UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission File Number
:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
,
(Address of principal executive offices) (Zip Code)
(
)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Class A Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
☒
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
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State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2021:
Title of each Class
Shares held by non-affiliates
Aggregate market value held
by non-affiliates
Class A Common Stock, $0.001 par value
7,457,553
$
Class B Common Stock, $0.001 par value
20,760
$
Class C Common Stock, $0.001 par value
31,938
$
(a) The aggregate market value was calculated by using the last sale price of the Class A Common Stock as of June 30, 2021.
(b)
The market value of the Class B and Class C Common Stock is an estimate based on their initial purchase price.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
March 11, 2022
Class B Common Stock, $0.001 par value
March 11, 2022
Class C Common Stock, $0.001 par value
March 11, 2022
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for its 2022 Annual Meeting of Stockholders of the Registrant are incorporated by reference
into Part III of this Annual Report on Form 10-K (this “Report”).
BIMINI CAPITAL MANAGEMENT, INC.
INDEX
PART I
ITEM 1. Business
1
ITEM 1A. Risk Factors
10
ITEM 1B. Unresolved Staff Comments
33
ITEM 2. Properties
33
ITEM 3. Legal Proceedings
33
ITEM 4. Mine Safety Disclosures
34
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
35
ITEM 6. [Reserved]
36
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
37
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
61
ITEM 8. Financial Statements and Supplementary Data
62
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
89
ITEM 9A. Controls and Procedures
89
ITEM 9B. Other Information
90
ITEM 9C. Disclosure Regarding Foreign Jurisdictions the Prevent Inspections
90
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
91
ITEM 11. Executive Compensation
91
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
91
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
91
ITEM 14. Principal Accountant Fees and Services
91
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
92
ITEM 16. Form 10-K Summary
93
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report that are subject to risks and uncertainties. These forward-looking statements
include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans
and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “intend,” “should,” “may,” “plans,” “projects,” “will,”
or similar expressions, or the negative of these words, we intend to identify forward-looking statements. Statements regarding the
following subjects are forward-looking by their nature:
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our business and investment strategy;
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our expected operating results;
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our ability to acquire investments on attractive terms;
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the effect of changing interest rates on inflation, unemployment and mortgage supply and demand;
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the effect of prepayment rates on the value of our assets;
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our ability to access the capital markets;
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our ability to obtain future financing arrangements;
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our ability to successfully hedge the interest rate risk and prepayment risk associated with our portfolio;
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the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the
relationship between Fannie Mae and Freddie Mac and the U.S. government;
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the impact of inflation on general economic conditions and monetary policy;
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market trends;
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our understanding of our competition and our ability to compete effectively;
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our ability to quantify risk based on historical experience;
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our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and
use our NOLs to offset future taxable income, including whether our shareholder rights plan will be effective in preventing an
ownership change that would significantly limit our ability to utilize such NOLs;
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the impact of possible future changes in tax laws or tax rates;
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our ability to maintain our exemption from the obligation to register under the Investment Company Act of 1940, as amended
(the “Investment Company Act”);
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the effect of actual or proposed actions of the U.S. Federal Reserve (the “Fed”), the Federal Housing Finance Agency (the
“FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury with respect to monetary policy or interest
rates;
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the ongoing effect of the coronavirus (COVID-19) pandemic and the potential future outbreak of other highly infectious or
contagious diseases on the Agency MBS market and on our results of future operations, financial position, and liquidity;
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geo-political events, such as the crisis in Ukraine, government responses to such events and the related impact on the
economy both nationally and internationally;
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expected capital expenditures;
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the impact of technology on our operations and business, and
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the eventual phase-out of the London Interbank Offered Rate (“LIBOR”) index, transition from LIBOR to an alternative
reference rate and the impact on our LIBOR sensitive assets, liabilities and funding hedges
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into
account all information currently available to us. You should not place undue reliance on these forward-looking statements. These
beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.
Some of these factors are described under the caption ‘‘Risk Factors’’ in this Report and any subsequent Quarterly Reports on Form
10-Q. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks
and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as
required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
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PART I
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,
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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
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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:
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●
Fixed-Rate Mortgages
.
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
.
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.
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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.
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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)
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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
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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.
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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.
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●
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.
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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,
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faster-than-expected prepayments could also materially adversely affect our business, financial condition and results of operations in
various ways, including, 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
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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
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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
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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
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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
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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
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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
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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
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Mr. Cauley and Mr. Haas that encourage their continued employment, those contracts may not prevent either Mr. Cauley or Mr. Haas
from leaving our company. The loss of either of them could materially adversely affect our business, financial condition and results of
operations.
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
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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
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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.
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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
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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.
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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”
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(defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to
certain exceptions) generally has no voting rights with respect to the 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,
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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.
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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
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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.
None.
ITEM 2. PROPERTIES.
Our executive offices and principal administrative offices are located at 3305 Flamingo Drive, Vero Beach, Florida, 32963, in an
office building which Bimini Capital owns. This facility is shared with our subsidiaries and Orchid. This property is suitable and adequate
for our business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS.
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
- 34 -
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of 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 DISCLOSURES.
Not Applicable.
- 35 -
PART II
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. [RESERVED]
- 37 -
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)
2021
2020
Change
Advisory services revenue
$
9,788
$
6,795
$
2,993
Interest and dividend income
4,262
5,517
(1,255)
Interest expense
(1,113)
(2,225)
1,112
Net revenues
12,937
10,087
2,850
Other expense
(4,744)
(10,279)
5,535
Expenses
(8,286)
(6,666)
(1,620)
Net loss before income tax benefit
(93)
(6,858)
6,765
Income tax benefit
(368)
(1,369)
1,001
Net income (loss)
$
275
$
(5,489)
$
5,764
GAAP 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)
$
707
$
60
$
767
$
-
September 30, 2021
(709)
(57)
(766)
709
57
766
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
December 31, 2020
(615)
(40)
(655)
615
40
655
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
40
1,105
-
June 30, 2020
(456)
(40)
(496)
456
38
494
(2)
March 31, 2020
(456)
(40)
(496)
(2,879)
(475)
(3,354)
(3,850)
- 41 -
Years Ended
December 31, 2021
$
(2,832)
$
(233)
$
(3,065)
$
2,832
$
233
$
3,065
$
-
December 31, 2020
(2,592)
(160)
(2,752)
(743)
(357)
(1,100)
(3,852)
Economic Net Portfolio Interest Income
(in thousands)
Interest Expense on Repurchase Agreements
Net Portfolio
Effect of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
December 31, 2021
$
511
$
21
$
(707)
$
728
$
490
$
(217)
September 30, 2021
537
24
(709)
733
513
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
December 31, 2020
597
43
(615)
658
554
(61)
September 30, 2020
604
43
(1,065)
1,108
561
(504)
June 30, 2020
523
60
(456)
516
463
7
March 31, 2020
2,040
928
(456)
1,384
1,112
656
Years Ended
December 31, 2021
$
2,237
$
116
$
(2,832)
$
2,948
$
2,121
$
(711)
December 31, 2020
3,764
1,074
(2,592)
3,666
2,690
98
(1)
Reflects the effect of derivative instrument hedges for only the 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
$
490
$
(217)
$
249
$
(60)
$
309
$
241
$
(526)
September 30, 2021
513
(196)
248
(57)
305
265
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
571
(137)
250
(58)
308
321
(445)
December 31, 2020
554
(61)
257
(40)
297
297
(358)
September 30, 2020
561
(504)
261
(40)
301
300
(805)
June 30, 2020
463
7
282
(40)
322
181
(315)
March 31, 2020
1,112
656
350
(40)
390
762
266
Years Ended
December 31, 2021
$
2,121
$
(711)
$
997
$
(233)
$
1,230
$
1,124
$
(1,941)
December 31, 2020
2,690
98
1,150
(160)
1,310
1,540
(1,212)
(1)
Calculated by 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
2021
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
147
-
-
(147)
-
Interest and dividend income
-
4,262
-
-
4,262
Interest expense
-
(116)
(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)
-
147
-
Income (loss) before income taxes
$
4,259
$
(3,508)
$
(843)
$
-
$
(92)
Assets
$
1,901
$
111,022
$
9,162
$
-
$
122,085
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
Advisory services, other operating segments
(1)
152
-
-
(152)
-
Interest and dividend income
-
5,517
-
5,517
Interest expense
-
(1,074)
(2)
(2,225)
Net revenues
6,947
4,443
(1,151)
(152)
10,087
Other expense
-
(9,825)
(3)
(10,279)
Operating expenses
(4)
(3,653)
(3,014)
-
(6,667)
Intercompany expenses
(1)
-
(152)
-
152
-
Income (loss) before income taxes
$
3,294
$
(8,548)
$
(1,605)
$
-
$
(6,859)
Assets
$
1,469
$
113,764
$
13,468
$
-
$
128,701
(1)
Includes advisory services revenue 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
$
443
$
3,030
September 30, 2021
5,136,331
672,384
2,157
390
2,547
June 30, 2021
4,504,887
542,679
1,791
395
2,186
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
347
1,615
March 31, 2020
3,269,859
376,673
1,377
348
1,725
Years Ended
December 31, 2021
$
4,932,548
$
619,533
$
8,156
$
1,632
$
9,788
December 31, 2020
3,363,208
373,464
5,281
1,514
6,795
Investment Portfolio Segment
Net Portfolio Interest Income
We 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 $0.1 million of economic net portfolio interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase
agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for each quarter in 2021 and 2020
and for the years ended December 31, 2021 and 2020 on both a GAAP and economic basis.
($ 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
$
511
3.27%
$
61,019
$
21
$
728
0.14%
4.77%
September 30, 2021
66,692
537
3.22%
67,253
24
733
0.14%
4.36%
June 30, 2021
70,925
578
3.26%
72,241
31
739
0.17%
4.09%
March 31, 2021
69,017
611
3.54%
69,104
40
748
0.23%
4.33%
- 44 -
December 31, 2020
69,161
597
3.45%
67,878
43
658
0.25%
3.88%
September 30, 2020
62,981
604
3.84%
61,151
43
1,108
0.28%
7.25%
June 30, 2020
53,630
523
3.90%
51,987
60
516
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
928
1,384
2.83%
4.22%
Years Ended
December 31, 2021
$
67,308
$
2,237
3.32%
$
67,404
$
116
$
2,948
0.17%
4.37%
December 31, 2020
80,479
3,764
4.68%
78,043
1,074
3,666
1.38%
4.70%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
December 31, 2021
$
490
$
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.14)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
December 31, 2020
554
(61)
3.20%
(0.43)%
September 30, 2020
561
(504)
3.56%
(3.41)%
June 30, 2020
463
7
3.44%
(0.07)%
March 31, 2020
1,112
656
3.16%
1.77%
Years Ended
December 31, 2021
$
2,121
$
(711)
3.15%
(1.05)%
December 31, 2020
2,690
98
3.30%
(0.02)%
(1)
Portfolio yields and costs of borrowings presented in the tables above and 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
$
500
$
11
$
511
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
533
4
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
- 45 -
June 30, 2020
53,101
529
53,630
502
21
523
3.78%
16.12%
3.90%
March 31, 2020
135,044
1,098
136,142
2,029
11
2,040
6.01%
3.93%
5.99%
Years Ended
December 31, 2021
$
65,813
$
1,495
$
67,308
$
2,217
$
20
$
2,237
3.37%
1.39%
3.32%
December 31, 2020
79,888
591
80,479
3,717
47
3,764
4.65%
7.98%
4.68%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our 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
$
21
$
728
0.14%
4.77%
September 30, 2021
67,253
24
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
December 31, 2020
67,878
43
658
0.25%
3.88%
September 30, 2020
61,151
43
1,108
0.28%
7.25%
June 30, 2020
51,987
60
516
0.46%
3.97%
March 31, 2020
131,156
928
1,384
2.83%
4.22%
Years Ended
December 31, 2021
$
67,404
$
116
2,948
0.17%
4.37%
December 31, 2020
78,043
1,074
3,666
1.38%
4.70%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Three Months Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
- 46 -
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
December 31, 2020
0.15%
0.27%
0.10%
(0.02)%
3.73%
3.61%
September 30, 2020
0.17%
0.35%
0.11%
(0.07)%
7.08%
6.90%
June 30, 2020
0.55%
0.70%
(0.09)%
(0.24)%
3.42%
3.27%
March 31, 2020
1.34%
1.43%
1.49%
1.40%
2.88%
2.79%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Years Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
December 31, 2021
0.10%
0.20%
0.07%
(0.03)%
4.27%
4.17%
December 31, 2020
0.55%
0.69%
0.83%
0.69%
4.15%
4.01%
Dividend Income
We owned 1,520,036 shares of Orchid common stock as of December 31, 2019. We acquired 1,075,321 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 -
2021
2020
Change
Realized gains (losses) on sales of MBS
$
69
$
(5,745)
$
5,814
Unrealized (losses) gains on MBS
(3,099)
112
(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
(59)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,869)
584
(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)
2021
2020
Change
Compensation and benefits
$
5,721
$
4,235
$
1,486
Legal fees
137
145
(8)
Accounting, auditing and other professional fees
377
431
(54)
Directors’ fees and liability insurance
763
691
72
Administrative and other expenses
1,287
1,165
122
$
8,285
$
6,667
$
1,618
- 48 -
The 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%
330
1-Sep-51
Interest-Only Securities
2,759
4.6%
2.86%
306
15-May-51
Inverse Interest-Only Securities
15
0.0%
5.90%
209
15-May-39
Total Mortgage Assets
$
60,803
100.0%
3.41%
329
1-Sep-51
December 31, 2020
Fixed Rate PT MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only Securities
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only Securities
25
0.0%
5.84%
221
15-May-39
Total Mortgage Assets
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
December 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
- 49 -
Fannie Mae
$
39,703
65.3%
$
38,946
59.8%
Freddie Mac
21,100
34.7%
26,232
40.2%
Total Portfolio
$
60,803
100.0%
$
65,178
100.0%
December 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
109.33
$
109.51
Weighted Average Structured Purchase Price
$
4.81
$
4.28
Weighted Average Pass-through Current Price
$
109.30
$
112.67
Weighted Average Structured Current Price
$
9.87
$
3.20
Effective Duration
(1)
2.103
3.309
(1)
Effective duration is the approximate percentage change in 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)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
23,338
$
106.48
1.41%
$
43,130
$
111.44
1.99%
Structured MBS
2,852
10.01
3.44%
-
-
0.00%
Our 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)
651
999
(29.48)%
23.59%
36.21%
Inverse Interest-Only MBS
15
1
(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
- 53 -
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
- 54 -
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.
- 55 -
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.
- 56 -
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:
- 58 -
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.
- 59 -
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.
Not Applicable.
- 62 -
ITEM 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm (
:
; PCAOB ID#
)
63
Consolidated Balance Sheets
65
Consolidated Statements of Operations
66
Consolidated Statements of Equity
67
Consolidated Statements of Cash Flows
68
Notes to Consolidated Financial Statements
69
- 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
,
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
1
and
14
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
2021
2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
$
Unpledged
Total mortgage -backed securities
Cash and cash equivalents
Restricted cash
Investment in Orchid Island Capital, Inc. common stock, at fair value
Accrued interest receivable
Property and equipment, net
Deferred tax assets, net of allowances
Due from affiliates
Other assets
Total Assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
Long-term debt
Accrued interest payable
Other liabilities
Total Liabilities
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $
designated Series A Junior Preferred Stock,
no shares issued and outstanding as of December 31, 2021 and 2020
-
-
Class A Common stock, $
shares issued and outstanding as of December 31, 2021 and
-
-
and outstanding as of December 31, 2020
11,609
Class B Common stock, $
issued and outstanding as of December 31, 2021 and 2020
Class C Common stock, $
issued and outstanding as of December 31, 2021 and 2020
Additional paid-in capital
Accumulated deficit
(297,891,168 )
(298,166,582 )
Stockholders' Equity
Total Liabilities and Equity
$
$
See Notes to Consolidated Financial Statements
- 66 -
BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2021 and 2020
2021
2020
Revenues:
Advisory services
$
$
Interest income
Dividend income from Orchid Island Capital, Inc. common stock
Total revenues
Interest expense:
Repurchase agreements
(116,179 )
(1,073,528 )
Long-term debt
(996,794 )
(1,150,613 )
Net revenues
Other income (expense)
Unrealized (losses) gains on mortgage-backed securities
(3,098,866 )
Realized gains (losses) on mortgage-backed securities
(5,744,589 )
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,868,657 )
Losses on derivative instruments
(198 )
(5,292,521 )
Gains on retained interests in securitizations
Other income
Other expense, net
(4,744,032 )
(10,279,321 )
Expenses:
Compensation and related benefits
Directors' fees and liability insurance
Audit, legal and other professional fees
Administrative and other expenses
Total expenses
Net loss before income tax benefit
(92,431 )
(6,858,558 )
Income tax benefit
(367,845 )
(1,369,416 )
Net income (loss)
$
$
(5,489,142 )
Basic and Diluted Net Income (Loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
$
(0.47
CLASS B COMMON STOCK
Basic and Diluted
$
$
(0.47
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
CLASS B COMMON STOCK
Basic and Diluted
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
$
$
$
(292,677,440 )
$
Net loss
-
(5,489,142 )
(5,489,142 )
Balances, December 31, 2020
(298,166,582 )
Net income
-
Class A common shares repurchased and retired
(906,361 )
(907 )
(1,762,506 )
(1,763,413 )
Balances, December 31, 2021
$
$
$
(297,891,168 )
$
See Notes to Consolidated Financial Statements
- 68 -
BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2021 and 2020
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
$
(5,489,142 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Deferred income tax
(367,845 )
(1,379,931 )
Losses on mortgage-backed securities
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
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
(583,961 )
Changes in operating assets and liabilities:
Accrued interest receivable
(27,750 )
Due from affiliates
(429,684 )
(10,351 )
Other assets
Accrued interest payable
(50,248 )
(537,885 )
Other liabilities
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(26,189,505 )
(43,129,835 )
Sales
Principal repayments
Payments received on retained interests in securitizations
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
NET CASH PROVIDED BY INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal repayments on repurchase agreements
(299,476,114 )
(683,441,436 )
Proceeds from long-term debt
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
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the year
$
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest
$
$
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.
2021
2020
Cash and cash equivalents
$
$
Restricted cash
Total cash, cash equivalents and restricted cash
$
$
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)
2021
2020
Management fee
$
$
Allocated overhead
Total
$
$
At December 31, 2021 and 2020, the net amount due from Orchid was approximately $
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s MBS portfolio as of December 31, 2021 and 2020:
(in thousands)
2021
2020
Fixed-rate Mortgages
$
$
Interest-Only Securities
Inverse Interest-Only Securities
Total
$
$
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)
2021
2020
Proceeds from sales of MBS
$
$
- 75 -
Carrying value of MBS sold
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)
2021
2020
Land
$
$
Buildings and improvements
Computer equipment and software
Office furniture and equipment
Total cost
Less accumulated depreciation and amortization
Property and equipment, net
$
$
Depreciation of property and equipment totaled approximately $
2020, respectively.
NOTE 5. OTHER ASSETS
The composition of other assets at December 31, 2021 and 2020 follows:
(in thousands)
2021
2020
Investment in Bimini Capital Trust II
$
$
Prepaid expenses
Servicing advances
Other
Total other assets
$
$
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
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
-
December 31, 2020
Fair value of securities pledged, including accrued
interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
In addition, cash pledged to counterparties as collateral for repurchase agreements was approximately $
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 $
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
$
$
$
$
$
$
Structured MBS - at fair value
Accrued interest on pledged securities
Cash
Total
$
$
$
$
$
$
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
2021
2020
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
$
$
$
$
(57,487 )
$
(1,391 )
$
$
$
$
$
(57,487 )
$
(1,391 )
$
December 31, 2020
Repurchase Agreements
$
$
$
$
(61,719 )
$
(3,352 )
$
$
$
$
$
(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)
2021
2020
Junior subordinated debt
$
$
Note payable
Paycheck Protection Plan ("PPP") loan
Total
$
$
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
$
at a spread of
% over the prevailing three-month LIBOR rate. As of December 31, 2021, the interest rate was
%. 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 $
installments of approximately $
% 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
%.
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 $
Act in the form of a low interest loan. The PPP loan had a fixed rate of
% 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
2022
$
2023
2024
2025
2026
Thereafter
Total
$
NOTE 10. CAPITAL STOCK
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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
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
shares were designated as Class B common stock and
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 $
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
$
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 $
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
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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 $
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 $
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
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
preferred stock, $
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.
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In 2015 the Board approved Articles Supplementary to the Company’s charter reclassifying and designating
authorized but unissued Class A Redeemable Preferred Stock and
Preferred Stock into undesignated preferred stock, par value $
to the reclassification and designation of the shares of Class A Preferred Stock and Class B Preferred Stock, the Company has
authority to issue
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 $
Supplementary were filed with the SDAT and became effective upon filing on December 21, 2015.
Rights Plan
On
(“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 Company that a person or group has acquired
% 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
% 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)
, (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.
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.
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.
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.
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
the 2018 Repurchase Plan at an aggregate cost of approximately $
, including commissions and fees, for a weighted average price of
$
shares at an aggregate cost of approximately $
, including commissions and fees, for a weighted average price of $
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
, including commissions and fees, for a weighted
average price of $
Subsequent to December 31, 2021, and through March 10, 2022, the
Company repurchased a total of
, including commissions and fees, for a
weighted average price of $
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
aggregate cost of the tender offer, including commissions and fees, was approximately $
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
, the Company received a demand for payment from Citigroup, Inc. in the amount of $
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 $
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 $
including a $
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)
2021
2020
Current
$
$
Deferred
(368 )
(1,379 )
Income tax benefit, net
$
(368 )
$
(1,369 )
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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)
2021
2020
Federal tax benefit based on statutory rate applicable for each year
$
(19 )
$
(1,440 )
State income tax benefit
(8 )
(302 )
Non-deductible expenses
(Decrease) increase of deferred tax asset valuation allowance
(2,191 )
Other
Income tax benefit
$
(368 )
$
(1,369 )
Deferred tax assets consisted of the following as of December 31, 2021 and 2020:
(in thousands)
2021
2020
Deferred tax assets:
Net operating loss carryforwards
$
$
Orchid Island Capital, Inc. common stock
MBS unrealized losses and gains
Capital loss carryforwards
Management agreement
Other
Valuation allowance
(29,784 )
(31,975 )
Net deferred tax assets
$
$
As of December 31, 2021 and 2020, the Company had federal NOL carryforwards of approximately $
respectively, and Florida NOL carryforwards of $
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 $
agreement with a tax basis of $
$
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
2009 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)
2021
2020
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
Effect of weighting
Weighted average shares-basic and diluted
Income (loss) per Class A common share:
Basic and diluted
$
$
(0.47
(in thousands, except per-share information)
2021
2020
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
$
$
(0.47
NOTE 14. FAIR VALUE
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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
$
$
$
$
Orchid Island Capital, Inc. common stock
December 31, 2020
Mortgage-backed securities
$
$
$
$
Orchid Island Capital, Inc. common stock
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 $
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
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(147 )
Interest and dividend income
Interest expense
(116 )
(997 )
(2)
(1,113 )
Net revenues
(997 )
(147 )
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
$
$
(3,508 )
$
(843 )
$
$
(92 )
Assets
$
$
$
$
$
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
$
$
$
$
- 88 -
Advisory services, other operating segments
(1)
(152 )
Interest and dividend income
Interest expense
(1,074 )
(1,151 )
(2)
(2,225 )
Net revenues
(1,151 )
(152 )
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
$
$
(8,548 )
$
(1,605 )
$
$
(6,859 )
Assets
$
$
$
$
$
(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
approximately
% and
%, 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 $
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 ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We had no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or
practices or financial statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
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
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)
internal control over financial reporting was effective based on those criteria.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
- 91 -
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the Company's
definitive Proxy Statement relating to the Company’s 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.
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.
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, and Director Independence.
The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.
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.
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)
63
Consolidated Balance Sheets
65
Consolidated Statements of Operations
66
Consolidated Statements of Equity
67
Consolidated Statements of Cash Flows
68
Notes to Consolidated Financial Statements
69
b. Financial Statement Schedules.
Not applicable.
c. Exhibits.
Exhibit No
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
- 93 -
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
.*
10.7
.*
21.1
**
31.1
**
31.2
**
32.1
***
32.2
***
101.INS
Instance Document****
101.SCH
Taxonomy Extension Schema Document****
101.CAL
Taxonomy Extension Calculation Linkbase Document****
101.DEF
Additional Taxonomy Extension Definition Linkbase Document****
101.LAB
Taxonomy Extension Label Linkbase Document****
101.PRE
Taxonomy Extension Presentation Linkbase Document****
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Management compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.
** Filed herewith.
*** Furnished herewith
**** Submitted electronically herewith.
ITEM 16. Form 10-K Summary.
- 94 -
The Company has elected not to provide summary information.
- 95 -
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 11, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date: March 11, 2022
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities indicated on March 11, 2022.
Signature
Capacity
/s/ Robert E. Cauley
Robert E. Cauley
Director, Chairman of the Board and
Chief Executive Officer
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
President, Chief Financial Officer, Chief Investment Officer and
Treasurer (Principal Financial Officer and Principal Accounting Officer)
/s/ Robert J. Dwyer
Robert J. Dwyer
Director
/s/ Frank E. Jaumot
Frank E. Jaumot
Director