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).
ý
☐
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
☐
Accelerated filer
☐
☐
(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.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
ý
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
November 14, 2022
Class B Common Stock, $0.001 par value
November 14, 2022
Class C Common Stock, $0.001 par value
November 14, 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
47
ITEM 4. Controls
and Procedures
48
PART II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
49
ITEM 1A.
Risk Factors
49
ITEM 2. Unregistered
Sales of Equity
Securities
and Use of
Proceeds
49
ITEM 3. Defaults
Upon Senior
Securities
49
ITEM 4. Mine
Safety Disclosures
49
ITEM 5. Other
Information
49
ITEM 6. Exhibits
50
SIGNATURES
51
- 1 -
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Unaudited)
September 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 September 30, 2022 and December
31, 2021
Class A Common stock, $
and
Class B Common stock, $
issued and outstanding as of September 30, 2022 and December 31, 2021
Class C Common stock, $
issued and outstanding as of September 30, 2022 and December 31, 2021
Additional paid-in capital
Accumulated deficit
(
305,730,514
)
(
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 Nine and Three Months Ended September 30, 2022 and 2021
Nine Months Ended September 30,
Three Months Ended September 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
(
313,843
)
(
94,926
)
(
209,928
)
(
23,729
)
Long-term debt
(
938,557
)
(
747,577
)
(
378,752
)
(
248,465
)
Net revenues
Other income (expense):
Unrealized losses on mortgage-backed securities
(
6,605,850
)
(
2,221,521
)
(
2,572,296
)
(
323,659
)
Realized (losses) gains on mortgage-backed securities
(
858,001
)
Unrealized losses on Orchid Island Capital, Inc. common stock
(
7,422,723
)
(
856,468
)
(
3,140,383
)
(
778,607
)
Gains (losses) on derivative instruments
(
280
)
(
147
)
Gains on retained interests in securitizations
Other income
Total other expense
(
14,025,878
)
(
2,854,649
)
(
4,802,482
)
(
1,032,766
)
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
(
9,410,422
)
(
3,428,806
)
Income tax (benefit) provision
(
1,571,076
)
(
255,618
)
Net (loss) income
$
(
7,839,346
)
$
$
(
3,173,188
)
$
Basic and Diluted Net (loss) income Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
(
0.75
)
$
$
(
0.31
)
$
CLASS B COMMON STOCK
Basic and Diluted
$
(
0.75
)
$
$
(
0.31
)
$
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 Nine and Three Months Ended September 30, 2022 and 2021
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
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
)
$
Net loss
-
(
3,173,188
)
(
3,173,188
)
Class A common shares repurchased and retired
(
225,970
)
(
226
)
(
362,126
)
(
362,352
)
Balances, September 30, 2022
$
$
$
(
305,730,514
)
$
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
)
$
Net income
-
Class A common shares repurchases and retired
(
814,074
)
(
815
)
(
1,569,694
)
(
1,570,509
)
Balances, September 30, 2021
$
$
$
(
297,331,338
)
$
See Notes to Condensed Consolidated Financial Statements
- 4 -
BIMINI CAPITAL MANAGEMENT,
INC.
CONDENSED CONSOLIDATED
STATEMENTS
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
2022
2021
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income
$
(
7,839,346
)
$
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation
Deferred income tax (benefit) provision
(
1,571,076
)
Unrealized losses on mortgage-backed securities
Realized losses on mortgage-backed securities
(
69,498
)
Gains on retained interests in securitizations
(65,928)
-
PPP loan forgiveness
(
153,724
)
Unrealized losses on Orchid Island Capital, Inc. common stock
Changes in operating assets and liabilities:
Accrued interest receivable
(
45,524
)
Due from affiliates
(
13,034
)
(
302,326
)
Other assets
(
84,426
)
Accrued interest payable
(
51,990
)
Other liabilities
(
1,241,306
)
(
98,625
)
NET CASH PROVIDED BY OPERATING
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(
21,009,391
)
(
26,189,505
)
Sales
Principal repayments
Payments received on retained interests in securitizations
Purchases of property and equipment
(
46,176
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(
1,364,069
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal repayments on repurchase agreements
(
284,094,690
)
(
197,873,114
)
Principal repayments on long-term debt
(
16,926
)
(
16,108
)
Class A common shares repurchased and retired
(
812,649
)
(
1,570,509
)
NET CASH USED IN FINANCING ACTIVITIES
(
16,213,575
)
(
3,497,731
)
NET DECREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
(
2,413,313
)
(
1,366,354
)
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)
September
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 nine and three-month periods ended September 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
September
30, 2022
and December
31, 2021.
September 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
nine and
three months
ended September
30, 2022,
the Company
only held
T-Note futures
contracts.
The Company
recorded
income of
approximately
$
Losses recorded
during the
nine and
three months
ended September
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 September 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 nine and three months ended September 30,
2022 and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Management fee
$
$
$
$
Allocated overhead
Repurchase, Clearing and Administrative Fee
357
-
174
-
Total
$
$
$
$
At September 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 September
30, 2022
and December
31, 2021:
(in thousands)
September 30, 2022
December 31, 2021
Fixed-rate MBS
$
$
Structured MBS
Total
$
$
The following table is a summary of the Company’s net gain (loss) from the sale of MBS during the nine months ended
September 30, 2022 and 2021.
(in thousands)
2022
2021
Proceeds from sales of MBS
$
$
Carrying value of MBS sold
(
23,955
)
(
12,994
)
Net (loss) gain on sales of MBS
$
(
858
)
$
Gross gain on sales of MBS
$
$
Gross loss on sales of MBS
(
858
)
Net (loss) gain 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
September
30, 2022,
the Company
had met all
margin call
requirements.
As of September
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
September 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
$
September
30, 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 September
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 September
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
September
30, 2022
and December
31, 2021.
($ in thousands)
September 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 September
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
September 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 September
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
September 30, 2022
Repurchase Agreements
$
$
$
$
(
42,250
)
$
(
1,244
)
$
$
$
$
$
(
42,250
)
$
(
1,244
)
$
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 September
30, 2022 and
December
31, 2021
is summarized
as follows:
(in thousands)
September 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 September
30, 2022
and December
31, 2021,
the outstanding
principal
balance on
the junior
subordinated
debt securities
owed
to BCTII
was $
interest
that floats
at a spread
of
% over the
prevailing
three-month
LIBOR rate.
As of September
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 three months of 2022
$
For the years ended:
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
nine months
ended September
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
nine months
ended September
30, 2022,
the Company
repurchased
a total of
Plan at an
aggregate
cost of approximately
$
From the
inception
of the 2021
Repurchase
Plan through
September
30, 2022,
the Company
repurchased
a total of
aggregate
cost of approximately
$
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 September 30, 2022.
NOTE 10.
INCOME TAXES
The total income tax (benefit) provision recorded for the nine months ended September
30, 2022 and 2021 was $
(
1.6
)
$
(
9.4
)
September 30, 2022 and 2021, respectively.
The total income tax (benefit) provision recorded for the three
months ended September
30, 2022 and 2021 was $(
) million and $
) million and
$
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 September
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 September
30, 2022
and 2021.
The table
below reconciles
the numerator
and denominator
of EPS for
the nine
and three
months ended
September
30, 2022
and
2021.
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 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
$
(
7,815
)
$
$
(
3,163
)
$
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
$
(
0.75
)
$
$
(
0.31
)
$
- 17 -
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 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
$
(
24
)
$
$
(
10
)
$
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
$
(
0.75
)
$
$
(
0.31
)
$
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 nine
and three
months ended
September
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.
Retained
interests
have a recorded
fair value
of zero as
of September
30, 2022
and December
31, 2021,
as the prospect
of future
cash flows
is uncertain.
Any cash
received from
the retained
interests
is reflected
as a gain
in the consolidated
statements
of operations.
- 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
September
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)
September 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
nine months
ended September
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 nine months ended September 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 nine months ended September 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)
(
85
)
Interest and dividend income
Interest expense
(
314
)
(
938
)
(2)
(
1,252
)
Net revenues
(
938
)
(
85
)
Other expenses
(
14,092
)
(
14,026
)
Operating expenses
(3)
(
4,914
)
(
1,302
)
(
6,216
)
Intercompany expenses
(1)
(
85
)
Income (loss) before income taxes
$
$
(
13,429
)
$
(
872
)
$
$
(
9,410
)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(
108
)
Interest and dividend income
Interest expense
(
95
)
(
748
)
(2)
(
843
)
Net revenues
(
748
)
(
108
)
Other (expenses) income
(
3,008
)
(
2,854
)
Operating expenses
(3)
(
3,396
)
(
1,738
)
(
5,134
)
Intercompany expenses
(1)
(
108
)
Income (loss) before income taxes
$
$
(
1,704
)
$
(
594
)
$
$
- 20 -
Segment information for the three months ended September 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)
(
29
)
Interest and dividend income
Interest expense
(
210
)
(
379
)
(2)
(
589
)
Net revenues
(
379
)
(
29
)
Other expenses
(
4,868
)
(
4,802
)
Operating expenses
(3)
(
1,677
)
(
401
)
(
2,078
)
Intercompany expenses
(1)
(
29
)
Income (loss) before income taxes
$
$
(
4,780
)
$
(
313
)
$
$
(
3,429
)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(
35
)
Interest and dividend income
Interest expense
(
24
)
(
248
)
(2)
(
272
)
Net revenues
(
248
)
(
35
)
Other (expenses) income
(
1,033
)
(
1,033
)
Operating expenses
(3)
(
1,157
)
(
496
)
(
1,653
)
Intercompany expenses
(1)
(
35
)
Income (loss) before income taxes
$
$
(
545
)
$
(
248
)
$
$
Includes fees paid by Royal Palm to Bimini Advisors for advisory services
.
(2)
Includes interest on long-term debt.
(3)
Corporate expenses are allocated based on each segment’s proportional
share of total revenues.
Assets in each reportable segment as of September 30, 2022 and December
31, 2021 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
September 30, 2022
$
$
$
December 31, 2021
NOTE 14. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both September 30, 2022 and December 31, 2021, the Company owned
effect to Orchid’s 1-for-5 reverse stock split), representing approximately
% and
%, respectively, of Orchid’s outstanding common
stock on such dates. The Company received dividends on this common
stock investment of approximately $
during the nine and three months ended September 30, 2022, respectively, and approximately $
nine and three months ended September 30, 2021,
respectively.
- 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 and, commencing April 1. 2022, provides certain repurchase agreement
trading, clearing and administrative services.
Pursuant to the terms of the management agreement, Bimini Advisors provides
Orchid with its management team, including its officers,
along with appropriate support personnel. Bimini Advisors is at all times subject
to the supervision and oversight of Orchid's board of
directors and has only such functions and authority as delegated to it.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS")
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our investment
strategy focuses on, and our
portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency
MBS, such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”)
and collateralized mortgage obligations (“CMOs”) issued
by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest
only securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types of
structured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock Repurchase
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 September
30, 2022,
we repurchased
a total of
547,672 shares
at an aggregate
cost of approximately
$1.0 million,
including
commissions
and fees,
for a weighted
average price
of $1.84
per share.
During the
nine months
ended September
30, 2022,
the Company
repurchased
a total of
455,385 shares
at an aggregate
cost of approximately
$0.8 million,
including
commissions
and fees,
for a weighted
average price
of $1.78
per share.
- 23 -
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (including ongoing economic impacts from
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;
●
our ability to manage the portfolio of Orchid and maintain our role as manager; and
●
the financial performance of Orchid and resulting changes in Orchid’s shareholders equity, the carrying value of our
investment, dividend income and our advisory services revenue.
Results
of Operations
Described
below are
the Company’s
results of
operations
for the
nine and
three months
ended September
30, 2022,
as compared
to
the nine
and three
months ended
September
30, 2021.
Net (Loss)
Income Summary
Consolidated
net loss for
the nine months
ended September
30, 2022
was $7.8
million, or
$0.75 basic
and diluted
loss per share
of
Class A Common
Stock, as
compared
to a consolidated
net income
of $0.8 million,
or $0.07
basic and
diluted income
per share
of Class
A
Common Stock,
for the nine
months ended
September
30, 2021.
Consolidated
net loss for
the three
months ended
September
30, 2022
was $3.2
million, or
$0.31 basic
and diluted
loss per
share of
Class A Common
Stock, as
compared
to consolidated
net income
of $0.5 million,
or $0.04
basic and diluted
income per
share of
Class A
Common Stock,
for the three
months ended
September
30, 2021.
- 24 -
The components
of net (loss)
income for
the nine
months ended
September
30, 2022
and 2021,
along with
the changes
in those
components
are presented
in the table
below.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Advisory services revenues
$
9,720
$
6,758
$
2,962
$
$
3,312
$
2,547
$
765
Interest and dividend income
2,364
3,245
(881)
728
1,043
(315)
Interest expense
(1,252)
(843)
(409)
(589)
(272)
(317)
Net revenues
10,832
9,160
1,672
3,451
3,318
133
Other expense
(14,026)
(2,855)
(11,171)
(4,802)
(1,033)
(3,769)
Expenses
(6,216)
(5,134)
(1,082)
(2,077)
(1,653)
(424)
Net (loss) income before income tax (benefit) provision
(9,410)
1,171
(10,581)
(3,428)
632
(4,060)
Income tax (benefit) provision
(1,571)
336
(1,907)
(255)
167
(422)
Net (loss) income
$
(7,839)
$
835
$
(8,674)
$
$
(3,173)
$
465
$
(3,638)
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
September 30, 2022
$
(184)
$
(48)
$
(232)
$
1,028
$
48
$
1,076
$
844
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
-
Nine Months Ended
September 30, 2022
$
(555)
$
(144)
$
(699)
$
1,349
$
144
$
1,493
$
794
September 30, 2021
(2,125)
(173)
(2,298)
2,125
173
2,298
$
-
- 26 -
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)
September 30, 2022
$
445
$
210
$
(184)
$
394
$
235
$
51
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)
Nine Months Ended
September 30, 2022
$
1,328
$
314
$
(555)
$
869
$
1,014
$
459
September 30, 2021
1,726
95
(2,125)
2,220
1,631
(494)
(1)
Reflects the effect of derivative instrument hedges for only the period
presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
September 30, 2022
$
235
$
51
$
379
$
(48)
$
427
$
(144)
$
(376)
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)
Nine Months Ended
September 30, 2022
$
1,014
$
459
$
939
$
(144)
$
1,083
$
75
$
(624)
September 30, 2021
1,631
(494)
748
(173)
921
883
(1,415)
(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.
- 27 -
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 nine months ended September 30, 2022 and 2021 is as
follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
9,720
$
-
$
-
$
-
$
9,720
Advisory services, other operating segments
(1)
85
-
-
(85)
-
Interest and dividend income
-
2,364
-
-
2,364
Interest expense
-
(314)
(2)
-
(1,252)
Net revenues
9,805
2,050
(938)
(85)
10,832
Other expenses
-
(14,092)
66
-
(14,026)
Operating expenses
(3)
(4,914)
(1,302)
-
-
(6,216)
Intercompany expenses
(1)
-
(85)
-
85
-
Income (loss) before income taxes
$
4,891
$
(13,429)
$
(872)
$
-
$
(9,410)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
6,758
$
-
$
-
$
-
$
6,758
Advisory services, other operating segments
(1)
108
-
-
(108)
-
Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other (expenses) income
-
(3,008)
154
-
(2,854)
Operating expenses
(3)
(3,396)
(1,738)
-
-
(5,134)
Intercompany expenses
(1)
-
(108)
-
108
-
Income (loss) before income taxes
$
3,470
$
(1,704)
$
(594)
$
-
$
1,172
- 28 -
Segment information for the three months ended September 30, 2022 and 2021 is
as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
3,312
$
-
$
-
$
-
$
3,312
Advisory services, other operating segments
(1)
29
-
-
(29)
-
Interest and dividend income
-
728
-
-
728
Interest expense
-
(210)
(2)
-
(589)
Net revenues
3,341
518
(379)
(29)
3,451
Other expenses
-
(4,868)
66
-
(4,802)
Operating expenses
(3)
(1,677)
(401)
-
-
(2,078)
Intercompany expenses
(1)
-
(29)
-
29
-
Income (loss) before income taxes
$
1,664
$
(4,780)
$
(313)
$
-
$
(3,429)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,547
$
-
$
-
$
-
$
2,547
Advisory services, other operating segments
(1)
35
-
-
(35)
-
Interest and dividend income
-
1,043
-
-
1,043
Interest expense
-
(24)
(2)
-
(272)
Net revenues
2,582
1,019
(248)
(35)
3,318
Other (expenses) income
-
(1,033)
-
-
(1,033)
Operating expenses
(3)
(1,157)
(496)
-
-
(1,653)
Intercompany expenses
(1)
-
(35)
-
35
-
Income (loss) before income taxes
$
1,425
$
(545)
$
(248)
$
-
$
632
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
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
September 30, 2022
$
1,967
86,542
$
8,361
$
96,870
December 31, 2021
1,901
111,022
9,162
122,085
- 29 -
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.
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
September 30, 2022
$
3,571,037
$
839,935
$
2,616
$
522
$
174
$
3,312
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
Nine Months Ended
September 30, 2022
$
4,459,203
$
853,350
$
7,881
$
1,482
$
357
$
9,720
September 30, 2021
4,557,978
557,250
5,569
1,189
-
6,758
- 30 -
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
nine months ended September 30, 2022, we generated $1.0 million of
net portfolio interest income, consisting of $1.3 million of interest
income from MBS
assets offset by $0.3
million of interest
expense on repurchase
liabilities.
For the comparable
period ended September
30, 2021, we
generated
$1.6 million
of net portfolio
interest income,
consisting
of $1.7 million
of interest
income from
MBS assets offset
by
$0.1 million
of interest
expense
on repurchase
liabilities.
The $0.4
million decrease
in interest
income for
the nine
months ended
September
30, 2022 was due to a $20.3 million decrease in average MBS balances,
which was partially offset by a 31 basis point ("bp") increase in
yields earned on the portfolio.
There was a $0.2 million increase
in interest expense
for the nine months ended
September 30, 2022
that
was due to
a 70 bp increase
in cost of
funds which
was partially
offset by a
$21.9 million
decrease
in average
repurchase
liabilities.
Our economic
interest
expense
on repurchase
liabilities
for the
nine months
ended September
30, 2022
and 2021
was $0.9
million and
$2.2 million,
respectively, resulting
in $0.5 million
and ($0.5)
million of
economic net
portfolio
interest
income (expense),
respectively.
During
the three
months
ended
September
30, 2022,
we generated
$0.2 million
of net
portfolio
interest
income,
consisting
of $0.4
million
of
interest income
from MBS
assets offset
by
$0.2 million
of
interest expense
on
repurchase liabilities.
For
the three
months ended
September 30, 2021, we generated $0.5 million of net portfolio interest income, consisting of approximately
$537,000 of interest income
from MBS
assets offset
by approximately
$24,000 of
interest
expense on
repurchase
liabilities.
Our economic interest expense
on repurchase liabilities
for the three months ended September 30, 2022 and 2021 was $0.4 million
and $0.7 million,
respectively, resulting
in approximately
$0.1 million
and ($0.2) million
of economic
net portfolio
interest income
(expense),
respectively.
The
tables
below
provide
information
on our
portfolio
average
balances,
interest
income,
yield
on
assets,
average
repurchase
agreement
balances, interest
expense, cost
of funds, net interest
income and net
interest rate
spread for the
nine months ended
September 30,
2022
and 2021
and each
quarter in
2022 and
2021 on both
a GAAP and
economic basis.
($ 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)
September 30, 2022
$
41,402
$
445
4.30%
$
40,210
$
210
$
394
2.09%
3.92%
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%
Nine Months Ended
September 30, 2022
$
48,584
$
1,328
3.65%
$
47,642
$
314
$
869
0.88%
2.43%
September 30, 2021
68,878
1,726
3.34%
69,533
95
2,220
0.18%
4.26%
- 31 -
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
September 30, 2022
$
235
$
51
2.21%
0.38%
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)%
Nine Months Ended
September 30, 2022
$
1,014
$
459
2.77%
1.22%
September 30, 2021
1,631
(494)
3.16%
(0.92)%
(1)
Portfolio yields
and costs
of borrowings
presented in
the tables
above and
the tables
on pages
32 and
33 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 33 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.
Interest Income and Average Earning Asset Yield
Our interest income
was $1.3
million for
the nine
months ended September 30,
2022 and
$1.7 million
for the
nine months ended
September
30, 2021.
Average
MBS holdings
were
$48.6
million
and $68.9
million
for the
nine months
ended
September
30, 2022
and 2021,
respectively.
The $0.4
million
decrease
in interest
income was
due to
a $20.3
million
decrease
in average
MBS holdings,
which was
partially
offset by a
31 basis point
("bp") increase
in yields.
Our interest income was $0.4 million for
the three months ended September 30, 2022 and
$0.5 million for the
three months ended
September 30, 2021.
Average MBS holdings were $41.4 million and $66.7 million for the three months ended September
30, 2022 and
2021, respectively.
The $0.1 million
decrease in
interest income
was due to a $25.3
million decrease
in average
MBS holdings,
which was
partially offset
by a 108
bp increase
in yields in
average MBS
holdings.
The tables below present the average
portfolio size, income
and yields of our respective
sub-portfolios,
consisting of structured
MBS
and PT MBS,
for the nine
months ended
September
30, 2022
and 2021,
and for each
quarter during
2022 and
2021.
- 32 -
($ 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
September 30, 2022
$
38,384
$
3,018
$
41,402
$
383
$
62
$
445
3.99%
8.17%
4.30%
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%
Nine Months Ended
September 30, 2022
$
45,596
$
2,988
$
48,584
$
1,188
$
140
$
1,328
3.48%
6.22%
3.65%
September 30, 2021
67,851
1,027
68,878
1,717
9
1,726
3.37%
1.25%
3.34%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
outstanding
balances
under repurchase
agreements
were $47.6
million and
$69.5 million,
generating
interest expense
of
$0.3 million
and $0.1
million for
the nine months
ended September
30, 2022
and 2021,
respectively.
Our average
cost of funds
was 0.88%
and 0.18% for nine months
ended September
30, 2022 and 2021, respectively.
There was a 70 bp increase in the average
cost of funds
and a
$21.9 million
decrease in
average outstanding repurchase agreements during
the
nine months
ended September 30,
2022, as
compared
to the nine
months ended
September
30, 2021.
Our economic
interest
expense
was $0.9
million
and $2.2
million
for the
nine
months
ended
September
30, 2022
and 2021,
respectively.
There was
a 183 bp decrease
in the average
economic cost
of funds
to 2.43%
for the nine
months ended
September
30, 2022 from
4.26%
for the nine
months ended September 30, 2021.
The $1.3 million decrease in
economic interest expense was due to the
$21.9 million
decrease in average
outstanding repurchase agreements,
combined with the
183 bp
decrease economic cost of
funds during the
nine
months ended
September
30, 2022.
Our average
outstanding
balances
under repurchase
agreements
were $40.2
million and
$67.3 million,
generating
interest expense
of
approximately
$0.2 million
and 24,000
for the three
months ended
September
30, 2022 and
2021, respectively.
Our average
cost of funds
was 2.09% and 0.14% for
three months ended
September 30,
2022 and 2021, respectively.
There was a 195 bp increase
in the average
cost of
funds,
which was
partially
offset by
a $27.0
million
decrease
in average
outstanding
repurchase
agreements
during
the three
months
ended September
30, 2022,
as compared
to the three
months ended
September
30, 2021.
Our
economic
interest
expense
was
$0.4
million
and
$0.7
million
for
the
three
months
ended
September 30,
2022
and
2021,
respectively. There
was a 44
bp decrease
in the average
economic
cost of funds
to 3.92%
for the
three months
ended September
30, 2022
from 4.36%
for the three
months ended
September
30, 2021.
Because all of
our repurchase agreements are short-term, changes in market rates
have a
more immediate impact on our
interest
expense.
Our average
cost of funds
calculated
on a GAAP
basis was
10 bps below
the average
one-month
LIBOR and
120 bps below
the
average
six-month
LIBOR for
the quarter
ended September
30, 2022.
Our average
economic
cost of
funds was
173 bps
above the
average
one-month
LIBOR
and 63
bps above
the average
six-month
LIBOR
for the
quarter
ended September
30, 2022.
The average
term to
maturity
of the outstanding
repurchase
agreements
decreased
from 16
days at December
31, 2021
to 16 days
at September
30, 2022.
The tables
below
present
the average
outstanding
balances
under
our repurchase
agreements,
interest
expense
and average
economic
cost of funds,
and average
one-month and
six-month LIBOR
rates for the
nine months
ended September
30, 2022 and
2021, and for
each
quarter in
2022 and
2021, on
both a GAAP
and economic
basis.
- 33 -
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
September 30, 2022
$
40,210
$
210
$
394
2.09%
3.92%
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%
Nine Months Ended
September 30, 2022
$
47,642
$
314
$
869
0.88%
2.43%
September 30, 2021
69,533
95
2,220
0.18%
4.26%
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
September 30, 2022
2.19%
3.29%
(0.10)%
(1.20)%
1.73%
0.63%
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%
Nine Months Ended
September 30, 2022
1.12%
1.98%
(0.24)%
(1.10)%
1.31%
0.45%
September 30, 2021
0.10%
0.19%
0.08%
(0.01)%
4.16%
4.07%
Dividend Income from Orchid
Effective August
30, 2022, Orchid
effected a 1-for-5
reverse stock
split, converting
every five shares
of issued and
outstanding
Orchid
common stock into one
share of common stock.
All share and per share
amounts reported
in this quarterly
report with respect
to Orchid’s
common stock
have been
adjusted
to reflect
this reverse
stock split.
At both September
30, 2022 and
December
31, 2021,
we owned 591,071
shares of
Orchid common
stock. Orchid
paid total
dividends
of $1.995
and $2.925
per share
during the
nine months
ended September
30, 2022
and 2021,
respectively.
During the
nine months
ended
September 30, 2022 and 2021, we
received dividends on this common stock investment of approximately $1.0 million and $1.5
million,
respectively. Orchid paid total dividends of $0.545 and $0.975 per share during the three months ended September 30, 2022 and 2021,
respectively.
During the three months ended
September 30, 2022 and 2021, we received
dividends on this common stock
investment of
approximately
$0.3
million and
$0.5 million,
respectively.
Long-Term Debt
Junior Subordinated Notes
Interest
expense on
our junior
subordinated
debt securities
was $0.9
million and
$0.7 million
for the nine
months ended
September
30,
2022 and 2021, respectively.
The average rate of interest paid for the nine months
ended September 30, 2022 was 4.64% compared
to
3.67% for
the comparable
period in
2021.
- 34 -
Interest expense
on
our
junior subordinated debt
securities was
$0.4 million
and
$0.2 million
for
the
three month
periods ended
September
30, 2022
and 2021,
respectively.
The average
rate of
interest
paid for
the three
months ended
September
30, 2022
was 5.58%
compared
to 3.62%
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 September
30, 2022,
the interest
rate was
6.79%.
Note Payable
On October
30, 2019,
the Company borrowed
$680,000 from a
bank. The
note is
payable in equal
monthly principal and interest
installments of approximately
$5,000 through October
30, 2039. Interest accrues
at 4.89% through October
30, 2024. Thereafter, interest
accrues based
on the weekly
average yield
to the United
States Treasury
securities
adjusted to
a constant
maturity of
5 years, plus
3.25%.
The note
is secured
by a mortgage
on the Company’s
office building.
Gains or Losses and Other Income
The table
below presents
our gains
or losses
and other
income for
the nine and
three months
ended September
30, 2022
and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Realized (losses) gains on sales of MBS
$
(858)
$
69
$
(927)
$
-
$
69
$
(69)
Unrealized losses on MBS
(6,606)
(2,222)
(4,384)
(2,572)
(324)
(2,248)
Total losses on
MBS
(7,464)
(2,153)
(5,311)
(2,572)
(255)
(2,317)
Gains (losses) on derivative instruments
795
(280)
1,075
844
(147)
991
Gains on retained interests in securitizations
66
-
66
66
-
66
Unrealized losses on
Orchid Island Capital, Inc. common stock
(7,423)
(856)
(6,567)
(3,140)
(779)
(2,361)
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 nine
months ended
September
30, 2022
and September
30, 2021,
we received
proceeds
of
$23.1 million
and $13.1
million from
the sales
of MBS,
respectively.
The fair
value of
our MBS
portfolio
and derivative
instruments,
and the
gains (losses)
reported
on those
financial
instruments,
are driven
by changes in yields and interest rates,
the spreads that MBS trade relative
to comparable duration
U.S. Treasuries or swaps, as well as
varying levels
of demand
for MBS.
The table
below presents
historical
interest
rate data
as of the
end of quarter
during 2022
and 2021.
- 35 -
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)
September 30, 2022
4.04%
3.80%
5.35%
6.11%
3.45%
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 nine
and three months ended September 30, 2022,
our total operating expenses were approximately $6.2 million and $2.1
million,
respectively, compared to approximately
$5.1 million and $1.7 million for the nine and three months ended September 30, 2021,
respectively.
The table
below presents
a breakdown
of operating
expenses for
the nine
and three
months ended
September
30, 2022 and
2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Compensation and related benefits
$
3,836
$
3,220
$
616
$
1,230
$
1,029
$
201
Legal fees
82
113
(31)
18
37
(19)
Accounting, auditing and other professional fees
288
293
(5)
85
97
(12)
Directors’ fees and liability insurance
588
568
20
195
190
5
Administrative and other expenses
1,422
940
482
549
300
249
$
6,216
$
5,134
$
1,082
$
2,077
$
1,653
$
424
Beginning
with the
second quarter
of 2022,
Bimini began
providing
certain repurchase
agreement
trading,
clearing and
administrative
services to
Orchid.
Providing
these services
required
Bimini to
increase staffing
and other
resources,
causing an
increase
in
compensation
related expenses
of approximately
$0.5 million
and $0.2
million for
the nine
and three
month periods
ended September
30,
2022, and
increases
in other
administrative
expenses
of approximately
$0.4 million
and $0.2
million for
the nine
and three
month periods
ended September
30, 2022,
as compared
to the nine
and three
months ended
September
30, 2021.
Income Tax Provision
We recorded
an income
tax (benefit)
provision
for the nine
months ended
September
30, 2022
and 2021
of approximately
$(1.6)
million and
$0.3 million,
respectively, on
consolidated
pre-tax book
(loss) income
of $(9.4)
million and
$1.2 million,
respectively. We
recorded
an income
tax (benefit)
provision
for the three
months ended
September
30, 2022
and 2021
of approximately
$(0.3) million
and
$0.2 million,
respectively, on
consolidated
pre-tax book
(loss) income
of $(3.4)
million and
$0.6 million.
- 36 -
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2022,
our MBS portfolio
consisted
of $44.3
million of
agency or
government
MBS at fair
value and
had a
weighted
average coupon
of 3.62%.
During the
nine months
ended September
30, 2022,
we received
principal
repayments
of $7.0 million
compared
to $11.8 million
for the
comparable
period ended
September
30,
2021.
The average
prepayment
speeds for
the quarters
ended
September
30, 2022
and 2021
were 10.8%
and 18.3%,
respectively.
The following
table presents
the three-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT MBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction
of the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three-month
prepayment
rate of the
securities
in the respective
asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2022
13.1
7.5
10.8
June 30, 2022
17.2
22.9
20.0
March 31, 2022
18.5
25.6
20.9
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
The following
tables summarize
certain characteristics
of our PT
MBS and structured
MBS as of
September
30, 2022
and December
31, 2021:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2022
Fixed Rate MBS
$
41,276
93.2%
4.02%
329
1-Jul-52
Structured MBS
2,994
6.8%
2.84%
301
15-May-51
Total MBS Portfolio
$
44,270
100.0%
3.62%
327
1-Jul-52
December 31, 2021
Fixed Rate MBS
$
58,029
95.4%
3.69%
330
1-Sep-51
Structured MBS
2,774
4.6%
2.88%
306
15-May-51
Total MBS Portfolio
$
60,803
100.0%
3.41%
329
1-Sep-51
($ in thousands)
September 30, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
31,774
71.8%
$
39,703
65.3%
Freddie Mac
12,496
28.2%
21,100
34.7%
Total Portfolio
$
44,270
100.0%
$
60,803
100.0%
- 37 -
September 30, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
105.51
$
109.33
Weighted Average Structured Purchase Price
$
4.48
$
4.81
Weighted Average Pass-through Current Price
$
94.00
$
109.30
Weighted Average Structured Current Price
$
13.36
$
9.87
Effective Duration
(1)
4.484
2.103
(1)
Effective duration is the approximate percentage change in price
for a 100 basis point change in rates.
An effective duration of 4.484 indicates
that an interest rate increase of 1.0% would be expected to cause a 4.484% decrease in the
value of the MBS in our investment portfolio at
September 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
nine months
ended September
30, 2022
and 2021.
($ in thousands)
Nine Months Ended September 30,
2022
2021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
21,009
$
99.14
4.12%
$
23,337
$
106.48
1.41%
Structured MBS
-
-
-
2,852
10.01
0.43%
Our portfolio
of PT MBS
is typically
comprised
of adjustable-rate
MBS, fixed-rate
MBS and hybrid
adjustable-rate
MBS. We generally
seek to acquire
low duration
assets that
offer high
levels of
protection
from mortgage
prepayments
provided
that they
are reasonably
priced by
the market.
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.
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.
- 38 -
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 September
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
$
41,276
$
1,973
$
(2,149)
$
(4,393)
4.78%
(5.21)%
(10.64)%
Structured MBS
2,994
(124)
63
78
(4.14)%
2.10%
2.61%
Total MBS
Portfolio
$
44,270
$
1,849
$
(2,086)
$
(4,315)
4.18%
(4.71)%
(9.75)%
($ 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
$
14,400
$
(1,115)
$
1,037
$
1,998
(7.75)%
7.20%
13.88%
$
14,400
$
(1,115)
$
1,037
$
1,998
Gross Totals
$
734
$
(1,049)
$
(2,317)
(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 September
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
five 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.
As of September
30, 2022,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$43.5 million
with a
net weighted
average borrowing
cost of 2.98%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
11 to 31 days,
with a weighted
average maturity
of 16 days.
Securing
the repurchase
agreement
obligation
as of September
30, 2022
are
MBS with
an estimated
fair value,
including
accrued interest,
of $44.3 million
and a weighted
average maturity
of 329 months.
Through
November
10, 2022,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to those
that existed
at September
30,
2022 with
maturities
through December
19, 2022.
- 39 -
The table below presents information about our period-end, maximum and average
repurchase agreement obligations for each
quarter in 2022 and 2021.
($ 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
September 30, 2022
$
43,494
$
46,977
$
40,210
$
3,284
8.17%
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.
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.
- 40 -
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.
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
and through
revenues
from our
advisory services
business.
As of September
30, 2022,
we had cash
and cash equivalents
of $5.9
million.
We generated
cash flows
of
$8.3 million
from principal
and interest
payments on
our MBS
portfolio
and had average
repurchase
agreements
outstanding
of $47.6
million during
the nine months
ended September
30, 2022.
In addition,
during the
nine months
ended September
30, 2022,
we received
approximately
$9.7 million
in management
fees and
expense reimbursements
as manager
of Orchid
and approximately
$1.0 million
in
dividends
from our
investment
in Orchid
common stock.
Outlook
Orchid Island
Capital Inc.
Orchid Island
Capital reported
a third quarter
2022 loss
of $84.5
million and
its shareholders
equity declined
from $506.4
million to
$400.4 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
once during
the quarter
from $0.225
per month
to $0.16 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.
- 41 -
Economic
Summary
The evolution
of economic
and market
developments
pivoted in
the third
quarter of
2022.
Trends in place
since late
2021 have
changed in
the third
quarter.
The outlook
for the domestic
economy of
the United
States, particularly
with respect
to inflation,
the level
of
interest
rates and
expectations
for monetary
policy from
the Fed changed
during the
quarter.
As the second
quarter of
2022 ended,
the
market expected
that the
monetary
tightening
policies implemented
by the Fed
to control
inflation
would soon
succeed, and
that by
early in
2023 the
Fed would
likely start
to unwind
their rate
increases
in order
to avert
an economic
slowdown
resulting
from these
policies. The
catalyst for
the changes
that occurred
during the
third quarter
of 2022 was
clear evidence
that not
only was
inflation
persisting,
but that
it
was becoming
more broad
based and
entrenched.
As the Fed
and the various
members of
the FOMC
became aware
of this, their
public
comments consistently
sought to
dispel the
notion that
they would
be easing
monetary policy
in early 2023
as the futures
markets were
pricing.
As the quarter
unfolded
and the inflation
data continued
to reflect
this trend,
the market
grew to
accept that
the Fed would
have to
raise the
Fed Funds
target further
into restrictive
territory.
At the conclusion
of their
meeting
on November
2, 2022,
Fed chairman
Powell
expressed
the view
that since
the incoming
economic
data since
their September
meeting was
so strong,
the terminal
funds rate
would
likely have
to be higher
than the
Fed expected
in September.
The market
reacted quickly
to this guidance
and the terminal
rate priced
into
the Fed funds
futures market
was nearly
5.15% on
November
4, 2022.
The market
is now very
sensitive
to income
economic
data,
particularly
inflation
data.
Contributing
to the change
in economic
and interest
rate trends
were developments
abroad, particularly
in Europe
and the United
Kingdom.
While inflation
has proven
to be more
robust and
challenging
to control
in the U.S.,
it has been
even more
so in Europe
and
most of the
world outside
of China,
which is grappling
with persistent
COVID-19
cases that
have forced
the government
to intermittently
lock down
various population
centers.
The war
in Ukraine
has contributed
significantly
to food
and energy
price pressures
globally, more
so than in
the U.S.
The result
is essentially
all central
banks across
the globe
– outside
of China
and Japan
– are raising
rates.
Like the
Fed, the
central banks’
efforts have
yet to slow
inflation
and more
rate hikes
are very
likely.
Food and
energy inflation
poses additional
pressure
on governments
who are
eager to
ease the
burden of
elevated prices
for essentials
like food
and energy, but
are constrained
because their
efforts themselves
might increase
inflationary
pressures
and run counter
to central
bank actions
that are
attempting
to
constrain
economic activity
and demand.
A further
complicating
factor has
been the
U.S. dollar.
As the Fed
is forced
to continue
to raise
rates in
the U.S.,
the dollar
has
appreciated
against all
other currencies.
This in turn
forces other
central banks
to raise
rates to
protect their
own currencies,
often above
and beyond
what their
domestic economic
circumstances
might warrant.
Risk sentiment
is at extremely
depressed
levels and
all asset
classes across
the financial
markets have
generated
negative
year-to-
date returns
for 2022,
outside of
energy and
certain food
commodities.
Economic growth
is expected
to continue
to slow over
the balance
of the year,
both in the
U.S. and
globally, and likely
contract in
2023.
Interest
Rates
As the market
incorporated
inflation
data and
the Fed’s response
through the
second quarter
of 2022,
interest
rates began
to rise
significantly.
On August
1, 2022,
the 10-year
U.S. Treasury
Note closed
with a yield
of 2.5759%,
shortly before
the FOMC
began to
temper market
expectations
that the
Fed would
pivot away
from their
tightening
and begin
to lower
the Fed Funds
rate in early
2023.
The
yield on the
10-year U.S.
Treasury Note
closed just
above 3.83%
on September
30, 2022,
and just under
4.25% on
October 24,
2022.
This increase
was much
less than
the increase
in short-term
rates.
Interest
rates on
U.S. Treasury
Note maturities
inside one
year
increased
by well over
100 basis
points and
by more than
160 basis
points for
maturities
of three
months or
less – in
each case
by the end
of the third
quarter of
2022.
With the continued
increases
in market
expectations
of the Fed’s
terminal rate,
maturities
of three or
fewer
months have
increased
by more
than 250
basis points
from the
end of the
second quarter
through November
10, 2022.
As of September
30, 2022,
market pricing
implied the
terminal rate
for the current
cycle would
be approximately
4.53%, which
would be
reached late
in the
first quarter
of 2023.
As of November
10, 2022,
pricing is
for a terminal
rate of approximately
4.85% sometime
late in June
of 2023
and
with the
Fed Funds
rate still
approximately
4.25% in
early 2024.
- 42 -
The Fed has
repeatedly
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.
However, as it
appears the
Fed will
have to increase
the Fed Funds
rate considerably
higher than
was believed
to
be the case
even a few
months ago,
and central
banks across
the globe
are doing
likewise,
financial
conditions
have begun
to deteriorate
and liquidity
in many financial
markets has
declined.
If such trends
persist and
evidence appears
that certain
financial
markets are
not
operating
smoothly, or financial
conditions
are prohibiting
economic
activity from
operating
smoothly, central
banks may
face a dilemma
of
continuing
to increase
interest
rates or
implementing
accommodations
to permit
the smooth
operation
of financial
markets and
the
economy –
assuming
this were
to occur
before inflation
could be
brought under
control.
The outcome
in such a
scenario
cannot be
predicted
with any
confidence
at this time.
The Agency
MBS Market
Returns for
the Agency
MBS market
for the third
quarter of
2022 were
(5.4)% and
these returns
were 1.7%
lower than
comparable
duration
LIBOR swaps.
The largest
MBS investors
have generally
been selling
or decreasing
their exposure
to the sector.
Agency MBS
spreads relative
to benchmark
interest
rates increased
to levels
observed in
March of
2020 by
the end of
the third
quarter of
2022 and
have exceeded
those levels
in October
of 2022.
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
by the Fed
are experiencing
declines in
reserves/deposits)
and large
money managers
(which have
experienced
significant
outflows
as investors
leave fixed
income investments),
are collectively
causing demand
for Agency
MBS to decline
materially
and driving
the spread
widening.
As the U.S.
dollar has
strengthened
against most
other currencies
across the
globe, there
is the chance
certain
central banks
– namely the
Bank of
Japan – may
be forced
to intervene
in the currency
markets to
support their
local currency,
in this case
the Yen.
They would
do so by selling
U.S. dollar-denominated
assets and
buying Yen.
The only
U.S. dollar-denominated
assets they
own
are U.S.
Treasuries and
Agency MBS,
and selling
these would
represent
another source
of downward
pressure
on Agency
MBS. The
relative performance
across the
Agency MBS
universe was
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.
These results
are consistent
with the
relative duration
of the securities,
as higher
coupons have
shorter durations,
or less sensitivity
to movements
in interest
rates.
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
weaken further
if the economies
do indeed
contract.
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
resulting
from the
impacts of
the COVID-19
pandemic,
the Fed implemented
a program
of quantitative
easing. 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. On
September
21, 2022,
the
FOMC announced
the Fed’s decision
to continue
reducing
the balance
sheet by a
maximum
of $60 billion
of U.S Treasuries
and $35
billion of
Agency MBS
per month.
- 43 -
On January
29, 2021,
the CDC issued
guidance extending
eviction
moratoriums
for covered
persons put
in place by
the CARES
Act
through March
31, 2021.
The FHFA subsequently
extended
the foreclosure
moratorium
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.
Foreclosure
activity has
risen since
the end of
the moratorium,
with foreclosure
starts in
the third
quarter of
2022 up 167%
from the
comparable
period in
2021, but
still remaining
slightly
below pre-pandemic
levels.
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
calls on banks
to cease
entering
into
new contracts
that use
USD LIBOR
as a reference
rate by no
later than
December
31, 2021.
- 44 -
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.
On July 28,
2022, the
Fed published
a proposed
rule to implement
the LIBOR
Act.
Since the
GSEs have
generally
been using
30-
day average
SOFR in their
newly issued
multifamily
loans and
other structured
products,
the Fed proposed
that the
benchmark
replacement
for Agency
MBS be the
30-day average
SOFR plus
the applicable
tenor spread
adjustment
specified
in the LIBOR
Act.
Comments
for the proposed
rule closed
August 29,
2022, and
any final
rule will
go into effect
30 days after
publication
in the Federal
Register.
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.
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.
- 45 -
Because of
these exceptions,
the GSEs
believe based
on prevailing
assumptions
and market
conditions
this change
will have
only a
marginal impact
on prepayment
speeds, in
aggregate.
Cohort level
impacts may
vary. For example,
more than
half of loans
referred to
foreclosure
are historically
referred
within six
months of
delinquency. The
degree to
which speeds
are affected
depends on
delinquency
levels, borrower
response,
and referral
to foreclosure
timelines.
The scope
and nature
of the actions
the U.S.
government
or the Fed
will ultimately
undertake
are unknown
and will
continue to
evolve
Effect on
Us
Regulatory
developments,
movements
in interest
rates and
prepayment
rates affect
us in many
ways, including
the following:
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.
- 46 -
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. To the
extent 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.
To the extent they
were acquired
at a discount,
this will
tend to decrease
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
In a continuation
of the extremely
turbulent
and volatile
market conditions
that have
existed since
the onset
of the COVID-19
pandemic,
during the
third quarter
of 2022 the
state of
the markets
and the outlook
changed
materially.
The perception
of inflation
on the
part of the
Fed has shaped
the rates
markets, currency
markets and
the outlook
for the economy
since the
spring of
2021.
This is when
inflation
first began
to accelerate
in the U.S.
During the
third quarter,
the Fed’s outlook,
or more accurately,
the markets
perception
of how
the Fed saw
inflation,
changed significantly.
Through early
August of
2022 the
markets perceived
that, while
inflation
was not transitory,
the Fed would
be able to
dampen demand
by raising
rates and
cause inflation
to decrease
back towards
the Fed’s long-term
target of
2%.
Further, the
market anticipated
this would
happen by
early in 2023
and that
the Fed would
then start
to loosen
monetary
policy shortly
thereafter.
The Fed,
through repeated
public comments
by various
Fed
officials and
ultimately
by the Chairman
at the Fed’s
annual central
banker symposium
in Jackson
Hole, Wyoming
in late August,
stressed that
this was not
going to
be the case.
Incoming economic
data
over the
period was
persistently
strong, indicating
the rate
increases
to date had
yet to slow
demand.
More importantly,
incoming
inflation
data showed
no evidence
of slowing
at all and
was in fact
becoming more
widespread,
possibly
even well
entrenched.
This reinforced
the
notion the
Fed will
have to take
rates higher
and for longer.
- 47 -
The result
of these
developments
was significant
and widespread.
Germane to
Royal Palm
and levered
Agency MBS
investors
were
increases
in market
interest
rates and
a widening
in the spreads
that Agency
MBS securities
trade relative
to comparable
duration
U.S.
Treasuries or
swaps.
The yield
on the 10-year
closed just
above 3.83%
on September
30, 2022,
and nearly
4.25% on
October
24, 2022.
As of November
10, 2022,
the market
is pricing
in a terminal
rate of
4.85% in
June of 2023.
As the market
has continued
to increase
expectations
of the Fed’s
terminal
rate, all
shorter maturity
U.S. Treasuries
have increased
in yield
as well.
of three
months or
less – in
each case
by the end
of the quarter.
Maturities
of three
months or
less have
increased
by over
250 basis
points since
the end of
the second
quarter –
a very rare
event in the
U.S. Treasury
market.
Agency MBS
spreads relative
to benchmark
interest
rates increased
to levels
observed
in March
of 2020 by
the end of
the third
quarter of
2022 and
have exceeded
those levels
in October
of 2022.
Returns for
the Agency
MBS market
for the third
quarter of
2022
were (5.4)%
and these
returns were
1.7% lower
than comparable
duration
LIBOR swaps.
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.
These results
are consistent
with the
relative duration
of the securities,
as higher
coupons have
shorter durations,
or less sensitivity
to
movements
in interest
rates. Actions
by the Fed
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.
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 September 30, 2022, we had no material commitments for capital expenditures.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information
otherwise required under this item.
- 48 -
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.
- 49 -
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 September 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
July 1, 2022 - July 30, 2022
218,311
$
1.61
218,311
$
1,505,329
August 1, 2022 - August 31, 2022
3,611
1.47
3,611
1,500,007
September 1, 2022 - September 30, 2022
4,048
1.37
4,048
1,494,444
Totals / Weighted Average
225,970
$
1.60
225,970
$
1,494,444
The Company did not have any unregistered sales of its equity securities during the
three months ended September 30, 2022.
ITEM 3.
DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4.
MINE SAFETY
DISCLOSURES.
Not Applicable.
ITEM 5.
OTHER INFORMATION
None.
- 50 -
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.
- 51 -
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:
November 14, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date:
November 14, 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 September 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