BIMINI CAPITAL MANAGEMENT, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
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.
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.
ý
☐
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).
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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. Check one:
Large accelerated filer
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Accelerated filer
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(Do not check if a smaller reporting company)
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.
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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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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
August 12, 2022
Class B Common Stock, $0.001 par value
August 12, 2022
Class C Common Stock, $0.001 par value
August 12, 2022
BIMINI CAPITAL MANAGEMENT, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
1
Condensed Consolidated Balance Sheets (unaudited)
1
Condensed Consolidated Statements of Operations (unaudited)
2
Condensed Consolidated Statement of Stockholders’ Equity (unaudited)
3
Condensed Consolidated Statements of Cash Flows (unaudited)
4
Notes to Condensed Consolidated Financial Statements (unaudited)
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
45
ITEM 4. Controls and Procedures
46
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
47
ITEM 1A. Risk Factors
47
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
47
ITEM 3. Defaults Upon Senior Securities
47
ITEM 4. Mine Safety Disclosures
47
ITEM 5. Other Information
47
ITEM 6. Exhibits
48
SIGNATURES
49
- 1 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2022
December 31, 2021
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
$
Unpledged
Total mortgage -backed securities
Cash and cash equivalents
Restricted cash
Orchid Island Capital, Inc. common stock, at fair value
Accrued interest receivable
Property and equipment, net
Deferred tax assets
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 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $
designated Series A Junior Preferred Stock,
no shares issued and outstanding as of June 30, 2022 and December 31, 2021
Class A Common stock, $
and
Class B Common stock, $
issued and outstanding as of June 30, 2022 and December 31, 2021
Class C Common stock, $
issued and outstanding as of June 30, 2022 and December 31, 2021
Additional paid-in capital
Accumulated deficit
(302,557,326 )
(297,891,168 )
Stockholders’ Equity
Total Liabilities and Stockholders' Equity
$
$
See Notes to Condensed Consolidated Financial Statements
- 2 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three and Six Months Ended June 30, 2022 and 2021
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Revenues:
Advisory services
$
$
$
$
Interest income
Dividend income from Orchid Island Capital, Inc. common stock
Total revenues
Interest expense
Repurchase agreements
(103,915 )
(71,197 )
(72,673 )
(31,339 )
Long-term debt
(559,805 )
(499,112 )
(303,739 )
(249,564 )
Net revenues
Other income (expense):
Unrealized losses on mortgage-backed securities
(4,033,554 )
(1,897,862 )
(919,350 )
(505,601 )
Realized losses on mortgage-backed securities
(858,001 )
(858,001 )
Unrealized losses on Orchid Island Capital, Inc. common stock
(4,282,340 )
(77,861 )
(1,038,143 )
(2,128,193 )
Losses on derivative instruments
(49,688 )
(133 )
(49,688 )
(376 )
Other income
Total other expense
(9,223,396 )
(1,821,883 )
(2,865,092 )
(2,480,283 )
Expenses:
Compensation and related benefits
Directors' fees and liability insurance
Audit, legal and other professional fees
Administrative and other expenses
Total expenses
Net (loss) income before income tax (benefit) provision
(5,981,616 )
(1,279,556 )
(1,215,251 )
Income tax (benefit) provision
(1,315,458 )
(92,982 )
(295,465 )
Net (loss) income
$
(4,666,158 )
$
$
(1,186,574 )
$
(919,786 )
Basic and Diluted Net (loss) income Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
(0.44
$
$
(0.11
$
(0.08
CLASS B COMMON STOCK
Basic and Diluted
$
(0.44
$
$
(0.11
$
(0.08
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
CLASS B COMMON STOCK
Basic and Diluted
See Notes to Condensed Consolidated Financial Statements
- 3 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Six and Three Months Ended June 30, 2022 and 2021
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2021
$
$
$
(298,166,582 )
$
Net income
-
Balances, March 31, 2021
$
$
$
(296,876,152 )
$
Net loss
-
(919,786 )
(919,786 )
Balances, June 30, 2021
$
$
$
(297,795,938 )
$
Balances, January 1, 2022
$
$
$
(297,891,168 )
$
Net loss
-
(3,479,584 )
(3,479,584 )
Class A common shares repurchased and retired
(188,280 )
(188 )
(377,110 )
(377,298 )
Balances, March 31, 2022
$
$
$
(301,370,752 )
$
Net loss
-
(1,186,574 )
(1,186,574 )
Class A common shares repurchased and retired
(41,135 )
(41 )
(72,958 )
(72,999 )
Balances, June 30, 2022
$
$
$
(302,557,326 )
$
See Notes to Condensed Consolidated Financial Statements
- 4 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 2022 and 2021
2022
2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
$
(4,666,158 )
$
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation
Deferred income tax (benefit) provision
(1,315,458 )
Unrealized losses on mortgage-backed securities
Realized losses on mortgage-backed securities
PPP loan forgiveness
(153,724 )
Unrealized losses on Orchid Island Capital, Inc. common stock
Changes in operating assets and liabilities:
Accrued interest receivable
(13,858 )
Due from affiliates
(75,404 )
(161,780 )
Other assets
(5,210 )
Accrued interest payable
(28,289 )
Other liabilities
(1,710,376 )
(481,108 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(10,821,877 )
(13,139,464 )
Sales
Principal repayments
Purchases of property and equipment
(21,447 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(5,713,261 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal repayments on repurchase agreements
(191,412,690 )
(110,759,114 )
Principal repayments on long-term debt
(11,271 )
(10,730 )
Class A common shares repurchased and retired
(450,297 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(22,413,568 )
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(3,282,843 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
$
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense
$
$
See Notes to Condensed Consolidated Financial Statements
- 5 -
BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2022
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.
Effective April 1, 2022, Bimini Advisors started providing certain repurchase agreement trading, clearing and administrative services to
Orchid that were previously provided by a third party. 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."
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 with the
exception that inter-segment revenues and expenses are included in the presentation of segment results. For further information see
Note 13.
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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six and three-month periods ended June 30, 2022 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2022.
The consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. For further
information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2021.
- 6 -
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
those estimates. Significant estimates affecting the accompanying consolidated financial statements include determining the fair
values of MBS and derivatives, the value of Orchid Common Stock, 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.
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
7 for a description of the accounting used for this VIE.
The Company obtains interests in VIEs through its investments in mortgage-backed securities. The interests in these VIEs are
passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future. As
a result, the Company does not consolidate these VIEs and accounts for the interest in these VIEs as mortgage-backed securities.
See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum exposure to
loss for these VIEs is the carrying value of the mortgage-backed securities.
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 June 30, 2022 and
December 31, 2021.
June 30, 2022
December 31, 2021
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.
- 7 -
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed securities 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. The Company refers to MBS and CMOs
as PT MBS. The Company refers 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 the Company’s operations for a
particular reporting period and is consistent with the underlying economics and how the portfolio is managed.
The Company records MBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
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 Orchid’s common shares 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.
- 8 -
Derivative Financial Instruments
The Company has historically used 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 are Treasury Note (“T-
Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities transactions. The Company accounts for TBA securities
as derivative instruments. Other types of derivative instruments may be used in the future. Gains and losses associated with derivative
transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.
During the six and three months ended June 30, 2022, the Company only held T-Note futures contracts. The Company recorded a
loss of approximately $
the six and three months ended June 30, 2021 were negligible.
Derivative instruments are carried at fair value, and changes in fair value are recorded in the consolidated 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 settlement of derivatives, including
current period net cash settlements on interest rate swaps, are 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 12 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates their carrying value as of June 30, 2022 and
December 31, 2021, 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 7 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 our building and its 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.
- 9 -
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.
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.
- 10 -
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
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 1.50% 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.
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the
Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been
previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, Orchid will
pay the following fees to the Company:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and
multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.
- 11 -
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 six and three months ended June 30, 2022 and
2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Management fee
$
$
$
$
Allocated overhead
Repurchase, Clearing and Administrative Fee
183
-
183
-
Total
$
$
$
$
At June 30, 2022 and December 31, 2021, the net amount due from Orchid was approximately $
respectively.
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s MBS portfolio as of June 30, 2022 and December 31, 2021:
(in thousands)
June 30, 2022
December 31, 2021
Fixed-rate MBS
$
$
Interest-Only MBS
Inverse Interest-Only MBS
Total
$
$
The following table is a summary of the Company’s net gain (loss) from the sale of MBS during the six months ended
June 30, 2022 and 2021.
(in thousands)
2022
2021
Proceeds from sales of MBS
$
$
Carrying value of MBS sold
(23,955 )
Net gain (loss) on sales of MBS
$
(858 )
$
Gross gain on sales of MBS
$
$
Gross loss on sales of MBS
(858 )
Net gain (loss) on sales of MBS
$
(858 )
$
- 12 -
NOTE 4. REPURCHASE AGREEMENTS
The Company pledges certain of its MBS 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 June 30, 2022, the Company had met all margin call
requirements.
As of June 30, 2022 and December 31, 2021, 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
June 30, 2022
Fair value of securities pledged, including accrued
interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
-
December 31, 2021
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 for repurchase agreements was approximately $
2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021, 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. As of June 30, 2022 and December 31, 2021, the Company did not have an amount at risk with any individual counterparty
greater than 10% of the Company’s equity.
- 13 -
NOTE 5. 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
June 30, 2022 and December 31, 2021.
($ in thousands)
June 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
$
$
$
$
$
Structured MBS - at fair value
Accrued interest on pledged securities
Restricted cash
Total
$
$
$
$
$
$
Assets Pledged from Counterparties
The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements as of June 30, 2022 and
December 31, 2021. 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
June 30, 2022
December 31, 2021
Cash
$
$
Total
$
$
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivatives and 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 tables present information
regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30,
2022 and December 31, 2021.
(in thousands)
Offsetting of Liabilities
Gross Amount Not Offset in the
Net Amount
Consolidated Balance Sheet
Gross Amount
of Liabilities
Financial
Gross Amount
Offset in the
Presented in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
June 30, 2022
Repurchase Agreements
$
$
$
$
(36,144 )
$
(782 )
$
$
$
$
$
(36,144 )
$
(782 )
$
December 31, 2021
Repurchase Agreements
$
$
$
$
(57,487 )
$
(1,391 )
$
$
$
$
$
(57,487 )
$
(1,391 )
$
- 14 -
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 5 for a discussion of collateral posted for, or received against,
repurchase obligations and derivative instruments.
NOTE 7. LONG-TERM DEBT
Long-term debt at June 30, 2022 and December 31, 2021 is summarized as follows:
(in thousands)
June 30, 2022
December 31, 2021
Junior subordinated debt
$
$
Secured note payable
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
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 June 30, 2022 and December 31, 2021, the outstanding principal balance on the junior subordinated debt securities owed to
BCTII was $
that floats at a spread of
% over the prevailing three-month LIBOR rate. As of June 30, 2022, 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.
Secured Note Payable
On October 30, 2019, the Company borrowed $
installments of approximately $
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.
- 15 -
The table below presents the future scheduled principal payments on the Company’s long-term debt.
(in thousands)
Last six months of 2022
$
2023
2024
2025
2026
After 2026
Total
$
NOTE 8. COMMON STOCK
There were no issuances of Bimini Capital's Class A Common Stock, Class B Common Stock or Class C Common Stock during the
six months ended June 30, 2022 and 2021.
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
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 $
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 six months ended June 30, 2022, the Company repurchased a total of
an aggregate cost of approximately $
the inception of the 2021 Repurchase Plan through June 30, 2022, the Company repurchased a total of
cost of approximately $
30, 2022, the Company repurchased a total of
and fees, for a weighted average price of $
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of
business.
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amount of $
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 $
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 related to the Citigroup demands.
- 16 -
Management is not aware of any other significant reported or unreported contingencies at June 30, 2022.
NOTE 10. INCOME TAXES
The total income tax (benefit) provision recorded for the six months ended June 30, 2022 and 2021 was $
(1.3 )
million, respectively, on consolidated pre-tax book (loss) income of $
(6.0 )
2022 and 2021, respectively.
The total income tax (benefit) provision recorded for the three months ended June 30, 2022 and 2021
was $(
) million and $(
) million, respectively, on consolidated pre-tax book loss of $(
) million and $(
) million in the three
months ended June 30, 2022 and 2021, respectively.
The Company’s tax provision is based on a projected effective rate based on annualized amounts applied to actual income to date
and includes the expected realization of a portion of the tax benefits of federal and state net operating losses carryforwards (“NOLs”).
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 Company currently provides a valuation
allowance against a portion of the NOLs since the Company believes that it is more likely than not that some of the benefits will not be
realized in the future. The Company will continue to assess the need for a valuation allowance at each reporting date.
NOTE 11. 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 June 30, 2022 and 2021.
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 June 30, 2022 and 2021.
The table below reconciles the numerator and denominator of EPS for the six and three months ended June 30, 2022 and 2021.
(in thousands, except per-share information)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Basic and diluted EPS per Class A common share:
(Loss) income attributable to Class A common shares:
Basic and diluted
$
(4,652
$
$
(1,183
$
(917
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
Effect of weighting
Weighted average shares-basic and diluted
(Loss) income per Class A common share:
Basic and diluted
$
(0.44
$
$
(0.11
$
(0.08
- 17 -
(in thousands, except per-share information)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Basic and diluted EPS per Class B common share:
(Loss) income attributable to Class B common shares:
Basic and diluted
$
(14
$
$
(4
$
(3
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
Weighted average shares-basic and diluted
(Loss) income per Class B common share:
Basic and diluted
$
(0.44
$
$
(0.11
$
(0.08
NOTE 12. FAIR VALUE
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 the six
and three months ended June 30, 2022 and 2021. 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 June 30, 2022 and December 31, 2021.
- 18 -
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. 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 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 June 30, 2022 and
December 31, 2021:
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
June 30, 2022
Mortgage-backed securities
$
$
$
$
Orchid Island Capital, Inc. common stock
December 31, 2021
Mortgage-backed securities
$
$
$
$
Orchid Island Capital, Inc. common stock
During the six months ended June 30, 2022 and 2021, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
- 19 -
NOTE 13. 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 revenues received under this management
agreement for the six months ended June 30, 2022 and 2021, 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 six months ended June 30, 2022 and 2021 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(56 )
Interest and dividend income
Interest expense
(104 )
(560 )
(2)
(664 )
Net revenues
(560 )
(56 )
Other expenses
(9,224 )
(9,224 )
Operating expenses
(4)
(3,237 )
(901 )
(4,138 )
Intercompany expenses
(1)
(56 )
Income (loss) before income taxes
$
$
(8,649 )
$
(560 )
$
$
(5,982 )
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(72 )
Interest and dividend income
Interest expense
(71 )
(499 )
(2)
(570 )
Net revenues
(499 )
(72 )
Other (expenses) income
(1,976 )
(3)
(1,822 )
Operating expenses
(4)
(2,230 )
(1,251 )
(3,481 )
Intercompany expenses
(1)
(72 )
Income (loss) before income taxes
$
$
(1,169 )
$
(345 )
$
$
- 20 -
Segment information for the three months ended June 30, 2022 and 2021 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(27 )
Interest and dividend income
Interest expense
(73 )
(304 )
(2)
(377 )
Net revenues
(304 )
(27 )
Other expenses
(2,865 )
(2,865 )
Operating expenses
(4)
(1,695 )
(417 )
(2,112 )
Intercompany expenses
(1)
(27 )
Income (loss) before income taxes
$
$
(2,640 )
$
(304 )
$
$
(1,280 )
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(37 )
Interest and dividend income
Interest expense
(31 )
(250 )
(2)
(281 )
Net revenues
(250 )
(37 )
Other (expenses) income
(2,634 )
(3)
(2,480 )
Operating expenses
(4)
(1,125 )
(599 )
(1,724 )
Intercompany expenses
(1)
(37 )
Income (loss) before income taxes
$
$
(2,217 )
$
(96 )
$
$
(1,215 )
Includes fees paid by Royal Palm to Bimini Advisors for advisory services .
(2)
Includes interest on long-term debt.
(3)
Includes gains 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.
Assets in each reportable segment as of June 30, 2022 and December 31, 2021 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
June 30, 2022
$
$
$
December 31, 2021
NOTE 14. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both June 30, 2022 and December 31, 2021, the Company owned
approximately
% and
%, respectively, of Orchid’s outstanding common stock on such dates. The Company received dividends
on this common stock investment of approximately $
respectively, and approximately $
- 21 -
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, 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. In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the
Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of
Directors, receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our
independent directors, each own shares of common stock of Orchid.
- 22 -
ITEM 2. 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 consolidated
financial statements and notes to those statements included in Item 1 of this Form 10-Q. 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 our most recent Annual Report on 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.
Effective April 1, 2022, Bimini Advisors started providing certain repurchase agreement trading, clearing and administrative
services to Orchid that were previously provided by a third party. The Company received additional fees for providing such services.
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 Plan
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,
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 June 30, 2022, we repurchased a total of 321,702 shares at an aggregate cost of approximately $0.6 million, including
commissions and fees, for a weighted average price of $2.00 per share. During the six months ended June 30, 2022, the Company
repurchased a total of 229,415 shares at an aggregate cost of approximately $0.5 million, including commissions and fees, for a weighted
average price of $1.96 per share.
- 23 -
Subsequent to June 30, 2022, the Company repurchased a total of 219,022 shares at an aggregate cost of approximately $0.4
million, including commissions and fees, for a weighted average price of $1.61 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;
●
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 ongoing 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;
●
increases in our cost of funds resulting from increases in the Fed Funds rate that are controlled by the Fed which have
occurred, and are likely to continue to occur, in 2022; 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 six and three months ended June 30, 2022, as compared to the six
and three months ended June 30, 2021.
Net (Loss) Income Summary
Consolidated net loss for the six months ended June 30, 2022 was $4.7 million, or $0.44 basic and diluted loss per share of Class A
Common Stock, as compared to a consolidated net income of $0.4 million, or $0.03 basic and diluted income per share of Class A
Common Stock, for the six months ended June 30, 2021.
Consolidated net loss for the three months ended June 30, 2022 was $1.2 million, or $0.11 basic and diluted loss per share of Class A
Common Stock, as compared to consolidated net loss of $0.9 million, or $0.08 basic and diluted loss per share of Class A Common Stock,
for the three months ended June 30, 2021.
- 24 -
The components of net (loss) income for the six months ended June 30, 2022 and 2021, along with the changes in those components
are presented in the table below.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
Change
2022
2021
Change
Advisory services revenues
$
6,408
$
4,211
$
2,197
$
$
3,332
$
2,186
$
1,146
Interest and dividend income
1,636
2,201
(565)
742
1,084
(342)
Interest expense
(664)
(570)
(94)
(376)
(281)
(95)
Net revenues
7,380
5,842
1,538
3,698
2,989
709
Other expense
(9,223)
(1,822)
(7,401)
(2,865)
(2,480)
(385)
Expenses
(4,138)
(3,481)
(657)
(2,113)
(1,724)
(389)
Net (loss) income before income tax (benefit) provision
(5,981)
539
(6,520)
(1,280)
(1,215)
(65)
Income tax (benefit) provision
(1,315)
168
(1,483)
(93)
(295)
202
Net (loss) income
$
(4,666)
$
371
$
(5,037)
$
$
(1,187)
$
(920)
$
(267)
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, as reflected in our consolidated statements of operations, is 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 GAAP interest
expense for the periods presented by the gains or losses on these derivative instruments may 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 derivative 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, which changes are
reflective of the future periods covered by the derivative 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 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. This
presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as
periods in the future.
- 25 -
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 its
financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative
of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our
consolidated statements of operations are not necessarily representative of the total interest 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 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 discussed above 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 each quarter in 2022 and 2021.
Gains (Losses) on Derivative Instruments - Attributed to Current Period (Non-GAAP)
(in thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Repurchase
Long-Term
Repurchase
Long-Term
Statement of
Three Months Ended
Agreements
Debt
Total
Agreements
Debt
Total
Operations
June 30, 2022
$
(186)
$
(48)
$
(234)
$
136
$
48
$
184
$
(50)
March 31, 2022
(185)
(48)
(233)
185
48
233
-
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
-
Six Months Ended
June 30, 2022
$
(371)
$
(96)
$
(467)
$
321
$
96
$
417
$
(50)
June 30, 2021
(1,416)
(116)
(1,532)
1,416
116
1,532
$
-
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)
June 30, 2022
$
392
$
73
$
(186)
$
259
$
319
$
133
March 31, 2022
491
31
(185)
216
460
275
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)
Six Months Ended
June 30, 2022
$
883
$
104
$
(371)
$
475
$
779
$
408
June 30, 2021
1,189
71
(1,416)
1,487
1,118
(298)
(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.
- 26 -
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
June 30, 2022
$
319
$
133
$
304
$
(48)
$
352
$
15
$
(219)
March 31, 2022
460
275
256
(48)
304
204
(29)
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)
Six Months Ended
June 30, 2022
$
779
$
408
$
560
$
(96)
$
656
$
219
$
(248)
June 30, 2021
1,118
(298)
500
(116)
616
618
(914)
(1)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income.
(2)
Reflects the effect of derivative instrument hedges for only the period presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income.
Segment Information
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm.
Segment information for the six months ended June 30, 2022 and 2021 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
6,408
$
-
$
-
$
-
$
6,408
Advisory services, other operating segments
(1)
56
-
-
(56)
-
Interest and dividend income
-
1,636
-
-
1,636
Interest expense
-
(104)
(2)
-
(664)
Net revenues
6,464
1,532
(560)
(56)
7,380
Other expenses
-
(9,224)
-
-
(9,224)
Operating expenses
(4)
(3,237)
(901)
-
-
(4,138)
Intercompany expenses
(1)
-
(56)
-
56
-
Income (loss) before income taxes
$
3,227
$
(8,649)
$
(560)
$
-
$
(5,982)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
4,211
$
-
$
-
$
-
$
4,211
Advisory services, other operating segments
(1)
72
-
-
(72)
-
Interest and dividend income
-
2,201
-
-
2,201
Interest expense
-
(71)
(2)
-
(570)
Net revenues
4,283
2,130
(499)
(72)
5,842
Other (expenses) income
-
(1,976)
(3)
-
(1,822)
Operating expenses
(4)
(2,230)
(1,251)
-
-
(3,481)
Intercompany expenses
(1)
-
(72)
-
72
-
Income (loss) before income taxes
$
2,053
$
(1,169)
$
(345)
$
-
$
539
- 27 -
Segment information for the three months ended June 30, 2022 and 2021 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
3,332
$
-
$
-
$
-
$
3,332
Advisory services, other operating segments
(1)
27
-
-
(27)
-
Interest and dividend income
-
742
-
-
742
Interest expense
-
(73)
(2)
-
(377)
Net revenues
3,359
669
(304)
(27)
3,697
Other expenses
-
(2,865)
-
-
(2,865)
Operating expenses
(4)
(1,695)
(417)
-
-
(2,112)
Intercompany expenses
(1)
-
(27)
-
27
-
Income (loss) before income taxes
$
1,664
$
(2,640)
$
(304)
$
-
$
(1,280)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,186
$
-
$
-
$
-
$
2,186
Advisory services, other operating segments
(1)
37
-
-
(37)
-
Interest and dividend income
-
1,084
-
-
1,084
Interest expense
-
(31)
(2)
-
(281)
Net revenues
2,223
1,053
(250)
(37)
2,989
Other (expenses) income
-
(2,634)
(3)
-
(2,480)
Operating expenses
(4)
(1,125)
(599)
-
-
(1,724)
Intercompany expenses
(1)
-
(37)
-
37
-
Income (loss) before income taxes
$
1,098
$
(2,217)
$
(96)
$
-
$
(1,215)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes gains 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.
Assets in each reportable segment were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
June 30, 2022
$
2,082
$
82,326
$
8,935
$
93,343
December 31, 2021
1,901
111,022
9,162
122,085
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 1.50% 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.
- 28 -
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the
Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been
previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, Orchid pays
the following fees to the Company:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and
multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.
In addition, Orchid is obligated to reimburse us for any direct expenses incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been
renewed through February 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 in each quarter during 2022 and 2021.
(in thousands)
Advisory Services
Repurchase,
Average
Average
Clearing and
Orchid
Orchid
Management
Overhead
Administrative
Three Months Ended
MBS
Equity
Fee
Allocation
Fees
Total
June 30, 2022
$
4,260,727
$
866,539
$
2,631
$
519
$
183
$
3,333
March 31, 2022
5,545,844
853,576
2,634
441
-
3,075
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
Six Months Ended
June 30, 2022
$
4,903,286
$
860,058
$
5,265
$
960
$
183
$
6,408
June 30, 2021
4,268,801
499,683
3,412
799
-
4,211
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
six months ended June 30, 2022, we generated $0.8 million of net portfolio interest income, consisting of $0.9 million of interest income from
MBS assets offset by $0.1 million of interest expense on repurchase liabilities. For the comparable period ended June 30, 2021, we
generated $1.1 million of net portfolio interest income, consisting of $1.2 million of interest income from MBS assets offset by $0.1 million of
interest expense on repurchase liabilities.
The $0.3 million decrease in interest income for the six months ended June 30, 2022 was due to
a $17.8 million decrease in average MBS balances, combined with a 1 basis point ("bp") decrease in yields earned on the portfolio. There
was a $33,000 increase in interest expense for the six months ended June 30, 2022 that was due to a $19.3 million decrease in average
repurchase liabilities that was partially offset by a 20 bp increase in cost of funds.
- 29 -
Our economic interest expense on repurchase liabilities for the six months ended June 30, 2022 and 2021 was $0.5 million and $1.5
million, respectively, resulting in $0.4 million and ($0.3) million of economic net portfolio interest income (expense), respectively.
During the three months ended June 30, 2022, we generated approximately $319,000 of net portfolio interest income, consisting of
approximately $392,000 of interest income from MBS assets offset by approximately $73,000 of interest expense on repurchase liabilities.
For the three months ended June 30, 2021, we generated approximately $547,000 of net portfolio interest income, consisting of
approximately $578,000 of interest income from MBS assets offset by approximately $31,000 of interest expense on repurchase liabilities.
Our economic interest expense on repurchase liabilities for the three months ended June 30, 2022 and 2021 was $0.3 million and $0.7
million, respectively, resulting in approximately $0.1 million and ($0.2) million of economic net portfolio interest income (expense),
respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase agreement
balances, interest expense, cost of funds, net interest income and net interest rate spread for the six months ended June 30, 2022 and 2021
and each quarter in 2022 and 2021 on both a GAAP and economic basis.
($ 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)
June 30, 2022
$
46,607
$
392
3.36%
$
45,870
$
73
$
259
0.63%
2.25%
March 31, 2022
57,741
491
3.40%
56,846
31
216
0.22%
1.52%
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%
Six Months Ended
June 30, 2022
$
52,174
$
883
3.39%
$
51,358
$
104
$
475
0.40%
1.85%
June 30, 2021
69,971
1,189
3.40%
70,672
71
1,487
0.20%
4.21%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
June 30, 2022
$
319
$
133
2.73%
1.11%
March 31, 2022
460
275
3.18%
1.88%
December 31, 2021
490
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.13)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
Six Months Ended
June 30, 2022
$
779
$
408
2.99%
1.54%
June 30, 2021
1,118
(298)
3.20%
-0.81%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 30 and 31 are calculated based on the
average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presented.
Average balances for quarterly periods are calculated using two data points, the beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the tables above and the tables on page 31 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.
(4)
Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS.
- 30 -
Interest Income and Average Earning Asset Yield
Our interest income was $0.9 million for the six months ended June 30, 2022 and $1.2 million for the six months ended June 30, 2021.
Average MBS holdings were $52.2 million and $70.0 million for the six months ended June 30, 2022 and 2021, respectively. The $0.3 million
decrease in interest income was due to a $17.8 million decrease in average MBS holdings, combined with a 1 basis point ("bp") decrease
in yields.
Our interest income was $0.4 million for the three months ended June 30, 2022 and $0.6 million for the three months ended June 30,
2021. Average MBS holdings were $46.6 million and $70.9 million for the three months ended June 30, 2022 and 2021, respectively. The
$0.2 million decrease in interest income was due to a $24.3 million decrease in average MBS holdings, partially offset by a 10 bp increase
in yields in average MBS holdings.
The tables below present the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS
and PT MBS, for the six months ended June 30, 2022 and 2021, and for each quarter during 2022 and 2021.
($ 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
June 30, 2022
$
43,568
$
3,039
$
46,607
$
333
$
59
$
392
3.06%
7.75%
3.36%
March 31, 2022
54,836
2,905
57,741
472
19
491
3.45%
2.61%
3.40%
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%
Six Months Ended
June 30, 2022
$
49,202
$
2,972
$
52,174
$
805
$
78
$
883
3.27%
5.24%
3.39%
June 30, 2021
69,455
516
69,971
1,184
5
1,189
3.41%
1.92%
3.40%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average outstanding balances under repurchase agreements were $51.4 million and $70.7 million, generating interest expense of
$104,000 and $71,000 for the six months ended June 30, 2022 and 2021, respectively. Our average cost of funds was 0.40% and 0.20%
for six months ended June 30, 2022 and 2021, respectively. There was a 20 bp increase in the average cost of funds and a $19.3 million
decrease in average outstanding repurchase agreements during the six months ended June 30, 2022, compared to the six months ended
June 30, 2021.
Our economic interest expense was $0.5 million and $1.5 million for the six months ended June 30, 2022 and 2021, respectively. There
was a 236 bp decrease in the average economic cost of funds to 1.85% for the six months ended June 30, 2022 from 4.21% for the six
months ended June 30, 2021. The $1.0 million decrease in economic interest expense was due to the $19.3 million decrease in average
outstanding repurchase agreements, combined with the 236 bp decrease economic cost of funds during the six months ended June 30,
2022.
Our average outstanding balances under repurchase agreements were $45.9 million and $72.2 million, generating interest expense of
approximately $73,000 and 31,000 for the three months ended June 30, 2022 and 2021, respectively. Our average cost of funds was 0.63%
and 0.17% for three months ended June 30, 2022 and 2021, respectively. There was a 46 bp increase in the average cost of funds, partially
offset by a $26.4 million decrease in average outstanding repurchase agreements during the three months ended June 30, 2022, compared
to the three months ended June 30, 2021.
- 31 -
Our economic interest expense was $0.3 million and $0.7 million for the three months ended June 30, 2022 and 2021, respectively.
There was a 184 bp decrease in the average economic cost of funds to 2.25% for the three months ended June 30, 2022 from 4.09% for
the three months ended June 30, 2021.
Because all of our repurchase agreements are short-term, changes in market rates have a more immediate impact on our interest
expense. Our average cost of funds calculated on a GAAP basis was 30 bps below the average one-month LIBOR and 127 bps below the
average six-month LIBOR for the quarter ended June 30, 2022. Our average economic cost of funds was 132 bps above the average one-
month LIBOR and 35 bps above the average six-month LIBOR for the quarter ended June 30, 2022. The average term to maturity of the
outstanding repurchase agreements increased from 16 days at December 31, 2021 to 26 days at June 30, 2022.
The tables below present the average outstanding balances under our repurchase agreements, interest expense and average economic
cost of funds, and average one-month and six-month LIBOR rates for the six months ended June 30, 2022 and 2021, and for each quarter
in 2022 and 2021, on both a GAAP and economic basis.
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
June 30, 2022
$
45,870
$
73
$
259
0.63%
2.25%
March 31, 2022
56,846
31
216
0.22%
1.52%
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%
Six Months Ended
June 30, 2022
$
51,358
$
104
$
475
0.40%
1.85%
June 30, 2021
70,672
71
1,487
0.20%
4.21%
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
June 30, 2022
0.93%
1.90%
(0.30)%
(1.27)%
1.32%
0.35%
March 31, 2022
0.25%
0.76%
(0.03)%
(0.54)%
1.27%
0.76%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
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%
Six Months Ended
June 30, 2022
0.59%
1.33%
(0.19)%
(0.93)%
1.26%
0.52%
June 30, 2021
0.11%
0.20%
0.09%
0.00%
4.10%
4.01%
Dividend Income
At both June 30, 2022 and December 31, 2021, we owned 2,595,357 shares of Orchid common stock. Orchid paid total dividends of
$0.29 and $0.39 per share during the six months ended June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022
and 2021, we received dividends on this common stock investment of approximately $0.8 million and $1.0 million, respectively. Orchid paid
total dividends of $0.135 and $0.195 per share during the three months ended June 30, 2022 and 2021, respectively. During the three
months ended June 30, 2022 and 2021, we received dividends on this common stock investment of approximately $0.4 million and $0.5
million, respectively.
- 32 -
Long-Term Debt
Junior Subordinated Notes
Interest expense on our junior subordinated debt securities was $0.54 million and $0.50 million for the six months ended June 30, 2022
and 2021, respectively. The average rate of interest paid for the six months ended June 30, 2022 was 4.16% compared to 3.69% for the
comparable period in 2021.
Interest expense on our junior subordinated debt securities was $0.30 million and $0.25 million for the three month periods ended June
30, 2022 and 2021, respectively. The average rate of interest paid for the three months ended June 30, 2022 was 4.50% compared to
3.67% for the comparable period in 2021.
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 June 30, 2022, the interest rate was 5.33%.
Note Payable
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest
installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest
accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%.
The note is secured by a mortgage on the Company’s office building.
Gains or Losses and Other Income
The table below presents our gains or losses and other income for the six and three months ended June 30, 2022 and 2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
Change
2022
2021
Change
Realized losses on sales of MBS
$
(858)
$
-
$
(858)
$
(858)
$
-
$
(858)
Unrealized losses on MBS
(4,034)
(1,898)
(2,136)
(919)
(506)
(413)
Total losses on MBS
(4,892)
(1,898)
(2,994)
(1,777)
(506)
(1,271)
Losses on derivative instruments
(50)
-
(50)
(50)
-
(50)
Unrealized losses on
Orchid Island Capital, Inc. common stock
(4,282)
(78)
(4,204)
(1,038)
(2,128)
1,090
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs,
and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell,
existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or
anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our
asset/liability management strategy. During the six months ended June 30, 2022, we received proceeds of $23.1 million from the sales of
MBS. We did not sell any MBS during the six months ended June 30, 2021.
- 33 -
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 the end of quarter during 2022 and 2021.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)
June 30, 2022
3.00%
2.97%
4.65%
5.52%
1.97%
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
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%
(1)
Historical 5 Year and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.
(2)
Historical 15 Year and 30 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 six and three months ended June 30, 2022, our total operating expenses were approximately $4.1 million and $2.1 million,
respectively, compared to approximately $3.5 million and $1.7 million for the six and three months ended June 30, 2021, respectively. The
table below presents a breakdown of operating expenses for the six and three months ended June 30, 2022 and 2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
Change
2022
2021
Change
Compensation and related benefits
$
2,606
$
2,190
$
416
$
1,262
$
1,067
$
195
Legal fees
64
77
(13)
29
32
(3)
Accounting, auditing and other professional fees
203
195
8
94
102
(8)
Directors’ fees and liability insurance
393
378
15
197
190
7
Administrative and other expenses
872
641
231
531
333
198
$
4,138
$
3,481
$
657
$
2,113
$
1,724
$
389
Income Tax Provision
We recorded an income tax (benefit) provision for the six months ended June 30, 2022 and 2021 of approximately $(1.3) million and
$0.2 million, respectively, on a consolidated pre-tax book (loss) income of $(6.0) million and $0.5 million, respectively.
million, respectively, on a consolidated pre-tax book loss of $1.3 million and $1.2 million, respectively.
- 34 -
Financial Condition:
Mortgage-Backed Securities
As of June 30, 2022, our MBS portfolio consisted of $38.5 million of agency or government MBS at fair value and had a weighted
average coupon of 3.55%. During the six months ended June 30, 2022, we received principal repayments of $5.1 million compared to
$7.4 million for the comparable period ended June 30, 2021. The average prepayment speeds for the quarters ended June 30, 2022 and
2021 were 20.0% and 21.9%, respectively.
The following table presents the three-month constant prepayment rate (“CPR”) experienced on our structured and PT MBS sub-
portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage
pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart
below represents the three-month prepayment rate of the securities in the respective asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
June 30, 2022
17.2
22.9
20.0
March 31, 2022
18.5
25.6
20.9
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
The following tables summarize certain characteristics of our PT MBS and structured MBS as of June 30, 2022 and December 31,
2021:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
June 30, 2022
Fixed Rate MBS
$
35,492
92.1%
4.03%
324
1-May-52
Interest-Only MBS
3,034
7.9%
2.82%
302
15-May-51
Inverse Interest-Only MBS
9
0.0%
5.45%
203
15-May-39
Total MBS Portfolio
$
38,535
100.0%
3.55%
322
1-May-52
December 31, 2021
Fixed Rate MBS
$
58,029
95.4%
3.69%
330
1-Sep-51
Interest-Only MBS
2,759
4.6%
2.86%
306
15-May-51
Inverse Interest-Only MBS
15
0.0%
5.90%
209
15-May-39
Total MBS Portfolio
$
60,803
100.0%
3.41%
329
1-Sep-51
- 35 -
($ in thousands)
June 30, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
24,701
64.1%
$
39,703
65.3%
Freddie Mac
13,834
35.9%
21,100
34.7%
Total Portfolio
$
38,535
100.0%
$
60,803
100.0%
June 30, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
106.70
$
109.33
Weighted Average Structured Purchase Price
$
4.48
$
4.81
Weighted Average Pass-through Current Price
$
100.30
$
109.30
Weighted Average Structured Current Price
$
12.95
$
9.87
Effective Duration
(1)
3.909
2.103
(1)
Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 3.909 indicates
that an interest rate increase of 1.0% would be expected to cause a 3.909% decrease in the value of the MBS in our investment portfolio at
June 30, 2022. 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. These figures include the structured securities in the portfolio but do
include the effect of our 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 six months ended June 30, 2022 and 2021.
($ in thousands)
Six Months Ended June 30,
2022
2021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
10,822
$
99.42
4.08%
$
12,368
$
104.84
1.19%
Structured MBS
-
-
-
772
7.72
3.33%
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 duration 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) causes 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.
- 36 -
Prepayments on the loans underlying our MBS can alter the timing of the cash flows received by us. As a result, we gauge the interest
rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to
movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage
related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially
above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of
expected prepayments.
We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured
MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets
and the duration of our liabilities. We generally calculate duration and effective duration using various third-party models or obtain these
quotes from third parties. However, empirical results and various third-party models may produce different duration numbers for the same
securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge
positions as of June 30, 2022, 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
$
35,492
$
1,584
$
(1,807)
$
(3,756)
4.46%
(5.09)%
(10.58)%
Interest-Only MBS
3,034
(255)
157
235
(8.40)%
5.18%
7.74%
Inverse Interest-Only MBS
9
2
(2)
(4)
22.04%
(24.62)%
(48.63)%
Total MBS Portfolio
$
38,535
$
1,331
$
(1,652)
$
(3,525)
3.45%
(4.29)%
(9.15)%
($ in thousands)
Notional
$ Change in Fair Value
% Change in Fair Value
Amount
(1)
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Treasury Futures Contracts
Repurchase Agreement Hedges
$
7,000
$
(540)
$
460
$
246
(7.71)%
6.57%
3.51%
$
7,000
$
(540)
$
460
$
246
Gross Totals
$
791
$
(1,192)
$
(3,279)
(1)
Represents the average contract/notional amount of Eurodollar futures contracts.
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments and hedging
instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown
above and such difference might be material and adverse to our stockholders.
Repurchase Agreements
As of June 30, 2022, 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 four of these counterparties. We believe these facilities provide borrowing
capacity in excess of our needs. None of these lenders are affiliated with us. These borrowings are secured by our MBS.
- 37 -
As of June 30, 2022, we had obligations outstanding under the repurchase agreements of approximately $36.9 million with a net
weighted average borrowing cost of 1.34%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 13
to 40 days, with a weighted average maturity of 26 days. Securing the repurchase agreement obligation as of June 30, 2022 are MBS with
an estimated fair value, including accrued interest, of $38.5 million and a weighted average maturity of 323 months. Through August 11,
2022, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 30, 2022 with maturities
through September 19, 2022.
The table below presents information about our period-end, maximum and average repurchase agreement obligations for each
quarter in 2022 and 2021.
($ 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
June 30, 2022
$
36,926
$
53,289
$
45,870
$
(8,944)
(19.50)%
March 31, 2022
54,815
58,772
56,846
(2,031)
(3.57)%
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%
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. 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.
- 38 -
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.
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 June 30, 2022, we had cash
and cash equivalents of $5.6 million. We generated cash flows of $6.0 million from principal and interest payments on our MBS portfolio
and had average repurchase agreements outstanding of $51.4 million during the six months ended June 30, 2022. In addition, during the
six months ended June 30, 2022, we received approximately $6.3 million in management fees and expense reimbursements as manager
of Orchid and approximately $0.8 million in dividends from our investment in Orchid common stock.
Outlook
Orchid Island Capital Inc.
Orchid Island Capital reported a second quarter 2022 loss of $60.1 million and its shareholders equity declined from $592.4 million to
$506.4 million. The market conditions described below led to the loss as agency MBS underperformed comparable duration treasuries
and the Orchid’s hedge positions. The decline in shareholders equity is likely to lead to reduced management fees at Bimini Advisors
going forward if Orchid is unable to rebuild its shareholders equity since the amount of the management fees paid to the Company are a
function of Orchid’s equity. Orchid also reduced its monthly dividend twice during the first quarter from $0.065 per month to $0.045 per
month. The reduction in the dividend decreased the monthly dividend revenues to the Company.
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.
- 39 -
Economic Summary
The second quarter of 2022 was another transitional period as the outlook for the economy, inflation and monetary policy changed
materially. Inflationary data was the driver of these developments. Inflation in the U.S. began to accelerate during the second quarter of
2021. For several months market participants, and especially the Fed, assumed that inflation would prove transitory as it was assumed
temporary supply chain constraints caused by COVID-19 were the cause and that these constraints would fade as the effects of COVID-19
itself declined over time. The sub-components of inflation exhibiting the largest increases were items likely to be affected by the effects of
COVID-19 on the supply of labor, or lack thereof in this case. By early in the fourth quarter of 2021 the Fed formally dropped their
contention that inflation was “transitory.” The Fed quickly pivoted from providing monetary policy accommodation to constraining inflation
and reducing their balance sheet. The war in the Ukraine, which started in late February of 2022, exacerbated the inflationary forces. At
the beginning of the second quarter market participants expected year-over-year inflation readings to moderate as baseline effects would
kick in, since inflation had surged starting in the second quarter of 2021. This did not happen, and the monthly core consumer price index
(“CPI”) readings for May and June of 2022 were quite high – 0.6% and 0.7% respectively – after a 0.6% increase for April of 2022.
Inflation was accelerating during the second quarter, not moderating, and becoming broader based. Further, survey-based measures of
inflation expectations were rising rapidly. The most recent measures of inflation are the highest in four decades.
While several important metrics of economic activity remain very strong, particularly hiring in the labor market and the unemployment
rate, other measures have softened. In particular, interest rate sensitive sectors of the economy, such as the housing market and large
consumer goods such as sales of cars and light trucks, have declined from peak levels seen earlier in the year. The stock markets in the
U.S. and abroad have declined materially so far in 2022 and most broad equity indices are down between 10% and 30% year to date in
U.S. dollar terms. With the Fed in the midst of an accelerated tightening cycle the dollar has strengthened against most major currencies,
such as the Euro, Yen, Yuan and most emerging market currencies.
Interest Rates
With inflation accelerating to the highest level since the early 1980s and the Fed intent on taking the Fed Funds rate to levels well
above their presumptive “neutral” rate of 2.50% to 2.75%, interest rates increased further during the second quarter. The yield on the 10-
year U.S. Treasury Note came within a few basis points of 3.50% on June 14, 2022, a few days after the May CPI was released. That
same day, the yield on the 2-year U.S. Treasury Note reached 3.43%. Yields on both benchmark treasuries declined modestly over the
balance of the quarter and into the third quarter of 2022.
The Fed reacted quickly as these developments unfolded and raised the Fed Funds rate by 50 basis points on May 4, 2022, and 75
basis points on June 15, 2022. The Fed raised the Fed Funds rate by another 75 basis points on July 27, 2022. The market expects the
Fed to continue to raise rates at each remaining meeting in 2022 and for the Fed Funds rate to end the year with a target range of 3.5% -
3.75%. This range is clearly above the Fed’s long-term neutral rate – deemed to be between 2.50% and 2.75%. The Fed has also
acknowledged their efforts to bring inflation under control and taking the Fed Funds rate above neutral may cause the economy to enter a
recession. They deem these steps as necessary to prevent inflation from remaining higher than the Fed’s target rate of inflation.
- 40 -
This rapid transition from accommodation to the extreme removal of policy accommodation – to the point of a restrictive policy stance
– has materially changed the outlook for the economy. The Fed’s policy actions have also been matched by most central banks across
the globe, and most market participants expect a global recession within a year or so. In the U.S., market participants feel the Fed will
succeed in reducing inflation, albeit at the cost of a recession, and as a result the U.S. Treasury yield curve has inverted. Current market
pricing in the Fed Funds futures market indicate the market expects the Fed to be cutting rates as early as the first quarter of 2023.
Accordingly, the yield on the 2-year U.S. Treasury Note now exceeds the yield on the 10-year U.S. Treasury Note. Incoming economic
data during the second quarter and early third quarter has exacerbated the yield curve inversion. It appears the economy is slowing even
quicker than feared, but with inflation so high it does not appear that the Fed will stop tightening. Such conditions, should they persist, are
likely to keep shorter maturity U.S. Treasuries high – reflecting increases to the Fed Funds rate over the near term – relative to longer
rates, which reflect market expectations for inflation to ultimately be contained, the economy to slow and the Fed to eventually lower the
Fed Funds rate.
The Agency MBS Market
The Agency MBS market generated a negative return of 3.9 % during the second quarter of 2022. As interest rates rose, the
prospect of the Fed raising the Fed Funds rate well above 3% by year end and the largest MBS investors selling or decreasing their
exposure to the sector, Agency MBS spreads relative to benchmark interest rates increased to levels just below those observed in March
of 2020. The largest investors of Agency MBS, the Fed via quantitative easing (which is now quantitative tightening as the Fed allows their
holdings of Agency MBS to run-off), large domestic banks (which due to quantitative tightening are experiencing declines in
reserves/deposits) and large money managers (which see other sectors of the fixed income markets as more attractive or are experiencing
out-flows in their assets under management and selling assets across all of their holdings), are collectively causing demand for Agency
MBS to decline materially and driving the spread widening. The relative performance across the Agency MBS universe is skewed in favor
of higher coupon, 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large
amounts by the Fed, and which may eventually be sold by the Fed, have performed the worst, however, subsequent to June 30, 2022,
performance of these securities has improved.
As both the domestic and the global economies appear to be slowing, the more credit sensitive sectors of the fixed income markets
have come under pressure and are likely to further weaken if the economies do indeed contract. As a result, the relative performance of
Agency MBS, while negative in absolute terms, has been better than most sectors of the fixed income markets. Actions by the Fed as
described above may prevent the sector from performing well in the near term but, if the economy does contract and enter a recession, the
sector could do well on a relative performance basis owing to the lack of credit exposure of Agency MBS. This is consistent with the
sector’s history of performance in a counter-cyclical manner – doing well when the economy is soft and relatively poorly when the economy
is strong.
Recent Legislative and Regulatory Developments
In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets as
investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the
COVID-19 pandemic, on the morning of Monday, 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.
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 and ended net asset purchases entirely by early March
of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this
plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency MBS each
month, with those numbers expected to double in September of 2022 to a maximum of $60 billion of U.S. Treasuries and $35 billion of
Agency MBS each month.
- 41 -
On December 27, 2020, former 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. 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. Following
the end of this limitation, U.S. foreclosure starts for the first half of 2022 were up 153% and down 1% from the comparable periods in 2021
and 2020, respectively, and at 41% of the 10-year historic average for the comparable period.
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 February 25, 2022, the FHFA published a final rule, effective as of
April 26, 2022, amending the GSE capital framework established in December 2020 by, among other things, replacing the fixed leverage
buffer equal to 1.5% of a GSE’s adjusted total assets with a dynamic leverage buffer equal to 50% of a GSE’s stability capital buffer,
reducing the risk weight floor from 10% to 5%, and removing the requirement that the GSEs must apply an overall effectiveness
adjustment to their credit risk transfer exposures. On June 14, 2022, the GSEs announced that they will each charge a 50 bps fee for
commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the GSE capital
framework. Industry groups have expressed concern that this poses a risk to the fungibility of the Uniform Mortgage-Backed Security
(“UMBS”), which could negatively impact liquidity and pricing in the market for TBA securities.
In 2017, policymakers announced that LIBOR will 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 extension, a joint statement by key regulatory authorities called on banks to cease entering
into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021.
- 42 -
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 became 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.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the Consolidated
Appropriations Act, 2022 (H.R. 2471). The LIBOR Act 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.
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.
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.
- 43 -
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:
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 uses 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.
- 44 -
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,
but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its balance
sheet 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 foreclosure or evictions, when and if it occurs, 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.
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. Increases in the
Fed Funds rate, SOFR or LIBOR typically 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
During the latter part of the second quarter of 2022 inflation data drove a material change in Fed policy, interest rates and the outlook
for the economy. Specifically, the CPI for May, released in June, was far above market expectations. Survey measures of inflation
expectations, released on the same day, surged to multi-decade highs. In July, the June CPI reading was released and was again well
above market expectations. Equally troubling, elevated inflation readings were very broad based, implying inflationary pressures have
clearly spread from just those sectors most exposed to COVID-19 related supply constraints. This was the catalyst for the Fed to pivot
even more forcefully than they did during late 2021/early 2022, and the Fed raised the Fed Funds rate by 200 basis points collectively at
the May, June and July meetings. The market expects the Fed to continuing raising the Fed Funds rate by another 100 basis points by
year-end. Increases in the Fed Funds rate are likely to affect economic activity, and the Fed has acknowledged their actions may lead to a
recession. Sectors of the economy most sensitive to interest rates – such as housing – have already started to slow and other economic
indicators have shown evidence of slowing, such as new orders and production levels for the manufacturing sector as reported by the
Institute for Supply Management. Initial claims for unemployment in July of 2022 have risen by approximately 94,000 above the low
reading reported in March of 2022.
- 45 -
The market appears to anticipate the Fed will be able to contain inflation and that the result will be a contraction in economic growth.
This is reflected in yields for longer-term U.S. Treasuries. With the Fed expected to increase the Fed Funds rate by another 100 basis
points or more, shorter maturity U.S. Treasuries remain elevated, with the yield on the 2-year U.S. Treasury Note yielding approximately
3.07% on August 3, 2022. The combined effect – more increases to the Fed Funds rate, inflation to be ultimately contained by the Fed
albeit potentially at the expense of a recession, has caused the yield curve to invert whereby shorter maturity U.S. Treasuries yield more
than long-term U.S. Treasuries. This condition may persist for the balance of 2022 and into 2023.
The Agency MBS market generated negative returns for the second quarter (-3.9%) and year-to-date (-8.8%), and such returns were
lower than comparable duration U.S. Treasuries by 1.20% and 2.3%, respectively. During June of 2022, spreads to comparable duration
U.S. Treasuries were near the extreme levels observed in March of 2020 when the markets experienced the extreme turbulence in the
early days of the COVID-19 pandemic that triggered unprecedented intervention in the market by the Fed. In spite of this poor
performance, Agency MBS actually delivered better returns than most sectors of the fixed income markets during the second quarter and
first six months of 2022. For this reason, returns to the sector may remain low as the largest participants in the sector – the Fed via
quantitative easing, now quantitative tightening, and large banks and money managers – refrain from increasing their investments in the
sector. However, if the economy does enter into a recession the sector could outperform other sectors owing to its lack of credit risk and
the prospects for lower funding rates and declining longer-term rates. Through the early days of the third quarter of 2022, Agency MBS
have performed well and most of the widening in spreads that occurred in June of 2022 has reversed.
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,
and these decisions and assessments can change significantly
each reporting period. There have been no changes to the processes used to determine our critical accounting estimates as discussed in
our annual report on Form 10-K for the year ended December 31, 2021.
Capital Expenditures
At June 30, 2022, we had no material commitments for capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
- 46 -
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of
the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the CEO and CFO concluded our 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 we
must disclose in our 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 Control over Financial Reporting
There were no material changes in the Company’s internal control over financial reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. 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
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 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 1A. RISK FACTORS.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2021, filed with the SEC on March 11, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 June 30, 2022.
Approximate Dollar
Shares Purchased
Amount of Shares
Total Number
Weighted-Average
as Part of Publicly
That May Yet be
of Shares
Price Paid
Announced
Repurchased Under
Repurchased
Per Share
Programs
the Authorization
April 1, 2022 - April 30, 2022
8,425
$
1.87
8,425
$
1,914,075
May 1, 2022 - May 31, 2022
24,700
1.77
24,700
1,870,338
June 1, 2022 - June 20, 2022
8,010
1.69
8,010
1,856,796
Totals / Weighted Average
41,135
$
1.77
41,135
$
1,856,796
The Company did not have any unregistered sales of its equity securities during the three months ended June 30, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
- 48 -
ITEM 6. EXHIBITS
Exhibit No
3.1
3.2
3.3
3.4
3.5
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***
* Filed herewith.
** Furnished herewith
*** Submitted electronically herewith.
- 49 -
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: August 12, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date: August 12, 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)
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Organization and Significant Accounting PoliciesNote 2. Advisory ServicesNote 3. Mortgage-backed SecuritiesNote 4. Repurchase AgreementsNote 5. Pledged AssetsNote 6. Offsetting Assets and LiabilitiesNote 7. Long-term Debt Long-term Debt At June 30, 2022 and December 31, 2021 Is Summarized As Follows:Note 7. Long-term DebtNote 8. Common StockNote 9. Commitments and ContingenciesNote 10. Income TaxesNote 11. Earnings Per ShareNote 12. Fair ValueNote 13. Segment InformationNote 14. Related Party TransactionsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits