preferred
stock. The
Board of Directors
has the authority
to classify
any
unissued shares
by setting
or changing
in any one
or more respects
the preferences,
conversion
or other
rights, voting
powers,
restrictions,
limitations
as to dividends,
qualifications
or terms
or conditions
of redemption
of such shares.
Common Stock
Of the
100,000,000
authorized
shares of
common stock,
98,000,000
shares were
designated
as Class A
common stock,
1,000,000
shares were
designated
as Class B
common stock
and
1,000,000
shares were
designated
as Class C
common stock.
Holders
of shares
of common
stock have
no sinking
fund or redemption
rights and
have no pre-emptive
rights to
subscribe
for any of
the Company’s
securities.
All common
shares
have a $
0.001
par value.
Class A
Common Stock
Each outstanding
share of
Class A common
stock entitles
the holder
to one vote
on all matters
submitted
to a vote
of stockholders,
including
the election
of directors.
Holders of
shares of
Class A common
stock are
not entitled
to cumulate
their votes
in the election
of
directors.
Subject to
the preferential
rights of
any other
class or series
of stock
and to the
provisions
of the Company's
charter, as amended,
regarding
the restrictions
on transfer
of stock,
holders of
shares of
Class A common
stock are
entitled to
receive dividends
on such stock
if,
as and when
authorized
and declared
by the Board
of Directors.
Class B
Common Stock
Each outstanding
share of
Class B common
stock entitles
the holder
to one vote
on all matters
submitted
to a vote
of common
stockholders,
including
the election
of directors.
Holders of
shares of
Class B common
stock are
not entitled
to cumulate
their votes
in the
election of
directors.
Holders of
shares of
Class A common
stock and
Class B common
stock shall
vote together
as one class
in all matters
except that
any matters
which would
adversely
affect the
rights and
preferences
of Class B
common stock
as a separate
class shall
require a
separate
approval
by holders
of a majority
of the outstanding
shares of
Class B common
stock.
Holders of shares of Class B
common stock are entitled to receive dividends on each share of Class B common
stock in an amount equal to the dividends declared
on each share of Class A common stock if, as and when authorized and declared by
the Board of Directors.
Each share
of Class
B common
stock shall
automatically
be converted
into one
share of
Class A common
stock on the
first day
of the
fiscal quarter
following
the fiscal
quarter during
which the
Company's Board
of Directors
were notified
that, as
of the end
of such fiscal
quarter, the
stockholders'
equity attributable
to the Class
A common
stock,
calculated
on a pro
forma basis
as if conversion
of the Class
B
common stock
(or portion
thereof
to be converted)
had occurred,
and otherwise
determined
in accordance
with GAAP, equals
no less than
$
150.00
per share
(adjusted
equitably
for any stock
splits, stock
combinations,
stock dividends
or the like);
provided,
that the number
of
shares of
Class B common
stock to
be converted
into Class
A common
stock in any
quarter shall
not exceed
an amount
that will
cause the
stockholders'
equity attributable
to the Class
A common
stock calculated
as set forth
above to
be less than
$
150.00
per share;
provided
further, that
such conversions
shall continue
to occur
until all
shares of
Class B common
stock have
been converted
into shares
of Class
A
common stock;
and provided
further, that
the total
number of
shares of
Class A common
stock issuable
upon conversion
of the Class
B
common stock
shall not
exceed
% 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 C
Common Stock
- 80 -
No dividends
will be paid
on the Class
C common
stock.
Holders
of shares
of Class
C common
stock are
not entitled
to vote
on any
matter submitted
to a vote
of stockholders,
including
the election
of directors,
except that
any matters
that would
adversely affect
the rights
and privileges
of the Class
C common
stock as a
separate
class shall
require the
approval
of a majority
of the Class
C common
stock.
Each share
of Class
C common
stock shall
automatically
be converted
into one
share of
Class A common
stock on the
first day
of the
fiscal quarter
following
the fiscal
quarter during
which the
Company's Board
of Directors
were notified
that, as
of the end
of such fiscal
quarter, the
stockholders'
equity attributable
to the Class
A common
stock,
calculated
on a pro
forma basis
as if conversion
of the Class
C
common stock
had occurred
and giving
effect to the
conversion
of all of
the shares
of Class B
common stock
as of such
date, and
otherwise
determined
in accordance
with GAAP, equals
no less than
$
150.00
per share
(adjusted
equitably
for any stock
splits,
stock
combinations,
stock dividends
or the like);
provided,
that the
number of
shares of
Class C common
stock to be
converted
into Class
A
common stock
shall not
exceed an
amount that
will cause
the stockholders'
equity attributable
to the Class
A common
stock calculated
as
set forth
above to
be less than
$
150.00
per share;
and provided
further, that
such conversions
shall continue
to occur until
all shares
of
Class C common
stock have
been converted
into shares
of Class A
common stock
and provided
further, that
the total
number of
shares of
Class A common
stock issuable
upon conversion
of the Class
C common
stock shall
not exceed
% 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
par value per share. The Company's Board of Directors
has the authority to classify any unissued shares of preferred stock and to reclassify
any previously classified but unissued shares of
any series of preferred stock previously authorized by the Board of Directors.
Prior to issuance of shares of each class or series of
preferred stock, the Board of Directors is required by the Company’s charter to fix the terms,
preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption for
each such class or series.
Classified and Designated Shares
Pursuant to the Company’s supplementary amendment of its charter, effective November 3, 2005, and by resolutions adopted
on
September 29, 2005, the Company’s Board of Directors classified and designated
1,800,000
shares of the authorized but unissued
preferred stock, $
0.001
par value, as Class A Redeemable Preferred Stock and
2,000,000
shares of the authorized but unissued
preferred stock as Class B Redeemable Preferred Stock.
Preferred Stock
The Class A Redeemable Preferred Stock and Class B Redeemable Preferred
Stock rank equal to each other and shall have the
same preferences, rights, voting powers, restrictions, limitations as to dividends
and other distributions, qualifications and terms;
provided, however that the redemption provisions of the Class A Redeemable Preferred
Stock and the Class B Redeemable Preferred
Stock differ.
Each outstanding share of Class A Redeemable Preferred Stock and Class B
Redeemable Preferred Stock shall have
one-fifth of a vote on all matters submitted to a vote of stockholders (or such lesser
fraction of a vote as would be required to comply
with the rules and regulations of the NYSE relating to the Company’s right to issue securities
without obtaining a stockholder vote).
Holders of shares of preferred stock shall vote together with holders of shares
of common stock as one class in all matters that would
be subject to a vote of stockholders.
The previously outstanding shares of Class A Redeemable Preferred Stock were
converted into Class A common stock on April
28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.
- 81 -
In 2015 the Board approved Articles Supplementary to the Company’s charter reclassifying
and designating
1,800,000
shares of
authorized but unissued Class A Redeemable Preferred Stock and
2,000,000
shares of authorized but unissued Class B Redeemable
Preferred Stock into undesignated preferred stock, par value $
0.001
per share, of the Company (“Preferred Stock”). After giving effect
to the reclassification and designation of the shares of Class A Preferred Stock
and Class B Preferred Stock, the Company has
authority to issue
10,000,000
shares of undesignated Preferred Stock and no shares of Class A Preferred
Stock or Class B Preferred
Stock. The Articles Supplementary were filed with the State Department
of Assessments and Taxation of Maryland (the “SDAT”) and
became effective upon filing on December 21, 2015.
In 2015 the Board approved Articles Supplementary to the Company’s charter creating
a new series of Preferred Stock designated
as Series A Junior Preferred Stock, par value $
0.001
per share, of the Company (the “Series A Preferred Stock”). The Articles
Supplementary were filed with the SDAT and became effective upon filing on December 21, 2015.
Rights Plan
On
December 21, 2015
the Board adopted a rights agreement and declared a distribution
of one preferred stock purchase right
(“Right”) for each outstanding share of the Company’s Class A common stock, Class B common
stock, and Class C common stock.
The distribution was payable to stockholders of record as of the close of business
on December 21, 2015.
The Rights
. Subject to the terms, provisions and conditions of the Rights Plan, if the
Rights become exercisable, each Right would
initially represent the right to purchase from the Company one ten-thousandth
of a share of Series A Preferred Stock for a purchase
price of $4.76, subject to adjustment in accordance with the terms of the Rights
Plan (the “Purchase Price”). If issued, each fractional
share of Series A Preferred Stock would give the stockholder approximately the
same distribution, voting and liquidation rights as does
one share of the Company’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights
as a
stockholder of the Company, including without limitation any distribution, voting or liquidation rights.
Exercisability.
The Rights will generally not be exercisable until the earlier of (i) 10 business
days after a public announcement by
the Company that a person or group has acquired
4.9
% or more of the outstanding Class A common stock without the approval
of the
Board of Directors (an “Acquiring Person”) and (ii) 10 business days after the
commencement of a tender or exchange offer by a
person or group for
4.9
% or more of the Class A common stock.
The date that the Rights may first become exercisable is referred to as
the “Distribution Date.” Until the Distribution Date, the
Class A common stock, Class B common stock and Class C common stock
certificates will represent the Rights and will contain a
notation to that effect. Any transfer of shares of Class A common stock, Class B common
stock and/or Class C common stock prior to
the Distribution Date will constitute a transfer of the associated Rights.
After the Distribution Date, the Rights may be transferred other
than in connection with the transfer of the underlying shares of Class A common
stock, Class B common stock or Class C common
stock.
After the Distribution Date and following a determination by the Board that a person
is an Acquiring Person, each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will thereupon
become void), will thereafter have the right to
receive upon exercise of a Right and payment of the Purchase Price,
that number of shares of Class A common stock, Class B
common stock or Class C common stock, as the case may be, having a market
value of two times the Purchase Price (or, at our
option, shares of Series A Preferred Stock or other consideration as provided
in the Rights Plan).
Exchange
. After the Distribution Date and following a determination by the
Board that a person or group is an Acquiring Person,
the Board may exchange the Rights (other than Rights owned by
such an Acquiring Person which will have become void), in whole or
in part, at an exchange ratio of one share of Class A common stock, Class B common
stock or Class C common stock, as the case
may be, or a fractional share of Series A Preferred Stock (or of a share of a similar
class or series of the Company’s preferred stock
having similar Rights, preferences and privileges) of equivalent value, per Right
(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 pursuant
to the Rights Plan, (iv) the repeal of
Section 382 of the Code or any successor statute if the Board determines
that the Rights Plan is no longer necessary for the
preservation of the applicable tax benefits, (v) the beginning of a taxable
year of the Company to which the Board determines that no
applicable tax benefits may be carried forward and (vi) the close of business
on June 30, 2016 if approval of the Rights Plan by the
Company’s stockholders has not been obtained.
Redemption.
At any time prior to the time an Acquiring Person becomes such,
the Board may redeem the Rights in whole, but not
in part, at a price of $0.001 per Right (the “Redemption Price”). The redemption
of the Rights may be made effective at such time, on
such basis and with such conditions as the Board in its sole discretion may establish.
Immediately upon any redemption of the Rights,
the right to exercise the Rights will terminate and the only right of the holders of Rights
will be to receive the Redemption Price.
Anti-Dilution Provisions.
The Board may adjust the Purchase Price, the number of shares
of Series A Preferred Stock or other
securities issuable and the number of outstanding Rights to prevent dilution that
may occur as a result of certain events, including
among others, a stock dividend, a forward or reverse stock split or a reclassification
of the preferred shares or Class A common stock,
Class B common stock or Class C common stock. No adjustments to the Purchase
Price of less than 1% will be made.
Anti-Takeover
Effects.
While this was not the purpose of the Board when adopting the Rights Plan,
the Rights will have certain
anti-takeover effects. The Rights will cause substantial dilution to any person or group that
attempts to acquire the Company without
the approval of the Board. As a result, the overall effect of the Rights may be to render more
difficult or discourage any attempt to
acquire the Company even if such acquisition may be favorable to the interests of the
Company’s stockholders. Because the Board can
redeem the Rights, the Rights should not interfere with a merger or other
business combination approved by the Board.
Amendments.
Before the Distribution Date, the Board may amend or supplement
the Rights Plan without the consent of the
holders of the Rights. After the Distribution Date, the Board may amend or supplement
the Rights Plan only to cure an ambiguity, to
alter time period provisions, to correct inconsistent provisions, or to make
any additional changes to the Rights Plan, but only to the
extent that those changes do not impair or adversely affect, in any material respect, any
Rights holder and do not result in the Rights
again becoming redeemable, and no such amendment may cause the Rights again
to become redeemable or cause this Rights Plan
again to become amendable other than in accordance with the applicable timing
of the Rights Plan.
There were
no issuances
of the Company's
Class A Common
Stock, Class
B Common
Stock or
Class C Common
Stock during
the
years ended
December
31, 2021 and
2020.
Stock Repurchase
Plans
On March 26,
2018, the
Board of
Directors
of the Company
(the “Board”)
approved
a Stock Repurchase
Plan (the
“2018 Repurchase
Plan”).
Pursuant
to the 2018
Repurchase
Plan, the
Company could
purchase
up to 500,000
shares of
its Class
A Common
Stock from
time to time,
subject to
certain limitations
imposed by
Rule 10b-18
of the Securities
Exchange
Act of 1934.
The 2018
Repurchase
Plan
was terminated
on September
16, 2021.
During the
period beginning
January 1,
2021 through
September
16, 2021,
the Company
repurchased
a total of
1,195
shares under
the 2018
Repurchase
Plan at an
aggregate
cost of approximately
$
2,298
, including
commissions
and fees,
for a weighted
average price
of
$
1.92
per share.
From the
inception
of the 2018
Repurchase
Plan through
its termination,
the Company
repurchased
a total of
71,598
shares at
an aggregate
cost of approximately
$
169,243
, including
commissions
and fees,
for a weighted
average price
of $
2.36
per share.
On September
16, 2021,
the Board
authorized
a share repurchase
plan pursuant
to Rule 10b5-1
of the Securities
Exchange
Act of
1934 (the
“2021 Repurchase
Plan”). Pursuant
to the 2021
Repurchase
Plan, the
Company may
purchase
shares of
its Class
A Common
- 83 -
Stock from
time to time
for an aggregate
purchase
price not
to exceed
$2.5 million.
Share repurchases
may be executed
through
various
means, including,
without limitation,
open market
transactions.
The 2021
Repurchase
Plan does
not obligate
the Company
to purchase
any shares,
and it expires
on September
16, 2023.
The authorization
for the 2021
Repurchase
Plan may
be terminated,
increased
or
decreased
by the Company’s
Board of
Directors
in its discretion
at any time.
During the
year ended
December
31, 2021,
the Company
repurchased
a total of
92,287
shares at
an aggregate
cost of approximately
$
192,905
, including
commissions
and fees,
for a weighted
average price
of $
2.09
per share
under the
2021 repurchase
Plan.
Subsequent
to December
31, 2021,
and through
March 10,
2022, the
Company repurchased
a total of
170,422
shares at
an aggregate
cost of approximately
$
343,732
, including
commissions
and fees,
for a
weighted
average price
of $
2.02
per share.
Tender Offer
In July 2021,
the Company
completed
a “modified
Dutch auction”
tender offer
and paid
an aggregate
of $1.5 million,
excluding
fees
and related
expenses,
to repurchase
812,879
shares of
Bimini Capital’s
Class A common
stock at
a price of
$
1.85
per share.
The
aggregate
cost of the
tender offer,
including
commissions
and fees,
was approximately
$
1.6
million.
NOTE 11.
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
legal actions arising in the ordinary course of
business.
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amount
of $
33.1
million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of additional
indemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
in the related MLPA’s.
The Company
believes the demands are without merit and intends to defend against the demands
vigorously.
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 contingencies
at December 31, 2021.
NOTE 12.
INCOME TAXES
In 2021, the Company recorded an income tax benefit of $
0.4
million, including a $
2.2
million decrease in the deferred tax asset
valuation allowance as a result of management’s reassessment of the Company’s ability to
utilize net operating losses (“NOLs”) and
capital loss carryforwards to offset future taxable income. In 2020, the Company recorded
an income tax benefit of $
1.4
million,
including a $
0.3
million increase in the deferred tax asset valuation allowance as a result
of management’s reassessment of the
Company’s ability to utilize NOLs and capital loss carryforwards to offset future taxable income.
The income tax benefit included in the consolidated statements of operations consists
of the following for the years ended
December 31, 2021 and 2020:
(in thousands)
Current
$
-
$
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 income
tax statutory rate of 21 percent on
income or loss before income tax expense.
A reconciliation for the years ended December 31, 2021 and 2020 is
presented in the table
below.
(in thousands)
Federal tax benefit based on statutory rate applicable for each year
$
(19)
$
(1,440)
State income tax benefit
(8)
(302)
Non-deductible expenses
-
(Decrease) increase of deferred tax asset valuation allowance
(2,191)
Other
1,219
Income tax benefit
$
(368)
$
(1,369)
Deferred tax assets consisted of the following as of December 31, 2021
and 2020:
(in thousands)
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
Capital loss carryforwards
1,423
2,573
Management agreement
Other
1,232
64,820
66,643
Valuation allowance
(29,784)
(31,975)
Net deferred tax assets
$
35,036
$
34,668
As of
December 31,
2021 and
2020, the
Company had
federal NOL
carryforwards of
approximately $
267.7
million and
$
268.9
million,
respectively, and Florida NOL
carryforwards of $
39.6
million and $
40.8
million, respectively. The NOL
carryforwards can
be used to
offset
future taxable income and will begin to expire in 2026.
In connection
with Orchid’s
2013 IPO,
Bimini Advisors
paid for,
and expensed
for GAAP
purposes, certain
offering costs
totaling
approximately
$
3.2
million.
For
tax
purposes,
these
offering
costs
created
an
intangible
asset
related
to
the
Orchid
management
agreement with a tax basis of
$
3.2
million. The deferred tax asset related
to the intangible asset at December
31, 2021 and 2020 totaled
$
0.8
million and $
0.8
million, respectively.
In assessing the
realizability of deferred tax assets,
management considers whether it
is more likely than
not that some portion
or
all of the deferred
tax assets will not
be realized. The ultimate realization
of capital loss and NOL
carryforwards is dependent upon the
generation
of
future
capital
gains
and
taxable
income
in
periods
prior
to
their
expiration.
The
valuation
allowance
is
based
on
management’s estimated
projections of
future taxable
income, and
the projected
ability to
utilize the
NOL carryforwards
to offset
that
projected taxable income before the NOLs expire. With respect to the taxable
income projections, management estimates the dividends
to be received on its Orchid share holdings as well as the management
fees and overhead sharing payments it will receive from Orchid.
With respect to the MBS portfolio, management makes estimates of various metrics such as the yields on the assets it plans to acquire,
its future funding and
interest costs, future
prepayment speeds and
net interest margin,
among others. Estimates are
also made for other
assets and expenses.
Changes in the taxable
income projections have a
direct impact on the
amount of the valuation
allowance, and
the impact
in any
reporting period
may be
significant. Utilization
of the
NOLs is
based on
these estimates
and the
assumptions that
management will be able to reinvest retained
earnings in order to grow the
MBS portfolio going forward and that
market value will not be
eroded due to adverse market conditions or hedging inefficiencies.
These estimates and assumptions may change from year to year to
the extent
Orchid’s book
value changes,
thus changing
projected management
fees and
overhead sharing
payments, and/or
market
conditions, including changes in interest rates, such that estimates
with respect to the portfolio metrics warrant revisions.
- 85 -
The Company
continues to
hold a
minimal amount
of residual
interests in
real estate
mortgage investment
conduits (“REMICs”),
some of which generate excess inclusion
income (“EII”).
These residual interests have no recorded
value on the balance sheet.
In its
tax
return,
the
Company
disclosed
a
tax
filing
position
related
to
the
EII
taxable
income
and
has
since
included
a
notice
of
inconsistent treatment in its
tax returns to
disclose the position.
The tax filing
position will continue to
be disclosed with respect
to the
remaining securitizations as long as they are held.
The Company has
not identified any
unrecognized tax benefits
that would result
in liabilities its
consolidated financial statements.
The Company has not had any settlements in the current period with taxing
authorities and is not currently under audit. Additionally,
no
tax benefits have been recognized in the consolidated financial statements
as a result of a lapse of the applicable statute of limitations.
NOTE 13.
EARNINGS PER SHARE
Shares of
Class B common
stock, participating
and convertible
into Class
A common stock,
are entitled
to receive
dividends
in an
amount equal
to the dividends
declared
on each share
of Class A
common stock
if, and when,
authorized
and declared
by the Board
of
Directors.
The Class
B common stock
is included
in the computation
of basic EPS
using the
two-class
method, and
consequently
is
presented
separately
from Class
A common
stock. Shares
of Class
B common
stock are
not included
in the computation
of diluted
Class A
EPS as the
conditions
for conversion
to Class A
common stock
were not
met at December
31, 2021 and
2020.
Shares of
Class C common
stock are
not included
in the basic
EPS computation
as these shares
do not have
participation
rights.
Shares of
Class C common
stock are
not included
in the computation
of diluted
Class A EPS
as the conditions
for conversion
to Class
A
common stock
were not
met at December
31, 2021
and 2020.
The table
below reconciles
the numerators
and denominators
of the basic
and diluted
EPS.
(in thousands, except per-share information)
Basic and diluted EPS per Class A common share:
Income (loss) attributable to Class A common shares:
Basic and diluted
$
$
(5,474)
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
10,702
11,609
Effect of weighting
-
Weighted average shares-basic and diluted
11,198
11,609
Income (loss) per Class A common share:
Basic and diluted
$
0.02
$
(0.47)
(in thousands, except per-share information)
Basic and diluted EPS per Class B common share:
Income (loss) attributable to Class B common shares:
Basic and diluted
$
$
(15)
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
Effect of weighting
-
-
Weighted average shares-basic and diluted
Income (loss) per Class B common share:
Basic and diluted
$
0.02
$
(0.47)
NOTE 14.
FAIR VALUE
- 86 -
Fair value
is the price
that would
be received
to sell an
asset or
paid to transfer
a liability
(an exit
price). A
fair value
measure should
reflect the
assumptions
that market
participants
would use
in pricing
the asset
or liability, including
the assumptions
about the
risk inherent
in a particular
valuation
technique,
the effect
of a restriction
on the sale
or use of
an asset and
the risk of
non-performance.
Required
disclosures
include stratification
of balance
sheet amounts
measured
at fair value
based on inputs
the Company
uses to derive
fair value
measurements.
These stratifications
are:
●
Level 1 valuations,
where the
valuation
is based on
quoted market
prices for
identical
assets or
liabilities
traded in
active markets
(which include
exchanges
and over-the-counter
markets with
sufficient
volume),
●
Level 2 valuations,
where the
valuation
is based on
quoted market
prices for
similar instruments
traded in
active markets,
quoted
prices for
identical
or similar
instruments
in markets
that are
not active
and model-based
valuation
techniques
for which
all
significant
assumptions
are observable
in the market,
and
●
Level 3 valuations,
where the
valuation
is generated
from model-based
techniques
that use
significant
assumptions
not
observable
in the market,
but observable
based on
Company-specific
data. These
unobservable
assumptions
reflect the
Company’s own
estimates
for assumptions
that market
participants
would use
in pricing
the asset
or liability. Valuation
techniques
typically
include option
pricing models,
discounted
cash flow
models and
similar techniques,
but may also
include
the
use of market
prices of
assets or
liabilities
that are
not directly
comparable
to the subject
asset or
liability.
MBS, Orchid
common stock,
retained
interests
and TBA
securities
were all
recorded
at fair value
on a recurring
basis during
2021 and
2020. When
determining
fair value
measurements,
the Company
considers
the principal
or most
advantageous
market in
which it
would
transact
and considers
assumptions
that market
participants
would use
when pricing
the asset.
When possible,
the Company
looks to
active and
observable
markets to
price identical
assets.
When identical
assets are
not traded
in active
markets, the
Company looks
to
market observable
data for
similar assets.
Fair value
measurements
for the retained
interests
are generated
by a model
that requires
management
to make a
significant
number of
assumptions,
and this
model resulted
in a value
of zero at
both December
31, 2021 and
2020.
The Company's
MBS and TBA
securities
are valued
using Level
2 valuations,
and such valuations
currently
are determined
by the
Company based
on independent
pricing sources
and/or third
party broker
quotes, when
available.
Because the
price estimates
may vary,
the Company
must make
certain judgments
and assumptions
about the
appropriate
price to
use to calculate
the fair
values. The
Company
and the independent
pricing sources
use various
valuation
techniques
to determine
the price
of the Company’s
securities.
These
techniques
include observing
the most
recent market
for like
or identical
assets (including
security
coupon, maturity,
yield, and
prepayment
speeds), spread
pricing techniques
to determine
market credit
spreads (option
adjusted spread,
zero volatility
spread, spread
to the U.S.
Treasury curve
or spread
to a benchmark
such as a
TBA security),
and model
driven approaches
(the discounted
cash flow
method, Black
Scholes and
SABR models
which rely
upon observable
market rates
such as the
term structure
of interest
rates and
the volatility).
The
appropriate
spread pricing
method used
is based on
market convention.
The pricing
source determines
the spread
of recently
observed
trade activity
or observable
markets for
assets similar
to those
being priced.
The spread
is then adjusted
based on variances
in certain
characteristics
between the
market observation
and the asset
being priced.
Those characteristics
include: type
of asset,
the expected
life
of the asset,
the stability
and predictability
of the expected
future cash
flows of
the asset,
whether
the coupon
of the asset
is fixed
or
adjustable,
the guarantor
of the security
if applicable,
the coupon,
the maturity, the
issuer, size of
the underlying
loans, year
in which
the
underlying
loans were
originated,
loan to value
ratio, state
in which the
underlying
loans reside,
credit score
of the underlying
borrowers
and other
variables
if appropriate.
The fair
value of the
security is
determined
by using the
adjusted
spread.
The Company’s
futures contracts
are Level
1 valuations,
as they are
exchange-traded
instruments
and quoted
market prices
are
readily available.
Futures contracts
are settled
daily. The Company’s
interest
rate swaps
and interest
rate swaptions
are Level 2
valuations.
The fair
value of interest
rate swaps
is determined
using a discounted
cash flow
approach
using forward
market interest
rates
and discount
rates, which
are observable
inputs. The
fair value
of interest
rate swaptions
is determined
using an option
pricing model.
The following
table presents
financial
assets and
liabilities
measured
at fair value
on a recurring
basis as of
December
31, 2021
and
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, 2021
Mortgage-backed securities
$
60,803
$
-
$
60,803
$
-
Orchid Island Capital, Inc. common stock
11,679
11,679
-
-
December 31, 2020
Mortgage-backed securities
$
65,178
$
-
$
65,178
$
-
Orchid Island Capital, Inc. common stock
13,548
13,548
-
-
During the
years ended
December
31, 2021
and 2020,
there were
no transfers
of financial
assets or
liabilities
between levels
1, 2 or 3.
NOTE 15. SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments; the asset
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist
of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
Total revenue received under this management
agreement for the years ended December 31, 2021 and 2020, were approximately
$
9.8
million and $
6.8
million, respectively,
accounting for approximately
% and
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted
by Royal Palm.
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the years ended December 31, 2021 and 2020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
-
-
(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)
(3)
-
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
-
-
(8,285)
Intercompany expenses
(1)
-
(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
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
- 88 -
Advisory services, other operating segments
(1)
-
-
(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)
-
-
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 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 proportional
share of total revenues.
NOTE 16. RELATED PARTY TRANSACTIONS
Other Relationships with Orchid
At both December 31, 2021 and 2020, the Company owned
2,595,357
shares of Orchid common stock representing
approximately
1.5
% and
3.4
%, respectively, of Orchid’s outstanding common stock, on such dates. During the years ended December
31, 2021 and 2020, the Company received dividends on this common stock
investment of approximately $
2.0
million and $
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, is eligible to receive compensation
from Orchid and owns shares of common stock of
Orchid.
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’s Board of Directors, is
eligible to receive compensation from
Orchid, and owns shares of common stock of Orchid.
Robert J. Dwyer and Frank E. Jaumot, our independent directors, each
own
shares of common stock of Orchid.
- 89 -

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
We had no
disagreements
with our
Independent
Registered
Public Accounting
Firm on any
matter of
accounting
principles
or
practices
or financial
statement
disclosure.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”),
the Company carried out an evaluation, under the
supervision and with the participation of the Company’s management, including the Company’s Chief
Executive Officer (“the CEO”)
and Chief Financial Officer (“the CFO”), of the effectiveness of the design and operation of the Company’s disclosure
controls and
procedures, as defined in Rule 13a-15(e) under the Exchange Act of 1934 (the “Exchange
Act”). Based on this evaluation, the CEO
and CFO concluded that the Company’s disclosure controls and procedures, as designed
and implemented, were effective as of the
evaluation date (1) in ensuring that information regarding the Company
and its subsidiaries is accumulated and communicated to our
management, including our CEO and CFO, by our employees, as appropriate
to allow timely decisions regarding required disclosure
and (2) in providing reasonable assurance that information the Company must disclose
in its periodic reports under the Exchange Act
is recorded, processed, summarized and reported within the time periods
prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company’s internal control over financial
reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over
financial reporting. In response to the COVID-19 pandemic, Company employees
began 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 were unchanged during this period.
Management’s Report of Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) under
the Securities Exchange Act as a process designed by, or
under the supervision of, the Company’s principal executive and principal financial officers
and effected by the Company’s board of
directors, management and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of
the assets of the Company;
●
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company
are being made only in accordance with authorizations of management
and directors of the Company; and
●
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.
As a result,
even systems determined to be effective can provide only reasonable assurance regarding
the preparation and presentation of
consolidated financial statements.
Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks
that controls may become inadequate because of changes in conditions or that
the degree of compliance with the policies or
procedures may deteriorate.
- 90 -
The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of
December 31, 2021.
In making this assessment, the Company’s management used criteria
set forth in
Internal Control-Integrated
Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s assessment, the Company’s management believes that, as of December 31, 2021, the
Company’s
internal control over financial reporting was effective based on those criteria.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below is
incorporated herein by reference to the Company's
definitive Proxy Statement relating to the Company’s 2022 Annual Meeting of Stockholders,
which the Company expects to file with the
U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not
later than 120 days after December 31, 2021 (the "Proxy
Statement").

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference
to the Proxy Statement and to Part II, Item 5 of this
Form 10-K.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference
to the Proxy Statement.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated herein by reference
to the Proxy Statement.
- 92 -
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
Exhibits, Financial Statement Schedules.
a.
Financial Statements. The consolidated financial statements of the Company, together with the report of Independent
Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form
10-K and are incorporated herein by
reference.
The following information is filed as part of this Form 10-K:
Page
Report of Independent Registered Public Accounting Firm (BDO USA,
LLP;
West Palm Beach, FL; PCAOB ID#243)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
b.
Financial Statement Schedules.
Not applicable.
c.
Exhibits.
Exhibit No
3.1
Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company’s Form
S-11/A, filed with the SEC on April 29, 2004
3.2
Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3
Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4
Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form
8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
3.5
Certificate of Notice, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-
K, dated January 28, 2008, filed with the SEC on February 1, 2008
3.6
Articles Supplementary, reclassifying shares of Class A Preferred Stock and Class B Preferred Stock into
Preferred Stock, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K,
dated December 21, 2015, filed with the SEC on December 21, 2015
3.7
Articles Supplementary, creating the Series A Preferred Stock, incorporated by reference to Exhibit 3.2 to
the Company’s Current Report on Form 8-K, dated December 21, 2015, filed with the SEC on December
21, 2015
.
3.8
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Current Report
on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
- 93 -
4.1
Rights Plan, dated as of December 21, 2015, between the Company and Broadridge Corporate Issuer
Solutions, Inc. incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated
December 21, 2015, filed with the SEC on December 21, 2015
.
4.2
Description of the Company’s Capital Stock, incorporated by reference to Exhibit 4.2 to the Company’s
Annual Report on Form 10-K, filed with the SEC on March 27, 2020
.
10.1
Management Agreement between Orchid Island Capital, Inc. and Bimini Advisors, LLC date February 20,
2013, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated
February 20, 2013, filed with the SEC on February 20, 2013
.
10.2
First Amendment to Management Agreement dated as of April 1, 2014, incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K, dated April 3, 2014
.
10.3
Second Amendment to Management Agreement dated as of June 30, 2014, incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated July 3, 2014
.
10.4
Third Amendment to Management Agreement dated as of November 16, 2021, incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 17, 2021, filed with the SEC
on November 18, 2021.
10.5
Investment Allocation Agreement among the Company, Orchid Island Capital, Inc. and Bimini Advisors, LLC
dated February 20, 2013, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K, dated February 20, 2013, filed with the SEC on February 20, 2013
.
10.6
Agreement between the Company and Robert E. Cauley dated June 30, 2009, regarding compensation
payable in connection with certain termination or change of control events, incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 2, 2009
.*
10.7
Agreement between the Company and G. Hunter Haas, IV dated June 30, 2009, regarding compensation
payable in connection with certain termination or change of control events, incorporated by reference to
Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed with the SEC on July 2, 2009
.*
21.1
Subsidiaries of the Registrant
**
31.1
Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
**
31.2
Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002
**
32.1
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
***
32.2
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 2002
***
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****
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Management compensatory plan or arrangement required to be filed by Item 601
of Regulation S-K.
**
Filed herewith.
***
Furnished herewith
****
Submitted electronically herewith.