AsMore generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”
New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac, on the one hand, and the federal government, on the other, which could adversely affect the price of, or our ability to invest in and finance, Agency MBS.
The interest and principal payments we expect to receive on the Agency MBS in which we invest are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Mae certificates are directly guaranteed by the U.S. government. Principal and interest payments relating to the securities issued by Fannie Mae and Freddie Mac are only guaranteed by each respective GSE.
In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008 (the “Recovery Act”). In addition to the FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Treasury entered into Preferred Stock Purchase Agreements (“PSPAs”) with the FHFA and have taken various actions intended to provide Fannie Mae and Freddie Mac with additional liquidity in an effort to ensure their financial stability. In September 2019, the FHFA and the U.S. Treasury agreed to modifications to the PSPAs that will permit Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively. As of September 30, 2020, Fannie Mae and Freddie Mac had retained equity capital of approximately $21 billion and $14 billion, respectively. In December 2020, a final rule was published in the federal register regarding GSE capital framework (the “December rule”), which requires Tier 1 capital in excess of 4% (approximately $265 billion) and a risk-weight floor of 20% for residential mortgages. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements (the “January agreement”) allowing the GSEs to continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the GSEs have common equity Tier 1 capital of at least 3% of their assets, (ii) the GSEs will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December rule to, among other things, reduce the Tier 1 capital and risk-weight floor requirements.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury suggested that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S. housing finance market should be re-examined. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements. The U.S. Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an Agency MBS and could have broad adverse market implications. If Fannie Mae or Freddie Mac was eliminated, or their structures were to change in a material manner that is not compatible with our business model, we would not be able to acquire Agency MBS from these entities, which could adversely affect our business operations. Such changes would likely have a similar impact on the business operations of Orchid, which could adversely affect the value and performance of our investment in Orchid common stock and the amount of management fees and expense reimbursements we receive from Orchid.
On June 23, 2021, the Supreme Court ruled in Collins v. Mnuchin, a case presenting a question of the constitutionality of the FHFA and its director’s protection from being replaced at will by the President. The Supreme Court held that the FHFA did not exceed its powers or functions as a conservator under the Recovery Act, and that the President may replace the director at will. On June 23, 2021, President Biden appointed Sandra Thompson as acting director of the FHFA.
Our investment in Orchid Island Capital, Inc. or other mortgage REIT common stock may fluctuate in value which materially adversely affect our business, financial condition and results of operations.
Investments in the securities of companies that own Agency MBS will be subject to all of the risks associated with the direct ownership of Agency MBS discussed above that could adversely affect the market price of the investment and the ability of the REIT to pay dividends. In addition, the market value of the common stock could be affected by market conditions beyond the Company’s control, such as limited liquidity in trading market for the common stock. A decrease in the dividend payment rate or the market value of the common stock could have a material adverse effect on our business, financial condition and results of operations.
In addition, the Company’s ability to dispose of the common stock investment because selling investments in Orchid’s common equity securities may be hindered due to its relationship as Orchid’s manager and the possession of inside information. Also, if we or other significant investors sell or are perceived as intending to sell a substantial number of shares in a short period of time, the market price of our remaining shares could be adversely affected.
The termination of our management agreement with Orchid couldwould significantly reduce our revenues.
revenues in the near term.Orchid is externally managed and advised by Bimini Advisors. As Manager, Bimini Advisors is responsible for administering Orchid’s business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel.
In exchange for these services, Bimini Advisors receives a monthly management fee. In addition, Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and Bimini Advisors allocates to Orchid its pro rata portion of certain overhead costs. The significance of these management fees and overhead reimbursements has increased, and is expected to continue to increase, as Orchid’s capital base continues to grow. If Orchid were to terminate the management agreement without cause, it would be obligated to pay to Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the initial term or automatic renewal term. The loss of these revenues, if it were to occur, would have a severe and immediate impact on the Company.
We may be subject to adverse legislative or regulatory changes that could reduce the market price of our common stock.
At any time, laws or regulations, or the administrative interpretations of those laws or regulations, which impact our business and Maryland corporations may be amended. In addition, the markets for MBS and derivatives, including interest rate swaps, have been the subject of intense scrutiny in recent years. We cannot predict when or if any new law, regulation or administrative interpretation, or any amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, revisions to these laws, regulations or administrative interpretations could cause us to change our investments. We could be materially adversely affected by any such change to any existing, or any new, law, regulation or administrative interpretation, which could reduce the market price of our common stock.
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic and acts of terrorism.
The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as coronavirus, or other widespread health emergency (or concerns over the possibility of such an emergency) terrorist attacks could create economic and financial disruptions, and could lead to operational difficulties that could impair our ability to manage our businesses.
We are subject to risks related to corporate social responsibility.
Our business faces public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new legislative or regulatory initiatives related to ESG could adversely affect our business.
Risks Related to Our Organization and Structure
Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock.
We have operated and intend to continue to operate our business so as to be exempt from registration under the Investment Company Act, because we are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Specifically, we invest and intend to continue to invest so that at least 55% of the assets that we own on an unconsolidated basis consist of qualifying mortgages and other liens and interests in real estate, which are collectively referred to as “qualifying real estate assets,” and so that at least 80% of the assets we own on an unconsolidated basis consist of real estate-related assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential mortgage pass-through securities issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets based on no-action letters issued by the SEC. To the extent that the SEC publishes new or different guidance with respect to these matters, we may fail to qualify for this exemption.
If we fail to qualify for this exemption and for any other exemption, we could be required to restructure our activities in a manner that, or at a time when, we would not otherwise choose to do so, which could negatively affect the value of shares of our common stock and our ability to distribute dividends. For example, if the market value of our investments in CMOs or structured Agency MBS, neither of which are qualifying real estate assets for Investment Company Act purposes, were to increase by an amount that resulted in less than 55% of our assets being invested in pass-through Agency MBS, we might have to sell CMOs or structured Agency MBS in order to maintain our exemption from the Investment Company Act. The sale could occur during adverse market conditions, and we could be forced to accept a price below that which we believe is acceptable.
Alternatively, if we fail to qualify for this exemption and for any other exemption, we may have to register under the Investment Company Act and we could become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters.
We may be required at times to adopt less efficient methods of financing certain of our securities, and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus. Our business will be materially and adversely affected if we fail to qualify for and maintain an exemption from regulation pursuant to the Investment Company Act.
Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition.
The Dodd-Frank Act established a comprehensive regulatory framework for derivative contracts commonly referred to as “swaps.” As a result, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its operators (in some cases the fund’s directors) to be regulated as “commodity pool operators,” (“CPOs”). Under new rules adopted by the U.S. Commodity Futures Trading Commission, (the “CFTC”), those funds that become commodity pools solely because of their use of swaps must register with the National Futures Association (the “NFA”). Registration requires compliance with the CFTC’s regulations and the NFA’s rules with respect to capital raising, disclosure, reporting, recordkeeping and other business conduct.
We use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks associated with changes in interest rates, mortgage spreads, yield curve shapes and market volatility. These hedging instruments may include interest rate swaps, interest rate futures and options on interest rate futures. We do not currently engage in any speculative derivatives activities or other non-hedging transactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading in commodity interests, and we do not consider the Company or its operations to be a commodity pool as to which CPO registration or compliance is required. We have received a no-action letter from the CFTC for relief from registration as a commodity pool operator and commodity trading advisor.
The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including their anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend or revoke the registration of or the no-action relief afforded to a person who fails to comply with commodities laws and regulations, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that the CFTC asserts that we are not entitled to the no-action letter relief claimed, we may be obligated to furnish additional disclosures and reports, among other things. Further, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event that we fail to comply with statutory requirements relating to derivatives or with the CFTC’s rules thereunder, including the no-action letter described above, we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial condition and results of operations.
Our Rights Plan could inhibit a change in our control that would otherwise be favorable to our stockholders.
In December 2015, our Board of Directors adopted a Rights Agreement (the “Rights Plan”) in an effort to protect against a possible limitation on our ability to use our net operating losses “(NOLs”) and net capital losses (“NCLs”) by discouraging investors from aggregating ownership of our Class A Common Stock and triggering an “ownership change” for purposes of Sections 382 and 383 of the Code. Under the terms of the Rights Plan, in general, if a person or group acquires ownership of 4.9% or more of the outstanding shares of our Class A Common Stock without the consent of our Board of Directors (an “Acquiring Person”), all of our other stockholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person. As a result, the Rights Plan may have the effect of inhibiting or impeding a change in control not approved by our Board of Directors and, notwithstanding its purpose, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, because our Board of Directors may consent to certain transactions, the Rights Plan gives our Board of Directors significant discretion over whether a potential acquirer’s efforts to acquire a large interest in us will be successful. There can be no assurance that the Rights Plan will prevent an “ownership change” within the meaning of Sections 382 and 383 of the Code, in which case we may lose all or most of the anticipated tax benefits associated with our prior losses.
Certain provisions of applicable law and our charter and bylaws may restrict business combination opportunities that would otherwise be favorable to our stockholders.
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders, including business combination provisions, supermajority vote and cause requirements for removal of directors, provisions that vacancies on our Board of Directors may be filled only by the remaining directors, for the full term of the directorship in which the vacancy occurred, the power of our Board of Directors to increase or decrease the aggregate number of authorized shares of stock or the number of shares of any class or series of stock, to cause us to issue additional shares of stock of any class or series and to fix the terms of one or more classes or series of stock without stockholder approval, the restrictions on ownership and transfer of our stock and advance notice requirements for director nominations and stockholder proposals. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our securities.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions that may be considered to be not in your best interests.
Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
| ● | actual receipt of an improper benefit or profit in money, property or services; or |
| ● | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
We have entered into indemnification agreements with our directors and executive officers that obligate us to indemnify them to the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present and former director or officer in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the provisions in our charter, bylaws and indemnification agreements or that might exist with other companies.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law ( the “MGCL”), may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:
| ● | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and |
| ● | “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and
“control share” provisions that provide that a holder
We have elected to opt-out of these provisions of the MGCL, in the case of the business combination provisions, by resolution of our Board of Directors (provided that such business combination is first approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person), and in the case of the control share provisions, pursuant to a provision in our bylaws. However, our Board of Directors may by resolution elect to repeal the foregoing opt-out from the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future.
U.S. Federal Income Tax Risks
An investment in our common stock has various income tax risks.
This summary is limited to the U.S. federal income tax risks addressed below. Additional risks or issues may exist that are not addressed in this Form 10-K and that could affect the U.S. federal and state income tax treatment of us or our stockholders. This summary is not intended to be used and cannot be used by any stockholder to avoid penalties that may be imposed on stockholders under the Code. Management strongly urges shareholders to seek advice based on their particular circumstances from their tax advisor concerning the effects of federal, state and local income tax law on an investment in our common stock.
Our ability to use net operating loss (“NOL”(“NOL”) carryovers and net capital loss (“NCL”(“NCL”) carryovers to reduce our taxable income may be limited.
We must have taxable income or net capital gains to benefit from our NOL and NCL, as well as certain other tax attributes. Although we believe that a significant portion of our NOLs will be available to use to offset the future taxable income of Bimini Capital and Royal Palm, no assurance can be provided that we will have taxable income or gains in the future to apply against our remaining NOLs and NCLs.
In addition, our NOL and NCL carryovers may be limited by Sections 382 and 383 of the Code if we undergo an “ownership change.” Generally, an “ownership change” occurs if certain persons or groups increase their aggregate ownership in our company by more than 50 percentage points looking back over the relevant testing period. If an ownership change occurs, our ability to use our NOLs and NCLs to reduce our taxable income in a future year would be limited to a Section 382 limitation equal to the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change. In the event of an ownership change, NOLs and NCLs that exceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period and such losses can be used to offset taxable income for years within the carryforward period subject to the Section 382 limitation in each year. However, if the carryforward period for any NOL or NCL were to expire before that loss had been fully utilized, the unused portion of that loss would be lost. The carryforward period for NOLs incurred through 2017 is 20 years from the year in which the losses giving rise to the NOLs were incurred, and the carryforward period for NCL is five years from the year in which the losses giving rise to the NCL were incurred. Our use of new NOLs or NCLs arising after the date of an ownership change would not be affected by the Section 382 limitation (unless there were another ownership change after those new losses arose).
Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses were generated. Accordingly, we believe that at the current time there is no annual limitation imposed by the application of Section 382 on our use of NOLs or NCLs. However, for post-2017 losses, the Jobs and Tax Cuts Act of 2017 modified the general rule such that an NOL carryover can only offset 80 percent of taxable income in the year it is utilized, so our post-2017 NOLs are limited by this tax law change. The rules for pre-2017 NOLs remain unchanged, and NCLsare 100% available to reduce futureoffset taxable income. In addition, post-2017 NOLs can now be carried forward indefinitely instead of being limited to 20 years for pre-2017 NOLs. The determination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership among stockholders. We adopted the Rights Plan described above in order to discourage or prevent an ownership change. However, there can be no assurance that the Rights Plan will prevent an ownership change. In addition, we have not obtained, and currently do not plan to obtain, a ruling from the Internal Revenue Service, or IRS, regarding our conclusion as to whether our losses are subject to any such limitations. Furthermore, we may decide in the future that it is necessary or in our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will occur in the future.
Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Limitations imposed by Sections 382 and 383 of the Internal Revenue Code may discourage us from, among other things, redeeming our stock or issuing additional stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Changes in tax laws could adversely affect our future results.
We have recorded a net deferred tax asset in the consolidated balance sheet based on the differences between the financial statement and income tax bases of assets using enacted tax rates. When U.S. corporate income tax rates change, we are required to reevaluate our deferred tax assets using the new tax rate. Changes in enacted tax rates require an adjustment to the carrying value of our deferred tax assets with a corresponding charge or benefit to earnings in the period of the tax rate change. Based on the size of our deferred tax assets, any such adjustment could be significant.
Risks Related to Conflicts of Interest in Our Relationship with Orchid
Bimini CapitalRoyal Palm and Orchid may compete for opportunities to acquire assets, which are allocated in accordance with the Investment Allocation Agreement by and among Orchid and Bimini Advisors.
From time to time we may seek to purchase for Bimini CapitalRoyal Palm the same or similar assets that we seek to purchase for Orchid. In such an instance, we may allocate such opportunities in a manner that preferentially favors Orchid. We will make available to either Bimini CapitalRoyal Palm or Orchid opportunities to acquire assets that we determine, in our reasonable and good faith judgment, based on the objectives, policies and strategies, and other relevant factors, are appropriate for either entity in accordance with the Investment Allocation Agreement among Bimini Capital, Orchid and Bimini Advisors.
Because many of Bimini Capital’sRoyal Palm’s targeted assets are typically available only in specified quantities and because many of our targeted assets are also targeted assets for Orchid, we may not be able to buy as much of any given asset as required to satisfy the needs of both Bimini CapitalRoyal Palm and Orchid. In these cases, the Investment Allocation Agreement will require the allocation of such assets to both accounts in proportion to their needs and available capital. The Investment Allocation Agreement will permit departure from such proportional allocation when (i) allocating purchases of whole-pool Agency MBS, because those securities cannot be divided into multiple parts to be allocated among various accounts, and (ii) such allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the Investment Allocation Agreement allows for a protocol of allocating assets so that, on an overall basis, each account is treated equitably.
There are conflicts of interest in our relationships with Orchid, which could result in decisions that may be considered as being not in the best interests of Bimini Capital’sCapital’s stockholders.
We are subject to conflicts of interest arising out of Bimini Advisors relationship as Manager of Orchid. All of our executive officers may have conflicts between their duties to Bimini Capital and their duties to Orchid as its Manager.
Bimini Capital may acquire or sell assets in which Orchid may have an interest. Similarly, Orchid may acquire or sell assets in which Bimini Capital has or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, Bimini Capital may engage in transactions directly with Orchid, including the purchase and sale of all or a portion of a portfolio asset.
Our officers devote as much time to Bimini Capital and to Orchid as they deem appropriate. However, these officers may have conflicts in allocating their time and services among Bimini Capital and Orchid. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from employees, Orchid and other entities for which we may act as manager in the future will likewise require greater focus and attention, placing personnel resources in high demand. In such situations, Bimini Capital may not receive the necessary support and assistance it requires or would otherwise receive if it were not acting as manager of one or more other entities.
Mr. Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the future. Mr. Haas, our Chief Financial Officer, Chief Investment Officer and President, is a member of the Board of Directors of Orchid, serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the future. Mr. Dwyer and Mr. Jaumot, the two independent members of our Board of Directors, own shares of common stock of Orchid at the time of this filing and may continue to own shares in the future. Accordingly, Messrs. Cauley, Haas, Dwyer and Jaumot may have a conflict of interest with respect to actions by Bimini Capital or Bimini Advisors that relate to Orchid as its Manager.
Bimini continues to hold an investment in the common stock of Orchid. In evaluating opportunities for ourselves and Orchid, this may lead us to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks or decrease the returns of your investment in our common stock.
Orchid may elect not to renew the management agreement without cause which may adversely affect our business, financial condition and results of operations.
Orchid may elect not to renew the management agreement, even without cause. The management agreement is automatically renewed in accordance with the terms of the agreement, each year, on February 20. However, with the consent of the majority of theirOrchid’s independent directors, and upon providing 180-days’ prior written notice, Orchid may elect not to renew the management agreement. If Orchid elects to not renew the agreement because of a decision by its Board of Directors that the management fee is unfair, Bimini Advisors will have the right to renegotiate a mutually agreeable management fee. If Orchid elects to not renew the management agreement without cause, it is required to pay Bimini Advisors a termination fee equal to three times the average annual management fee incurred during the prior 24-month period immediately preceding the most recently completed calendar quarter prior to the effective date of termination. Notwithstanding the termination fee, nonrenewal of the management agreement may adversely affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.
There is a limited market for our Class A Common Stock.
Our Class A Common Stock trades on the OTCQB under the symbol “BMNM”. We may apply to list our Class A Common Stock on a national securities market if, in the future, we qualify for such a listing. However, even if listed on a national securities market, the ability to buy and sell our Class A Common Stock may be limited due to our small public float, and significant sales may depress or result in a decline in the market price of our Class A Common Stock. Additionally, until such time that our Class A Common Stock is approved for listing on a national securities market, our ability to raise capital through the sale of additional securities may be limited. Accordingly, no assurance can be given as to:
| ● | the likelihood that an actual market for our common stock will develop, or be continued once developed; |
| ● | the liquidity of any such market; |
| ● | the ability of any holder to sell shares of our common stock; or |
| ● | the prices that may be obtained for our common stock. |
the likelihood that an actual market for our common stock will develop, or be continued once developed;
the ability of any holder to sell shares of our common stock; or
the prices that may be obtained for our common stock.
We have not made distributions to our stockholders since 2011.
Our Board of Directors has not authorized the payment of any cash dividends to our stockholders since 2011. All distributions will be made at the discretion of our Board of Directors out of funds legally available therefor and will depend on our earnings, our financial condition and such other factors as our Board of Directors may deem relevant from time to time. As a result of the termination of our REIT status effective as of January 1, 2015, we are planning to retain any available funds and future earnings to fund the development and growth of our business. As a result, for the foreseeable future, weWe do not expect to make distributions.
distributions for the foreseeable future.Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, as well as warrants to purchase shares of common stock or convertible preferred stock. Upon the liquidation of the Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Furthermore, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue, and to classify or reclassify any unissued shares of common stock or preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future securities offerings. Our stockholders are therefore subject to the risk of our future securities offerings reducing the market price of our common stock and diluting their common stock.
The market value of our common stock may be volatile.
The market value of shares of our common stock may be highly volatile and subject to wide price fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the share price or trading volume of our common stock include:
actual or anticipated variations in our operating results;
changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;
increases in market interest rates that affect the value of our MBS portfolios;
changes in our book value;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;
departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community; and
general market and economic conditions.
| ● | actual or anticipated variations in our operating results; |
| ● | changes in our earnings estimates or publication of research reports about us or the real estate, REIT, or specialty finance industry; |
| ● | increases in market interest rates that affect the value of our MBS portfolios; |
| ● | changes in our book value; |
| ● | changes in market valuations of similar companies; |
| ● | adverse market reaction to any increased indebtedness we incur in the future; |
| ● | changes of key management personnel; |
| ● | actions by institutional stockholders; |
| ● | speculation in the press or investment community; and |
| ● | general market and economic conditions. |
We cannot make any assurances that the market price of our common stock will not fluctuate or decline significantly in the future.
Sales of our common stock may harm our share price.
There is very limited liquidity in the trading market for our common stock. Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock.
Risks Related to COVID-19
The market and economic disruptions caused by COVID-19 have negatively impacted our business.
Beginning in mid-March 2020, Agency MBS markets experienced significant volatility and sharp declines in liquidity, which negatively impacted our portfolio. Our portfolio was pledged as collateral under daily mark-to-market repurchase agreements. Fluctuations in the value of our Agency MBS resulted in margin calls, requiring us to post additional collateral with our lenders under these repurchase agreements. These fluctuations and requirements to post additional collateral were material. For example, we sold approximately $171.2 million of Agency MBS during the three months ended March 31, 2020 in order to meet these margin calls and to maintain sufficient liquidity, which resulted in losses of approximately $5.8 million.
The Agency MBS market largely stabilized after the Fed announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. The Fed reaffirmed this commitment most recently on January 27, 2021, announcing that it would continue to increase its holdings of U.S. Treasuries and Agency MBS as needed to sustain smooth functioning of markets for these securities. However, if the COVID-19 outbreak continues or worsens, or if the current policy response changes or is ineffective, the Agency MBS market may experience significant volatility, illiquidity and dislocations in the future, which may adversely affect our results of operations and financial condition.
Our inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.
Our ability to fund our operations, meet financial obligations and finance asset acquisitions is dependent upon our ability to secure and maintain our repurchase agreements with our counterparties. Because repurchase agreements are short-term commitments of capital, lenders may respond to market conditions in ways that make it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have imposed and may continue to impose more onerous terms when rolling such financings. If we are not able to renew our existing repurchase agreements or arrange for new financing on terms acceptable to us, or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and/or dispose of assets.
Issues related to financing are exacerbated in times of significant dislocation in the financial markets, such as those experienced related to the COVID-19 pandemic. It is possible our lenders will become unwilling or unable to provide us with financing, and we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our lenders’ valuation of our assets that collateralize the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to re-evaluate the fair market value of the assets that cover outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, the lender has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. A margin call requires us to transfer additional assets to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Significant margin calls could have a material adverse effect on our results of operations, financial condition, business, and liquidity, and could cause the value of our common stock to decline. In addition, we experienced an increase in haircuts on financings we have rolled. As haircuts are increased, we are required to post additional collateral. We may also be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity. As a result of the ongoing COVID-19 pandemic, we experienced margins calls well beyond historical norms. A sufficiently deep and/or rapid increase in margin calls or haircuts will have an adverse impact on our liquidity.
We cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19 pandemic and the global recessionary economic conditions will have on us.
Governments have adopted, and may continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the economy and continued functioning of the financial markets. We cannot assure you that these programs will be effective, sufficient or will otherwise have a positive impact on our business.
Beginning in the first quarter of 2020, the Fed took significant action to purchase U.S. Treasuries and Agency MBS, support other asset classes and reduce short-term interest rates. On January 27, 2021, the FOMC announced its intention to continue using its full range of tools, including continuing to increase its holdings of U.S. Treasuries by at least $80 billion per month and its holdings of Agency MBS by at least $40 billion per month until “substantial further progress” has been made towards its maximum employment and price stability goals. Additionally, the FOMC decided to keep the target range for the federal funds rate between 0% and 0.25% and expects to maintain this target range until the labor market reaches maximum employment and will allow inflation to exceed 2% long enough to compensate for the extended period when inflation was below the 2% target.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provided billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who had difficulty making their loan payments. As certain time limits imposed in CARES Act programs began to expire, on December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package as part of the Consolidated Appropriations Act, 2021, providing for extensions of many of the CARES Act policies and programs as well as additional relief.
The GSEs have also issued guidance on how they will handle servicer advances for loans that back Agency MBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. The results of these measures are likely to suppress refinancing activity during the forbearance period, but potentially increase refinancing activity once the forbearance period ends as delinquent loans are repurchased by the GSEs. A policy adopted by the GSEs in April 2020 approving the purchase of certain single-family mortgages in forbearance was not extended beyond December, meaning that mortgages originated after December 31, 2020 that enter delinquency or forbearance before delivery to the GSEs are ineligible for delivery. On February 9, 2021, the FHFA extended the foreclosure moratorium begun under the CARES Act for loans backed by Fannie Mae and Freddie Mac to March 31, 2021, and on February 16, 2021, the U.S. Housing and Urban Development Department extended the foreclosure moratorium for federally backed loans to June 30, 2021. Borrowers have the right to request and obtain a forbearance of 180 days, and an extension of an additional 180 days, upon a claim of pandemic-related financial hardship. Borrowers may also request up to two additional three-month extensions, up to a maximum of 18 months of total forbearance.
There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets or prepayments on Agency MBS. To the extent the financial or mortgage markets do not respond favorably to any of these actions, such actions do not function as intended, or prepayments increase materially as a result of these actions, our business, results of operations and financial condition may continue to be materially adversely affected.
Measures intended to prevent the spread of COVID-19 have disrupted our ability to operate our business.
In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, all of our employees are working remotely. If our employees are unable to work effectively as a result of COVID-19, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity incidents, data breaches or cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of proprietary data, interruptions or delays in the operation of our business and damage to our reputation.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Our executive offices and principal administrative offices are located at 3305 Flamingo Drive, Vero Beach, Florida, 32963, in an office building which Bimini Capital owns. This facility is shared with our subsidiaries and Orchid. This property is suitable and adequate for our business as currently conducted.
ITEM 3. LEGAL PROCEEDINGS.
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets 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 demand isdemands 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 demanddemands vigorously. No provision or accrual has been recorded as of December 31, 20202022 related to the Citigroup demand.
demands.We are not party to any other material pending legal proceedings as described in Item 103 of Regulation S-K.
ITEM 4. MINE SAFETY DISCLOSURES.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Class A Common Stock is traded over-the-counter under the symbol “BMNM”. As of March 15, 2021,10, 2023, we had 11,608,55510,019,888 shares of Class A Common Stock issued and outstanding, which were held by 177103 shareholders of record and 1,113851 beneficial owners whose shares were held in “street name” by brokers and depository institutions.
As of March 15, 2021,10, 2023, we had 31,938 shares of Class B Common Stock outstanding, which were held by 2 holders of record and 31,938 shares of Class C Common Stock outstanding, which were held by one holder of record. There is no established public trading market for our Class B Common Stock or Class C Common Stock.
Dividend Distribution Policy
We have not made a distribution to stockholders since 2011. We are planningdo not expect to retain any available funds and future earnings to fundmake distributions for the development and growth of our business, so future distributions should not be expected.
foreseeable future.Preferred Stock
Our charter authorizes us to issue preferred stock that could have a preference over our common stock with respect to distributions. If we were to issue any preferred stock, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock.
Securities Authorized For Issuance Under Equity Compensation Plans
On August 12, 2011, Bimini Capital’s shareholders approved the 2011 Long Term Compensation Plan (the “Plan”). The Plan is intended to permit the grant of stock options, stock appreciation rights (“SARs”), stock awards, performance units and other equity-based and incentive awards up to an aggregate of 4,000,000 shares (but no more than 10% of the number of shares of Class A Common Stock outstanding on any particular grant date), subject to adjustments and limitations as provided in the Plan. The following table provides information as of December 31, 2020 concerning shares of our common stock authorized for issuance under the Plan.
| | | | | | | | Number of securities | |
| | | | | | | | remaining available for | |
| | Total number of securities | | | Weighted-average | | | future issuance under | |
| | to be issued upon exercise | | | exercise price of | | | equity compensation plans | |
| | of outstanding options, | | | of outstanding options, | | | (excluding securities | |
| | warrants and rights | | | warrants and rights | | | reflected in column (a)) | |
Plan Category | | (a) | | | (b) | | | | |
Equity compensation plans approved by
| | | | | | | | | |
by security holders
| | | -
| | | | -
| | | | 2,621,667
| (2)
|
Equity compensation plans not approved
| | | | | | | | | | | | |
by security holders(1)
| | | -
| | | | -
| | | | -
| |
Total
| | | -
| | | | -
| | | | 2,621,667
| |
(1) | We do not have any equity compensation plans that have not been approved by our stockholders.
|
(2)
| Represents the maximum number of shares remaining available for future issuance under the terms of the Incentive Plan irrespective of the 10% limitation described above. Taking into account the 10% limitation and the number of shares of Class A Common Stock outstanding as of December 31, 2020, no shares are available for future issuance under the terms of the Incentive Plan as of December 31, 2020.
|
None.
Unregistered Sales of Equity Securities
Issuer Purchases of Equity Securities
On March 26, 2018, the Company's Board of Directors authorizedof the repurchase ofCompany (the “Board”) approved a Stock Repurchase Plan (the “2018 Repurchase Plan”). Pursuant to the 2018 Repurchase Plan, the Company could purchase up to 500,000 shares of the Company'sits Class A common stock.Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. The maximum remaining number2018 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 shares thatthe Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may be repurchased under this authorization is 429,596 shares. The authorization, as currently extended, expires on November 15, 2021. The Company did not repurchase anypurchase shares of its commonClass A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million.
The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or result of operations.
The table below presents the Company’s share repurchase activity for the three months ended December 31, 2020.
2022.| | | Total Number of Shares Repurchased | | | Weighted-Average Price Paid Per Share | | | Shares Purchased as Part of Publicly Announced Programs | | | Approximate Dollar Amount of Shares That May Yet Be Repurchased Under the Authorization | |
October 1, 2022 - October 31, 2022 | | | - | | | $ | - | | | | - | | | $ | 1,494,444 | |
November 1, 2022 - November 30, 2022 | | | 70,000 | | | | 1.07 | | | | 70,000 | | | | 1,419,544 | |
December 1, 2022 - December 31, 2022 | | | 156,921 | | | | 1.05 | | | | 156,921 | | | | 1,254,427 | |
Totals / Weighted Average | | | 226,921 | | | $ | 1.06 | | | | 226,921 | | | $ | 1,254,427 | |
ITEM 6. SELECTED FINANCIAL DATA.[RESERVED]
ITEM 7. MANAGEMENT’SMANAGEMENT’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 8 of this Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
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.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 (thethe “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.
Impact of the COVID-19 Pandemic
Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions. In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several of our hedge positions. During this period, we sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million.
The Agency MBS market largely stabilized after the Federal Reserve (the “Fed”) announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. Agency MBS valuations have increased substantially since the end of March 2020. As of December 31, 2020, we had timely satisfied all margin calls.
In response to the Shelter in Place order issued in Florida in March 2020, management has invoked the Company’s Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.
In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest loan. The Company has evaluated the other provisions of the CARES Act and does not believe it will have material effect on our consolidated financial statements. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency MBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. During the forbearance period the Company will continue to receive scheduled principal and interest each month on its Agency MBS securities. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.
PlansOn March 26, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan (“the “2018 Repurchase Plan”). Pursuant to the 2018 Repurchase Plan, we maycould purchase up to 500,000 shares of the Company’s Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934. The 2018 Repurchase Plan was terminated on September 16, 2021. During the period beginning January 1, 2021 through September 16, 2021, the Company repurchased a total of 1,195 shares under the 2018 Repurchase Plan at an aggregate cost of approximately $2,298, including commissions and fees, for a weighted average price of $1.92 per share. From commencement of the 2018 Repurchase Plan, through its termination, the Company repurchased a total of 71,598 shares at an aggregate cost of approximately $169,243, including commissions and fees, for a weighted average price of $2.36 per share.
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, we may purchase shares of our Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases may be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan does not obligate the Company to purchase any shares. The Repurchase Plan, as currently extended,shares, and it expires on November 15, 2021.September 16, 2023. The authorizationauthorization for the Share2021 Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time.
From
the commencement of the
2021 Repurchase Plan, through December 31,
2020,2022, we repurchased a total of 70,404774,593 shares at an aggregate cost of approximately $166,945,$1.2 million, including commissions and fees, for a weighted average price of $2.37$1.61 per share. During the year ended December 31, 2022, the Company repurchased a total of 682,306 shares at an aggregate cost of approximately $1.1 million, including commissions and fees, for a weighted average price of $1.54 per share. The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or result of operations.
Tender Offer
In July 2019,2021, we completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2$1.5 million, excluding fees and related expenses, to repurchase 1.1 million812,879 shares of our Class A common stock, which were retired, at a price of $2.00$1.85 per share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (in addition to those related to the COVID-19 pandemic) may impact our results of operations and financial condition. These factors include:
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 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; and
other market developments.
| ● | increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Fed that occurred in 2022 and are likely to occur in 2023; |
| ● | 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 Fed, the FOMC, 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; |
| ● | 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 access to funding and borrowing capacity;
the market value of our investments;
the requirements to qualify for a registration exemption under the Investment Company Act;
our ability to use net operating loss carryforwards and net capital loss carryforwards to reduce our taxable income;
the impact of possible future changes in tax laws or tax rates; and
our ability to manage the portfolio of Orchid and maintain our role as manager.
| ● | our access to funding and borrowing capacity; |
| ● | 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 or cost of funds resulting from increases in the Fed Funds rate that are controlled by the Fed which have occurred in 2022, and are likely to continue to occur, in 2023; |
| ● | 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 year ended December 31, 2020,2022, as compared to the year ended December 31, 2019.2021.
Net (Loss) Income Summary
Consolidated net loss for the year ended December 31, 20202022 was $5.5$19.8 million, or $0.47$1.90 basic and diluted lossincome per share of Class A Common Stock, as compared to consolidated net income of $13.3$0.3 million, or $1.09$0.02 basic and diluted incomeloss per share of Class A Common Stock, for the year ended December 31, 2019.
2021.The components of net (loss) income for the yearsyears ended December 31, 20202022 and 2019,2021, along with the changes in those components are presented in the table below:
| (in thousands) | | | | | | | | | |
| | | 2020 | | | 2019 | | | Change | |
Advisory services revenue | | $ | 6,795 | | | $ | 6,908 | | | $ | (113 | ) |
Interest and dividend income | | | 5,517 | | | | 9,328 | | | | (3,811 | ) |
Interest expense | | | (2,225 | ) | | | (6,175 | ) | | | 3,950 | |
Net revenues | | | 10,087 | | | | 10,061 | | | | 26 | |
Other expense | | | (10,279 | ) | | | (603 | ) | | | (9,676 | ) |
Expenses | | | (6,666 | ) | | | (6,440 | ) | | | (226 | ) |
Net (loss) income before income tax benefit | | | (6,858 | ) | | | 3,018 | | | | (9,876 | ) |
Income tax benefit | | | (1,369 | ) | | | (10,282 | ) | | | 9,463 | |
Net (loss) income | | $ | (5,489 | ) | | $ | 13,300 | | | $ | (18.789 | ) |
(in thousands) | | | | | | | | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Advisory services revenue | | $ | 12,996 | | | $ | 9,788 | | | $ | 3,208 | |
Interest and dividend income | | | 3,155 | | | | 4,262 | | | | (1,107 | ) |
Interest expense | | | (2,131 | ) | | | (1,113 | ) | | | (1,018 | ) |
Net revenues | | | 14,020 | | | | 12,937 | | | | 1,083 | |
Other expense | | | (12,146 | ) | | | (4,744 | ) | | | (7,402 | ) |
Expenses | | | (9,839 | ) | | | (8,286 | ) | | | (1,553 | ) |
Net loss before income tax provision (benefit) | | | (7,965 | ) | | | (93 | ) | | | (7,872 | ) |
Income tax provision (benefit) | | | 11,858 | | | | (368 | ) | | | 12,226 | |
Net (loss) income | | $ | (19,823 | ) | | $ | 275 | | | $ | (20,098 | ) |
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
We have not designated our derivative financial instruments as hedge accounting relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense, has beenas 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 wouldmay 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 reflected 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 our borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income.
We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate our financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments 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 the years ended December 31, 20202022 and 20192021 and for each quarter during 20202022 and 2019. As a result of the market turmoil during the first quarter of 2020 several hedge positions where closed. However, the hedges closed were hedges that covered periods well beyond the first quarter of 2020. Accordingly, the open equity at the time these hedges were closed will result in adjustments to economic interest expense through the balance of their respective original hedge periods. Since the Company’s portfolio was significantly reduced during the first quarter of 2020, the effect of applying the open equity at the time of closure of these hedge instruments to the current, and much smaller, repurchase agreement interest expense amounts could materially impact the economic interest amounts reported below.
| Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP) | |
| (in thousands) | | | | | | | | | |
| | | Recognized in | | | | | | | |
| | | Statement of | | | TBA | | | | |
| | | Operations | | | Securities | | | Futures | |
| Three Months Ended | | (GAAP) | | | Income (Loss) | | | Contracts | |
December 31, 2020 | | $ | - | | | $ | - | | | $ | - | |
September 30, 2020 | | | - | | | | - | | | | - | |
June 30, 2020 | | | (2 | ) | | | - | | | | (2 | ) |
March 31, 2020 | | | (5,291 | ) | | | (1,441 | ) | | | (3,850 | ) |
December 31, 2019 | | | 287 | | | | (192 | ) | | | 479 | |
September 30, 2019 | | | (483 | ) | | | (204 | ) | | | (279 | ) |
June 30, 2019 | | | (3,364 | ) | | | (734 | ) | | | (2,630 | ) |
March 31, 2019 | | | (2,258 | ) | | | (1,067 | ) | | | (1,191 | ) |
| Years Ended | | | | | | | | | | | | |
December 31, 2020 | | $ | (5,293 | ) | | $ | (1,441 | ) | | $ | (3,852 | ) |
December 31, 2019 | | | (5,818 | ) | | | (2,197 | ) | | | (3,621 | ) |
| Gains (Losses) on Futures Contracts | |
| (in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | Attributed to Current Period (Non-GAAP) | | | Attributed to Future Periods (Non-GAAP) | | | | |
| | | | | | Junior | | | | | | | | | Junior | | | | | | Statement | |
| | | Repurchase | | | Subordinated | | | | | | Repurchase | | | Subordinated | | | | | | of | |
| Three Months Ended | | Agreements | | | Debt | | | Total | | | Agreements | | | Debt | | | Total | | | Operations | |
December 31, 2020 | | $ | (615 | ) | | $ | (40 | ) | | $ | (655 | ) | | $ | 615 | | | $ | 40 | | | $ | 655 | | | $ | - | |
September 30, 2020 | | | (1,065 | ) | | | (40 | ) | | | (1,105 | ) | | | 1,065 | | | | 40 | | | | 1,105 | | | | - | |
June 30, 2020 | | | (456 | ) | | | (40 | ) | | | (496 | ) | | | 456 | | | | 38 | | | | 494 | | | | (2 | ) |
March 31, 2020 | | | (456 | ) | | | (40 | ) | | | (496 | ) | | | (2,879 | ) | | | (475 | ) | | | (3,354 | ) | | | (3,850 | ) |
December 31, 2019 | | | 510 | | | | 56 | | | | 566 | | | | (50 | ) | | | (37 | ) | | | (87 | ) | | | 479 | |
September 30, 2019 | | | (124 | ) | | | 61 | | | | (63 | ) | | | (155 | ) | | | (61 | ) | | | (216 | ) | | | (279 | ) |
June 30, 2019 | | | (226 | ) | | | 43 | | | | (183 | ) | | | (2,215 | ) | | | (232 | ) | | | (2,447 | ) | | | (2,630 | ) |
March 31, 2019 | | | 5 | | | | 65 | | | | 70 | | | | (976 | ) | | | (285 | ) | | | (1,261 | ) | | | (1,191 | ) |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | (2,592 | ) | | $ | (160 | ) | | $ | (2,752 | ) | | $ | (743 | ) | | $ | (357 | ) | | $ | (1,100 | ) | | $ | (3,852 | ) |
December 31, 2019 | | | 165 | | | | 225 | | | | 390 | | | | (3,396 | ) | | | (615 | ) | | | (4,011 | ) | | | (3,621 | ) |
| Economic Net Portfolio Interest Income | |
| (in thousands) | |
| | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio | |
| | | | | | | | | Effect of | | | | | | Interest Income | |
| | | Interest | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Income | | | Basis | | | Hedges(1) | | | Basis(2) | | | Basis | | | Basis(3) | |
December 31, 2020 | | $ | 597 | | | $ | 43 | | | $ | (615 | ) | | $ | 658 | | | $ | 554 | | | $ | (61 | ) |
September 30, 2020 | | | 604 | | | | 43 | | | | (1,065 | ) | | | 1,108 | | | | 561 | | | | (504 | ) |
June 30, 2020 | | | 523 | | | | 60 | | | | (456 | ) | | | 516 | | | | 463 | | | | 7 | |
March 31, 2020 | | | 2,040 | | | | 928 | | | | (456 | ) | | | 1,384 | | | | 1,112 | | | | 656 | |
December 31, 2019 | | | 1,899 | | | | 948 | | | | 510 | | | | 438 | | | | 951 | | | | 1,461 | |
September 30, 2019 | | | 1,646 | | | | 1,002 | | | | (124 | ) | | | 1,126 | | | | 644 | | | | 520 | |
June 30, 2019 | | | 2,134 | | | | 1,340 | | | | (226 | ) | | | 1,566 | | | | 794 | | | | 568 | |
March 31, 2019 | | | 2,190 | | | | 1,313 | | | | 5 | | | | 1,308 | | | | 877 | | | | 882 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 3,764 | | | $ | 1,074 | | | $ | (2,592 | ) | | $ | 3,666 | | | $ | 2,690 | | | $ | 98 | |
December 31, 2019 | | | 7,869 | | | | 4,603 | | | | 165 | | | | 4,438 | | | | 3,266 | | | | 3,431 | |
2021. Gains (Losses) on Futures Contracts
(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Attributed to Current Period (Non-GAAP) | | | Attributed to Future Periods (Non-GAAP) | | | | | |
Three Months Ended | | Repurchase Agreements | | | Junior Subordinated Debt | | | Total | | | Repurchase Agreements | | | Junior Subordinated Debt | | | Total | | | Statement of Operations | |
December 31, 2022 | | $ | (185 | ) | | $ | (48 | ) | | $ | (233 | ) | | $ | 192 | | | $ | 48 | | | $ | 240 | | | $ | 7 | |
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 | | | | - | |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | (740 | ) | | $ | (192 | ) | | $ | (932 | ) | | $ | 1,541 | | | $ | 192 | | | $ | 1,733 | | | $ | 801 | |
December 31, 2021 | | | (2,832 | ) | | | (233 | ) | | | (3,065 | ) | | | 2,832 | | | | 233 | | | | 3,065 | | | | - | |
(in thousands) | |
| | | | | | | Interest Expense on Repurchase Agreements | | | Net Portfolio Interest Income | |
Three Months Ended | | Interest Income | | | GAAP Basis | | | Effect of Non-GAAP Hedges(1) | | | Economic Basis(2) | | | GAAP Basis | | | Economic Basis(3) | |
December 31, 2022 | | $ | 534 | | | $ | 401 | | | $ | 185 | | | $ | 586 | | | $ | 133 | | | $ | (52 | ) |
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 | ) |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 1,862 | | | $ | 715 | | | $ | 740 | | | $ | 1,455 | | | $ | 1,147 | | | $ | 407 | |
December 31, 2021 | | | 2,237 | | | | 116 | | | | 2,832 | | | | 2,948 | | | | 2,121 | | | | (711 | ) |
| Reflects the effect of derivative instrument hedges for only the period presented. |
| Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
| Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
| Economic Net Interest Income | |
| (in thousands) | |
| | | Net Portfolio | | | Interest Expense on Long-Term Debt | | | | | | | |
| | | Interest Income | | | | | | Effect of | | | | | | Net Interest Income | |
| | | GAAP | | | Economic | | | GAAP | | | Non-GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(1) | | | Basis | | | Hedges(2) | | | Basis(3) | | | Basis | | | Basis(4) | |
December 31, 2020 | | $ | 554 | | | $ | (61 | ) | | $ | 257 | | | $ | (40 | ) | | $ | 297 | | | $ | 297 | | | $ | (358 | ) |
September 30, 2020 | | | 561 | | | | (504 | ) | | | 261 | | | | (40 | ) | | | 301 | | | | 300 | | | | (805 | ) |
June 30, 2020 | | | 463 | | | | 7 | | | | 282 | | | | (40 | ) | | | 322 | | | | 181 | | | | (315 | ) |
March 31, 2020 | | | 1,112 | | | | 656 | | | | 350 | | | | (40 | ) | | | 390 | | | | 762 | | | | 266 | |
December 31, 2019 | | | 951 | | | | 1,461 | | | | 376 | | | | 56 | | | | 320 | | | | 575 | | | | 1,141 | |
September 30, 2019 | | | 644 | | | | 520 | | | | 390 | | | | 61 | | | | 329 | | | | 254 | | | | 191 | |
June 30, 2019 | | | 794 | | | | 568 | | | | 400 | | | | 43 | | | | 357 | | | | 394 | | | | 211 | |
March 31, 2019 | | | 877 | | | | 882 | | | | 406 | | | | 65 | | | | 341 | | | | 471 | | | | 541 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 2,690 | | | $ | 98 | | | $ | 1,150 | | | $ | (160 | ) | | $ | 1,310 | | | $ | 1,540 | | | $ | (1,212 | ) |
December 31, 2019 | | | 3,266 | | | | 3,431 | | | | 1,572 | | | | 225 | | | | 1,347 | | | | 1,694 | | | | 2,084 | |
Economic Net Interest Income
(in thousands) | |
| | | Net Portfolio | | | Interest Expense on Long-Term Debt | | | | | | | | | |
| | | Interest Income | | | | | | | | | | | | | | | Net Interest Income | |
Three Months Ended | | GAAP Basis | | | Economic Basis(1) | | | GAAP Basis | | | Effect of Non-GAAP Hedges(2) | | | Economic Basis(3) | | | GAAP Basis | | | Economic Basis(4) | |
December 31, 2022 | | $ | 133 | | | $ | (52 | ) | | $ | 477 | | | $ | 48 | | | $ | 525 | | | $ | (344 | ) | | $ | (577 | ) |
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 | ) |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 1,147 | | | $ | 407 | | | $ | 1,416 | | | $ | 192 | | | $ | 1,608 | | | $ | (269 | ) | | $ | (1,201 | ) |
December 31, 2021 | | | 2,121 | | | | (711 | ) | | | 997 | | | | 233 | | | | 1,230 | | | | 1,124 | | | | (1,941 | ) |
| Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
| Reflects the effect of derivative instrument hedges for only the period presented. |
| Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
| Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. |
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm. Segment information for the years ended December 31, 20202022 and 20192021 is as follows:
| (in thousands) | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2020 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 6,795 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,795 | |
Advisory services, other operating segments(1) | | | 152 | | | | - | | | | - | | | | (152 | ) | | | - | |
Interest and dividend income | | | - | | | | 5,517 | | | | - | | | | - | | | | 5,517 | |
Interest expense | | | - | | | | (1,074 | ) | | | (1,151 | )(2) | | | - | | | | (2,225 | ) |
Net revenues | | | 6,947 | | | | 4,443 | | | | (1,151 | ) | | | (152 | ) | | | 10,087 | |
Other expense | | | - | | | | (9,825 | ) | | | (454 | )(3) | | | - | | | | (10,279 | ) |
Operating expenses(4) | | | (3,653 | ) | | | (3,014 | ) | | | - | | | | - | | | | (6,667 | ) |
Intercompany expenses(1) | | | - | | | | (152 | ) | | | - | | | | 152 | | | | - | |
Income (loss) before income taxes | | $ | 3,294 | | | $ | (8,548 | ) | | $ | (1,605 | ) | | $ | - | | | $ | (6,859 | ) |
Assets | | $ | 1,469 | | | $ | 113,764 | | | $ | 13,468 | | | $ | - | | | $ | 128,701 | |
(in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | Asset Management | | | Investment Portfolio | | | Corporate | | | | Eliminations | | | Total | |
2022 | | | | | | | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 12,996 | | | $ | - | | | $ | - | | | | $ | - | | | $ | 12,996 | |
Advisory services, other operating segments(1) | | | 115 | | | | - | | | | - | | | | | (115 | ) | | | - | |
Interest and dividend income | | | - | | | | 3,155 | | | | - | | | | | - | | | | 3,155 | |
Interest expense | | | - | | | | (715 | ) | | | (1,416 | ) | (2) | | | - | | | | (2,131 | ) |
Net revenues | | | 13,111 | | | | 2,440 | | | | (1,416 | ) | | | | (115 | ) | | | 14,020 | |
Other (expense) income | | | - | | | | (12,212 | ) | | | 66 | | (3) | | | - | | | | (12,146 | ) |
Operating expenses(4) | | | (7,805 | ) | | | (2,034 | ) | | | - | | | | | - | | | | (9,839 | ) |
Intercompany expenses(1) | | | - | | | | (115 | ) | | | - | | | | | 115 | | | | - | |
Income (loss) before income taxes | | $ | 5,306 | | | $ | (11,921 | ) | | $ | (1,350 | ) | | | $ | - | | | $ | (7,965 | ) |
Year end assets | | $ | 1,970 | | | $ | 77,483 | | | $ | 6,864 | | | | $ | - | | | $ | 86,317 | |
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| | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 6,908 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,908 | |
Advisory services, other operating segments(1) | | | 271 | | | | - | | | | - | | | | (271 | ) | | | - | |
Interest and dividend income | | | - | | | | 9,327 | | | | 1 | | | | | | | | 9,328 | |
Interest expense | | | - | | | | (4,603 | ) | | | (1,572 | )(2) | | | | | | | (6,175 | ) |
Net revenues | | | 7,179 | | | | 4,724 | | | | (1,571 | ) | | | (271 | ) | | | 10,061 | |
Other income (expense) | | | - | | | | 112 | | | | (715 | )(3) | | | | | | | (603 | ) |
Operating expenses(4) | | | (2,750 | ) | | | (3,690 | ) | | | - | | | | | | | | (6,440 | ) |
Intercompany expenses(1) | | | - | | | | (271 | ) | | | - | | | | 271 | | | | - | |
Income (loss) before income taxes | | $ | 4,429 | | | $ | 875 | | | $ | (2,286 | ) | | $ | - | | | $ | 3,018 | |
Assets | | $ | 1,457 | | | $ | 263,223 | | | $ | 14,809 | | | $ | - | | | $ | 279,489 | |
| | | Asset Management | | | Investment Portfolio | | | Corporate | | | | Eliminations | | | Total | |
2021 | | | | | | | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 9,788 | | | $ | - | | | $ | - | | | | $ | - | | | $ | 9,788 | |
Advisory services, other operating segments(1) | | | 147 | | | | - | | | | - | | | | | (147 | ) | | | - | |
Interest and dividend income | | | - | | | | 4,262 | | | | - | | | | | - | | | | 4,262 | |
Interest expense | | | - | | | | (116 | ) | | | (997 | ) | (2) | | | - | | | | (1,113 | ) |
Net revenues | | | 9,935 | | | | 4,146 | | | | (997 | ) | | | | (147 | ) | | | 12,937 | |
Other expense | | | - | | | | (4,898 | ) | | | 154 | | (3) | | | - | | | | (4,744 | ) |
Operating expenses(4) | | | (5,676 | ) | | | (2,609 | ) | | | - | | | | | - | | | | (8,285 | ) |
Intercompany expenses(1) | | | - | | | | (147 | ) | | | - | | | | | 147 | | | | - | |
Income (loss) before income taxes | | $ | 4,259 | | | $ | (3,508 | ) | | $ | (843 | ) | | | $ | - | | | $ | (92 | ) |
Year end assets | | $ | 1,901 | | | $ | 111,022 | | | $ | 9,162 | | | | $ | - | | | $ | 122,085 | |
| Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
| Includes interest on long-term debt. |
| Includes income recognized on the forgiveness of the PPP loan and gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
| Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
Advisory Services Revenue
Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement. We receive a monthly management fee in the amount of:
One-twelfth of 1.5% | ● | 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
One-twelfth of 1.25% of Orchid’s month-end equity entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that is greater than $250 million and less than or equalhad 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 $500 million, and
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
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 $10,000 per month. |
In addition, Orchid is obligated to reimburse us for any direct expenses incurred on its behalf and to pay to us an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. The management agreement has been renewed through February 20222024 and provides for automatic one-year extension options. Should Orchid terminate the management agreement without cause, it will be obligated to pay to us a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.
The following table summarizes the advisory services revenue received from Orchid for the years ended December 31, 20202022 and 20192021 and each quarter during 20202022 and 2019.
| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | Average | | | Advisory Services | |
| | | Orchid | | | Orchid | | | Management | | | Overhead | | | | |
| Three Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Total | |
December 31, 2020 | | $ | 3,633,631 | | | $ | 387,503 | | | $ | 1,384 | | | $ | 442 | | | $ | 1,826 | |
September 30, 2020 | | | 3,422,564 | | | | 368,588 | | | | 1,252 | | | | 377 | | | | 1,629 | |
June 30, 2020 | | | 3,126,779 | | | | 361,093 | | | | 1,268 | | | | 347 | | | | 1,615 | |
March 31, 2020 | | | 3,269,859 | | | | 376,673 | | | | 1,377 | | | | 348 | | | | 1,725 | |
December 31, 2019 | | | 3,705,920 | | | | 414,018 | | | | 1,477 | | | | 379 | | | | 1,856 | |
September 30, 2019 | | | 3,674,087 | | | | 394,788 | | | | 1,440 | | | | 351 | | | | 1,791 | |
June 30, 2019 | | | 3,307,885 | | | | 363,961 | | | | 1,326 | | | | 327 | | | | 1,653 | |
March 31, 2019 | | | 3,051,509 | | | | 363,204 | | | | 1,285 | | | | 323 | | | | 1,608 | |
| Years Ended | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 3,363,208 | | | $ | 373,464 | | | $ | 5,281 | | | $ | 1,514 | | | $ | 6,795 | |
December 31, 2019 | | | 3,434,850 | | | | 383,993 | | | | 5,528 | | | | 1,380 | | | | 6,908 | |
2021.($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Advisory Services | |
| | | Average | | | Average | | | | | | | | | | | Repurchase, | | | | | |
| | | Orchid | | | Orchid | | | Management | | | Overhead | | | Clearing and | | | | | |
Three Months Ended | | MBS | | | Equity | | | Fee | | | Allocation | | | Administrative | | | Total | |
December 31, 2022 | | $ | 3,370,608 | | | $ | 823,516 | | | $ | 2,566 | | | $ | 560 | | | $ | 150 | | | $ | 3,276 | |
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 | | | | 853,577 | | | | 2,634 | | | | 441 | | | | 0 | | | | 3,075 | |
December 31, 2021 | | | 6,056,259 | | | | 806,382 | | | | 2,587 | | | | 443 | | | | 0 | | | | 3,030 | |
September 30, 2021 | | | 5,136,331 | | | | 672,384 | | | | 2,157 | | | | 390 | | | | 0 | | | | 2,547 | |
June 30, 2021 | | | 4,504,887 | | | | 542,679 | | | | 1,791 | | | | 395 | | | | 0 | | | | 2,186 | |
March 31, 2021 | | | 4,032,716 | | | | 456,687 | | | | 1,621 | | | | 404 | | | | 0 | | | | 2,025 | |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 4,187,054 | | | $ | 845,892 | | | $ | 10,447 | | | $ | 2,042 | | | $ | 507 | | | $ | 12,996 | |
December 31, 2021 | | | 4,932,548 | | | | 619,533 | | | | 8,156 | | | | 1,632 | | | | - | | | | 9,788 | |
Investment Portfolio Segment
Net Portfolio Interest Income
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the year ended December 31, 2020,2022, we generated $2.7$1.1 million of net portfolio interest income, consisting of $3.8$1.9 million of interest income from MBS assets offset by $1.1$0.7 million of interest expense on repurchase liabilities. For the year ended December 31, 2019,2021, we generated $3.3$2.1 million of net portfolio interest income, consisting of $7.9$2.2 million of interest income from MBS assets offset by $4.6$0.1 million of interest expense on repurchase liabilities. The $4.1$0.4 milliondecrease in interest income for the year ended December 31, 20202022 was due to a 75$19.6 milliondecrease in average MBS balances, partially offset by a 58 basis point ("bp") increase in yields earned on the portfolio, combined with a $119.8portfolio. The $0.6 million decrease in average MBS balances. The $3.5 million decreaseincrease in interest expense for the year ended December 31, 20202022 was due to a 104136 bp decreaseincrease in cost of funds, combined withpartially offset by a $111.8$20.8 milliondecrease in average repurchase liabilities.
Our economic interest expense on repurchase liabilities for the years ended December 31, 20202022 and 20192021 was $3.7$1.5 million and $4.4$2.9 million, respectively, resulting in $0.1$0.4 million and $3.4$(0.7) 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 each quarter in 20202022 and 20192021 and for the years ended December 31, 20202022 and 20192021 on both a GAAP and economic basis.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | Yield on | | | Average | | | Interest Expense | | | Average Cost of Funds | |
| | | MBS | | | Interest | | | Average | | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Held(1) | | | Income(2) | | | MBS | | | Agreements(1) | | | Basis | | | Basis(2) | | | Basis | | | Basis(3) | |
December 31, 2022 | | $ | 45,081 | | | $ | 534 | | | | 4.74 | % | | $ | 43,656 | | | $ | 401 | | | $ | 586 | | | | 3.68 | % | | | 5.37 | % |
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 | % |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 47,708 | | | $ | 1,862 | | | | 3.90 | % | | $ | 46,646 | | | $ | 715 | | | $ | 1,455 | | | | 1.53 | % | | | 3.12 | % |
December 31, 2021 | | | 67,308 | | | | 2,237 | | | | 3.32 | % | | | 67,404 | | | | 116 | | | | 2,948 | | | | 0.17 | % | | | 4.37 | % |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | Yield on | | | Average | | | Interest Expense | | | Average Cost of Funds | |
| | | MBS | | | Interest | | | Average | | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Held(1) | | | Income(2) | | | MBS | | | Agreements(1) | | | Basis | | | Basis(2) | | | Basis | | | Basis(3) | |
December 31, 2020 | | $ | 69,161 | | | $ | 597 | | | | 3.45 | % | | $ | 67,878 | | | $ | 43 | | | $ | 658 | | | | 0.25 | % | | | 3.88 | % |
September 30, 2020 | | | 62,981 | | | | 604 | | | | 3.84 | % | | | 61,151 | | | | 43 | | | | 1,108 | | | | 0.28 | % | | | 7.24 | % |
June 30, 2020 | | | 53,630 | | | | 523 | | | | 3.90 | % | | | 51,987 | | | | 60 | | | | 516 | | | | 0.46 | % | | | 3.97 | % |
March 31, 2020 | | | 136,142 | | | | 2,040 | | | | 5.99 | % | | | 131,156 | | | | 928 | | | | 1,384 | | | | 2.83 | % | | | 4.22 | % |
December 31, 2019 | | | 190,534 | | | | 1,899 | | | | 3.99 | % | | | 182,215 | | | | 948 | | | | 438 | | | | 2.08 | % | | | 0.96 | % |
September 30, 2019 | | | 187,199 | | | | 1,646 | | | | 3.52 | % | | | 177,566 | | | | 1,002 | | | | 1,126 | | | | 2.26 | % | | | 2.54 | % |
June 30, 2019 | | | 211,406 | | | | 2,134 | | | | 4.04 | % | | | 199,901 | | | | 1,340 | | | | 1,566 | | | | 2.68 | % | | | 3.13 | % |
March 31, 2019 | | | 212,033 | | | | 2,190 | | | | 4.13 | % | | | 199,771 | | | | 1,313 | | | | 1,308 | | | | 2.63 | % | | | 2.62 | % |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 80,479 | | | $ | 3,764 | | | | 4.68 | % | | $ | 78,043 | | | $ | 1,074 | | | $ | 3,666 | | | | 1.38 | % | | | 4.70 | % |
December 31, 2019 | | | 200,293 | | | | 7,869 | | | | 3.93 | % | | | 189,863 | | | | 4,603 | | | | 4,438 | | | | 2.42 | % | | | 2.34 | % |
| ($ in thousands) | | | | | | | | | | | | |
| | | Net Portfolio | | | Net Portfolio | |
| | | Interest Income | | | Interest Spread | |
| | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Basis | | | Basis(2) | | | Basis | | | Basis(4) | |
December 31, 2020 | | $ | 554 | | | $ | (61 | ) | | | 3.20 | % | | | (0.43 | )% |
September 30, 2020 | | | 561 | | | | (504 | ) | | | 3.56 | % | | | (3.41 | )% |
June 30, 2020 | | | 463 | | | | 7 | | | | 3.44 | % | | | (0.07 | )% |
March 31, 2020 | | | 1,112 | | | | 656 | | | | 3.16 | % | | | 1.77 | % |
December 31, 2019 | | | 951 | | | | 1,461 | | | | 1.91 | % | | | 3.03 | % |
September 30, 2019 | | | 644 | | | | 520 | | | | 1.26 | % | | | 0.98 | % |
June 30, 2019 | | | 794 | | | | 568 | | | | 1.36 | % | | | 0.91 | % |
March 31, 2019 | | | 877 | | | | 882 | | | | 1.50 | % | | | 1.51 | % |
| Years Ended | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 2,690 | | | $ | 98 | | | | 3.30 | % | | | (0.02 | )% |
December 31, 2019 | | | 3,266 | | | | 3,431 | | | | 1.51 | % | | | 1.59 | % |
($ in thousands) | | | | | | | | | | | | | | | | |
| | | Net Portfolio | | | Net Portfolio | |
| | | Interest Income | | | Interest Spread | |
| | | GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Basis | | | Basis(2) | | | Basis | | | Basis(4) | |
December 31, 2022 | | $ | 133 | | | $ | (52 | ) | | | 1.06 | % | | | (0.63 | )% |
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 | % | | | (1.14 | )% |
June 30, 2021 | | | 547 | | | | (161 | ) | | | 3.09 | % | | | (0.83 | )% |
March 31, 2021 | | | 571 | | | | (137 | ) | | | 3.31 | % | | | (0.79 | )% |
Years Ended | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 1,147 | | | $ | 407 | | | | 2.37 | % | | | 0.78 | % |
December 31, 2021 | | | 2,121 | | | | (711 | ) | | | 3.15 | % | | | (1.05 | )% |
| Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 4843 and 4944 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presented. |
| Economic interest expense and economic net interest income presented in the tables above and the tables on page 4944 include the effect of derivative instrument hedges for only the period presented. |
| Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS held. |
| 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 $3.8$1.9 million for the year ended December 31, 20202022 and $7.9$2.2 million for year ended December 31, 2019.2021. Average MBS holdings were $80.5$47.7 million and $200.3$67.3 million for the years ended December 31, 20202022 and 2019,2021, respectively. The $4.1$0.4 milliondecrease in interest income was due to a $119.8$19.6 milliondecrease in average MBS holdings, partially offset by a 7558 bp increase in yields.
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and pass-through MBS (“PT MBS”) for the years ended December 31, 20202022 and 20192021 and each quarter during 20202022 and 2019.2021.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average MBS Held | | | Interest Income | | | Realized Yield on Average MBS | |
| | | PT | | | Structured | | | | | | | PT | | | Structured | | | | | | | PT | | | Structured | | | | | |
Three Months Ended | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | |
December 31, 2022 | | $ | 42,125 | | | $ | 2,956 | | | $ | 45,081 | | | $ | 473 | | | $ | 61 | | | $ | 534 | | | | 4.49 | % | | | 8.31 | % | | | 4.74 | % |
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 | % |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 44,728 | | | $ | 2,980 | | | $ | 47,708 | | | $ | 1,661 | | | $ | 201 | | | $ | 1,862 | | | | 3.71 | % | | | 6.74 | % | | | 3.90 | % |
December 31, 2021 | | | 65,813 | | | | 1,495 | | | | 67,308 | | | | 2,217 | | | | 20 | | | | 2,237 | | | | 3.37 | % | | | 1.39 | % | | | 3.32 | % |
- 41 -
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Average MBS Held | | | Interest Income | | | Realized Yield on Average MBS | |
| | | PT | | | Structured | | | | | | PT | | | Structured | | | | | | PT | | | Structured | | | | |
| Three Months Ended | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | | | MBS | | | MBS | | | Total | |
December 31, 2020 | | $ | 68,842 | | | $ | 319 | | | $ | 69,161 | | | $ | 598 | | | $ | (1 | ) | | $ | 597 | | | | 3.47 | % | | | (1.20 | )% | | | 3.45 | % |
September 30, 2020 | | | 62,564 | | | | 417 | | | | 62,981 | | | | 588 | | | | 16 | | | | 604 | | | | 3.76 | % | | | 15.35 | % | | | 3.84 | % |
June 30, 2020 | | | 53,101 | | | | 529 | | | | 53,630 | | | | 502 | | | | 21 | | | | 523 | | | | 3.78 | % | | | 16.12 | % | | | 3.90 | % |
March 31, 2020 | | | 135,044 | | | | 1,098 | | | | 136,142 | | | | 2,029 | | | | 11 | | | | 2,040 | | | | 6.01 | % | | | 3.93 | % | | | 5.99 | % |
December 31, 2019 | | | 188,884 | | | | 1,650 | | | | 190,534 | | | | 1,870 | | | | 29 | | | | 1,899 | | | | 3.96 | % | | | 6.90 | % | | | 3.99 | % |
September 30, 2019 | | | 185,309 | | | | 1,890 | | | | 187,199 | | | | 1,652 | | | | (6 | ) | | | 1,646 | | | | 3.57 | % | | | (1.15 | )% | | | 3.52 | % |
June 30, 2019 | | | 209,171 | | | | 2,235 | | | | 211,406 | | | | 2,111 | | | | 23 | | | | 2,134 | | | | 4.04 | % | | | 4.01 | % | | | 4.04 | % |
March 31, 2019 | | | 209,469 | | | | 2,564 | | | | 212,033 | | | | 2,143 | | | | 47 | | | | 2,190 | | | | 4.09 | % | | | 7.42 | % | | | 4.13 | % |
| Years Ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 79,888 | | | $ | 591 | | | $ | 80,479 | | | $ | 3,717 | | | $ | 47 | | | $ | 3,764 | | | | 4.65 | % | | | 7.98 | % | | | 4.68 | % |
December 31, 2019 | | | 198,208 | | | | 2,085 | | | | 200,293 | | | | 7,776 | | | | 93 | | | | 7,869 | | | | 3.92 | % | | | 4.46 | % | | | 3.93 | % |
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average outstanding repurchase agreements were $78.0$46.7 million and $189.9$67.4 million, generating interest expense of $1.1$0.7 million and $4.6$0.1 million for the years ended December 31, 20202022 and 2019,2021, respectively. Our average cost of funds was 1.38%1.53% and 2.42%0.17% for the years ended December 31, 20202022 and 2019,2021, respectively. There was a 104136 bp decreaseincrease in the average cost of funds and a $111.8$20.7 milliondecrease in average outstanding repurchase agreements during the year ended December 31, 20202022 as compared to the year ended December 31, 2019.
2021. Our economic interest expense was $3.7$1.5 million and $4.4$3.0 million for the years ended December 31, 20202022 and 2019,2021, respectively. There was a 236125 bp increasedecrease in the average economic cost of funds to 4.70%3.12% for the year ended December 31, 20202022 from 2.34%4.37% for the previous year. The $0.7 million decrease in economic interest expense was due to a combination of the 104 bp decrease in the average cost of funds noted above and the $111.8 million decrease in average outstanding repurchase agreements during the year ended December 31, 2020.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 1042 bps abovebelow the one-month average one-month LIBORSOFR and 233 bps belowabove the six-month average six-month LIBORSOFR for the quarter ended December 31, 2020.2022. Our average economic cost of funds was 373117 bps above the one-month average one-month LIBORSOFR and 361192 bps above the six-month average six-month LIBORSOFR for the quarter ended December 31, 2020.2022. The average term to maturity of the outstanding repurchase agreements increaseddecreased from 2416 days at December 31, 20192021 to 3315 days at December 31, 2020.
2022.The tables below present the average outstanding balance under all repurchase agreements, interest expense and average economic cost of funds, and one-month average one-month and six-month LIBORaverage SOFR rates for each quarter in 20202022 and 20192021 and for the years ended December 31, 20202022 and 20192021 on both a GAAP and economic basis.
($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
December 31, 2022 | | $ | 43,656 | | | $ | 401 | | | $ | 586 | | | | 3.68 | % | | | 5.37 | % |
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 | % |
Years Ended | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | $ | 46,646 | | | $ | 715 | | | $ | 1,455 | | | | 1.53 | % | | | 3.12 | % |
December 31, 2021 | | | 67,404 | | | | 116 | | | | 2,948 | | | | 0.17 | % | | | 4.37 | % |
| | | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average SOFR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
Three Months Ended | | One-Month | | | Six-Month | | | SOFR | | | SOFR | | | SOFR | | | SOFR | |
December 31, 2022 | | | 4.06 | % | | | 2.89 | % | | | (0.38 | )% | | | 0.79 | % | | | 1.31 | % | | | 2.48 | % |
September 30, 2022 | | | 2.47 | % | | | 1.43 | % | | | (0.38 | )% | | | 0.66 | % | | | 1.45 | % | | | 2.49 | % |
June 30, 2022 | | | 1.09 | % | | | 0.39 | % | | | (0.46 | )% | | | 0.24 | % | | | 1.16 | % | | | 1.86 | % |
March 31, 2022 | | | 0.16 | % | | | 0.07 | % | | | 0.06 | % | | | 0.15 | % | | | 1.36 | % | | | 1.45 | % |
December 31, 2021 | | | 0.05 | % | | | 0.05 | % | | | 0.09 | % | | | 0.09 | % | | | 4.72 | % | | | 4.72 | % |
September 30, 2021 | | | 0.05 | % | | | 0.03 | % | | | 0.09 | % | | | 0.11 | % | | | 4.31 | % | | | 4.33 | % |
June 30, 2021 | | | 0.03 | % | | | 0.03 | % | | | 0.14 | % | | | 0.14 | % | | | 4.06 | % | | | 4.06 | % |
March 31, 2021 | | | 0.01 | % | | | 0.06 | % | | | 0.22 | % | | | 0.17 | % | | | 4.32 | % | | | 4.27 | % |
Years Ended | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | 1.95 | % | | | 1.20 | % | | | (0.42 | )% | | | 0.33 | % | | | 1.17 | % | | | 1.92 | % |
December 31, 2021 | | | 0.04 | % | | | 0.04 | % | | | 0.13 | % | | | 0.13 | % | | | 4.33 | % | | | 4.33 | % |
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| ($ in thousands) | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Three Months Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
December 31, 2020 | | $ | 67,878 | | | $ | 43 | | | $ | 658 | | | | 0.25 | % | | | 3.88 | % |
September 30, 2020 | | | 61,151 | | | | 43 | | | | 1,108 | | | | 0.28 | % | | | 7.24 | % |
June 30, 2020 | | | 51,987 | | | | 60 | | | | 516 | | | | 0.46 | % | | | 3.97 | % |
March 31, 2020 | | | 131,156 | | | | 928 | | | | 1,384 | | | | 2.83 | % | | | 4.22 | % |
December 31, 2019 | | | 182,215 | | | | 948 | | | | 438 | | | | 2.08 | % | | | 0.96 | % |
September 30, 2019 | | | 177,566 | | | | 1,002 | | | | 1,126 | | | | 2.26 | % | | | 2.54 | % |
June 30, 2019 | | | 199,901 | | | | 1,340 | | | | 1,566 | | | | 2.68 | % | | | 3.13 | % |
March 31, 2019 | | | 199,771 | | | | 1,313 | | | | 1,308 | | | | 2.63 | % | | | 2.62 | % |
| | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Average | | | | | | | | | | | | | | | | | |
| | | Balance of | | | Interest Expense | | | Average Cost of Funds | |
| | | Repurchase | | | GAAP | | | Economic | | | GAAP | | | Economic | |
| Years Ended | | Agreements | | | Basis | | | Basis | | | Basis | | | Basis | |
December 31, 2020 | | $ | 78,043 | | | $ | 1,074 | | | | 3,666 | | | | 1.38 | % | | | 4.70 | % |
December 31, 2019 | | | 189,863 | | | | 4,603 | | | | 4,438 | | | | 2.42 | % | | | 2.34 | % |
| | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Three Months Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
December 31, 2020 | | | 0.15 | % | | | 0.27 | % | | | 0.10 | % | | | (0.02 | )% | | | 3.73 | % | | | 3.61 | % |
September 30, 2020 | | | 0.17 | % | | | 0.35 | % | | | 0.11 | % | | | (0.07 | )% | | | 7.08 | % | | | 6.90 | % |
June 30, 2020 | | | 0.55 | % | | | 0.70 | % | | | (0.09 | )% | | | (0.24 | )% | | | 3.42 | % | | | 3.27 | % |
March 31, 2020 | | | 1.34 | % | | | 1.43 | % | | | 1.49 | % | | | 1.40 | % | | | 2.88 | % | | | 2.79 | % |
December 31, 2019 | | | 1.90 | % | | | 1.98 | % | | | 0.18 | % | | | 0.10 | % | | | (0.94 | )% | | | (1.02 | )% |
September 30, 2019 | | | 2.22 | % | | | 2.18 | % | | | 0.04 | % | | | 0.08 | % | | | 0.32 | % | | | 0.36 | % |
June 30, 2019 | | | 2.45 | % | | | 2.49 | % | | | 0.23 | % | | | 0.19 | % | | | 0.68 | % | | | 0.64 | % |
March 31, 2019 | | | 2.50 | % | | | 2.77 | % | | | 0.13 | % | | | (0.14 | )% | | | 0.12 | % | | | (0.15 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Average GAAP Cost of Funds | | | Average Economic Cost of Funds | |
| | | | | | | | | | | Relative to Average | | | Relative to Average | |
| | | Average LIBOR | | | One-Month | | | Six-Month | | | One-Month | | | Six-Month | |
| Years Ended | | One-Month | | | Six-Month | | | LIBOR | | | LIBOR | | | LIBOR | | | LIBOR | |
December 31, 2020 | | | 0.55 | % | | | 0.69 | % | | | 0.83 | % | | | 0.69 | % | | | 4.15 | % | | | 4.01 | % |
December 31, 2019 | | | 2.27 | % | | | 2.35 | % | | | 0.15 | % | | | 0.07 | % | | | 0.07 | % | | | (0.01 | )% |
Dividend Income
from OrchidEffective 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 annual report with respect to Orchid’s common stock have been adjusted to reflect this reverse stock split.
We owned 1,520,036569,071 and 519,071 shares of Orchid common stock as of December 31, 2019. We acquired 1,075,321 additional shares during the year ended December 31, 2020, bringing our total ownership to 2,595,357 shares.2022 and 2021, respectively. Orchid paid total dividends of $0.79$2.475 per share during 20202022 and $0.96$3.90 per share during 2019.2021. During the years ended December 31, 20202022 and 2019,2021, we received dividends on this commoncommon stock investment of approximately $1.8$1.3 million and $1.5$2.0 million, respectively.
Interest expense on our junior subordinated debt securities was approximately $1.1$1.4 million and $1.6$1.0 million for the years ended December 31, 20202022 and 2019,2021, respectively. The average rate of interest paid for the year ended December 31, 20202022 was 4.22%5.25% compared to 5.94%3.66% for the year ended December 31, 2019.2021. 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 December 31, 2020,2022, the interest rate was 3.72%8.27%.
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan. PPP loans may be forgiven, in whole or in part, ifThe Small Business Administration notified the proceeds are used for payrollCompany that, effective as of April 22, 2021, all principal and other permitted purposes in accordance with the requirements ofaccrued interest under the PPP and if certain other requirements are met. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first ten months after the completion of the loan forgiveness covered period.
has been forgiven.Gains or Losses and Other Income
The table below presents our gains or losses and other income for the years ended December 31, 20202022 and 2019.2021.
(in thousands) | | | | | | | | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Realized (losses) gains on sales of MBS | | $ | (858 | ) | | $ | 69 | | | $ | (927 | ) |
Unrealized losses on MBS | | | (5,916 | ) | | | (3,099 | ) | | | (2,817 | ) |
Total losses on MBS | | | (6,774 | ) | | | (3,030 | ) | | | (3,744 | ) |
Gains on derivative instruments | | | 801 | | | | - | | | | 801 | |
Gains on retained interests in securitizations | | | 66 | | | | - | | | | 66 | |
Unrealized losses on Orchid Island Capital, Inc. common stock | | | (6,239 | ) | | | (1,869 | ) | | | (4,370 | ) |
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| (in thousands) | | | | | | | | | |
| | | 2020 | | | 2019 | | | Change | |
Realized (losses) gains on sales of MBS | | $ | (5,745 | ) | | $ | 23 | | | $ | (5,768 | ) |
Unrealized gains on MBS | | | 112 | | | | 6,338 | | | | (6,226 | ) |
Total (losses) gains on MBS | | | (5,633 | ) | | | 6,361 | | | | (11,994 | ) |
Losses on derivative instruments | | | (5,293 | ) | | | (5,818 | ) | | | 525 | |
Gains on retained interests in securitizations | | | 59 | | | | 315 | | | | (256 | ) |
Unrealized gains (losses) on Orchid Island Capital, Inc. common stock | | | 584 | | | | (821 | ) | | | 1,405 | |
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the year ended December 31, 2020,2022, we received proceeds of $176.2$23.1 million from the sales of MBS compared to $44.0$13.1 million for the year ended December 31, 2019.
2021. The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are sensitive todriven in part by changes in yields and interest rates.rates, the spreads that MBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for MBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on MBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent MBS are carried at a discount to par, unrealized gains or losses on MBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. The table below presents historical interest rate data as of the end of each quarter end during 20202022 and 2019.
| | | | | | | | | 15 Year | | | 30 Year | | | Three | |
| | | 5 Year | | | 10 Year | | | Fixed-Rate | | | Fixed-Rate | | | Month | |
| | | Treasury Rate(1) | | | Treasury Rate(1) | | | Mortgage Rate(2) | | | Mortgage Rate(2) | | | Libor(3) | |
December 31, 2020 | | | 0.36 | % | | | 0.92 | % | | | 2.22 | % | | | 2.68 | % | | | 0.23 | % |
September 30, 2020 | | | 0.27 | % | | | 0.68 | % | | | 2.39 | % | | | 2.89 | % | | | 0.24 | % |
June 30, 2020 | | | 0.29 | % | | | 0.65 | % | | | 2.60 | % | | | 3.16 | % | | | 0.31 | % |
March 31, 2020 | | | 0.38 | % | | | 0.70 | % | | | 2.89 | % | | | 3.45 | % | | | 1.10 | % |
December 31, 2019 | | | 1.69 | % | | | 1.92 | % | | | 3.18 | % | | | 3.72 | % | | | 1.91 | % |
September 30, 2019 | | | 1.55 | % | | | 1.68 | % | | | 3.12 | % | | | 3.61 | % | | | 2.13 | % |
June 30, 2019 | | | 1.76 | % | | | 2.00 | % | | | 3.24 | % | | | 3.80 | % | | | 2.40 | % |
March 31, 2019 | | | 2.24 | % | | | 2.41 | % | | | 3.72 | % | | | 4.27 | % | | | 2.61 | % |
2021.| | | | | | | 15 Year | | 30 Year | | 90 Day |
| | | 5 Year | | 10 Year | | Fixed-Rate | | Fixed-Rate | | Average |
| | | Treasury Rate(1) | | Treasury Rate(1) | | Mortgage Rate(2) | | Mortgage Rate(2) | | SOFR(3) |
December 31, 2022 | | 4.00% | | 3.88% | | 5.68% | | 6.42% | | 3.62% |
September 30, 2022 | | 4.04% | | 3.80% | | 5.96% | | 6.70% | | 2.13% |
June 30, 2022 | | 3.00% | | 2.97% | | 4.83% | | 5.70% | | 0.70% |
March 31, 2022 | | 2.42% | | 2.33% | | 3.83% | | 4.67% | | 0.09% |
December 31, 2021 | | 1.26% | | 1.51% | | 2.33% | | 3.11% | | 0.05% |
September 30, 2021 | | 1.00% | | 1.53% | | 2.28% | | 3.01% | | 0.05% |
June 30, 2021 | | 0.87% | | 1.44% | | 2.34% | | 3.02% | | 0.02% |
March 31, 2021 | | 0.94% | | 1.75% | | 2.45% | | 3.17% | | 0.04% |
(1) | Historical 5 Year and 10 Year Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange. |
(2) | Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey. |
(3) | Historical LIBOR areSOFR is obtained from the Intercontinental Exchange Benchmark Administration Ltd.Federal Reserve Bank of New York. |
For the year ended December 31, 2020,2022, our total operating expenses were approximately $6.7$9.8 million compared to approximately $6.4$8.3 million for the year ended December 31, 2019.2021. The table below presents a breakdown of operating expenses for the years ended December 31, 20202022 and 2019.2021.
(in thousands) | | | | | | | | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Compensation and benefits | | $ | 6,530 | | | $ | 5,721 | | | $ | 809 | |
Legal fees | | | 101 | | | | 137 | | | | (36 | ) |
Accounting, auditing and other professional fees | | | 404 | | | | 377 | | | | 27 | |
Directors’ fees and liability insurance | | | 804 | | | | 763 | | | | 41 | |
Administrative and other expenses | | | 2,000 | | | | 1,287 | | | | 713 | |
| | | $ | 9,839 | | | $ | 8,285 | | | $ | 1,554 | |
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 $0.6 million for year ended December 31, 2022, and increases in other administrative expenses of approximately $0.6 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021 .
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| (in thousands) | | | | | | | | | |
| | | 2020 | | | 2019 | | | Change | |
Compensation and benefits | | $ | 4,235 | | | $ | 4,116 | | | $ | 119 | |
Legal fees | | | 145 | | | | 148 | | | | (3 | ) |
Accounting, auditing and other professional fees | | | 431 | | | | 342 | | | | 89 | |
Directors’ fees and liability insurance | | | 691 | | | | 654 | | | | 37 | |
Administrative and other expenses | | | 1,165 | | | | 1,180 | | | | (15 | ) |
| | | $ | 6,667 | | | $ | 6,440 | | | $ | 227 | |
Income Taxes
In 2022, we recorded an income tax provision of $11.9 million, including a $12.2 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2022, of the Company’s ability to utilize tax net operating losses (“NOLs”) to offset future taxable income. In 2021, we recorded an income tax benefit of $0.4 million, including a $2.2 million decrease in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2021, of the Company’s ability to utilize NOLs to offset future taxable income.
Financial Condition:
Mortgage-Backed Securities
As of December 31, 2020,2022, our MBS portfolio consisted of $65.2$45.9 million of agency or government MBS at fair value and had a weighted average coupon of 3.89%3.67%. During the year ended December 31, 2020,2022, we received principal repayments of $13.9$8.2 million compared to $22.7$14.5 million for the year ended December 31, 2019.2021. The average prepayment speeds for the quarters ended December 31, 20202022 and 20192021 were 14.4%8.3% and 15.6%21.1%, respectively.
The following table presents the 3-monththree-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. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.
| | | | | | Structured | | | | |
| | | PT MBS | | | MBS | | | Total | |
| Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
December 31, 2020 | | | 12.8 | | | | 24.5 | | | | 14.4 | |
September 30, 2020 | | | 13.0 | | | | 32.0 | | | | 15.8 | |
June 30, 2020 | | | 12.4 | | | | 25.0 | | | | 15.3 | |
March 31, 2020 | | | 11.6 | | | | 18.1 | | | | 13.7 | |
December 31, 2019 | | | 15.6 | | | | 15.6 | | | | 15.6 | |
September 30, 2019 | | | 9.5 | | | | 16.2 | | | | 10.5 | |
June 30, 2019 | | | 9.9 | | | | 14.6 | | | | 10.5 | |
March 31, 2019 | | | 5.7 | | | | 13.4 | | | | 6.8 | |
| | | | | | Structured | | | | |
| | | PT MBS | | | MBS | | | Total | |
Three Months Ended | | Portfolio (%) | | | Portfolio (%) | | | Portfolio (%) | |
December 31, 2022 | | 8.2 | | | 8.4 | | | 8.3 | |
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 December 31, 20202022 and 2019:2021:
($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Weighted | | | |
| | | | | | | Percentage | | | | | | | Average | | | |
| | | | | | | of | | | Weighted | | | Maturity | | | |
| | | Fair | | | Entire | | | Average | | | in | | Longest | |
Asset Category | | Value | | | Portfolio | | | Coupon | | | Months | | Maturity | |
December 31, 2022 | | | | | | | | | | | | | | | | | | |
Fixed Rate MBS | | $ | 42,974 | | | | 93.6 | % | | | 4.07 | % | | | 329 | | 1-Aug-52 | |
Structured MBS | | | 2,919 | | | | 6.4 | % | | | 2.84 | % | | | 300 | | 15-May-51 | |
Total MBS Portfolio | | $ | 45,893 | | | | 100.0 | % | | | 3.67 | % | | | 327 | | 1-Aug-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) | | | | | | |
| | | | | | Weighted | |
| | | | Percentage | | Average | |
| | | | of | Weighted | Maturity | |
| | | Fair | Entire | Average | in | Longest |
| Asset Category | | Value | Portfolio | Coupon | Months | Maturity |
| December 31, 2020 | | | | | | |
Fixed Rate PT MBS | $ | 64,902 | 99.6% | 3.89% | 333 | 1-Aug-50 |
Interest-Only Securities | | 251 | 0.4% | 3.56% | 299 | 15-Jul-48 |
Inverse Interest-Only Securities | | 25 | 0.0% | 5.84% | 221 | 15-May-39 |
Total Mortgage Assets | $ | 65,178 | 100.0% | 3.89% | 333 | 1-Aug-50 |
| December 31, 2019 | | | | | | |
Fixed Rate PT MBS | $ | 216,231 | 99.3% | 4.25% | 316 | 1-Nov-49 |
Interest-Only Securities | | 1,024 | 0.4% | 3.65% | 281 | 15-Jul-48 |
Inverse Interest-Only Securities | | 586 | 0.3% | 4.77% | 254 | 25-Apr-41 |
Total Mortgage Assets | $ | 217,841 | 100.0% | 4.25% | 316 | 1-Nov-49 |
| ($ in thousands) | | | | | | | | | | | | |
| | | December 31, 2020 | | | December 31, 2019 | |
| | | | | | Percentage of | | | | | | Percentage of | |
| Agency | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | |
Fannie Mae | | $ | 38,946 | | | | 59.8 | % | | $ | 203,321 | | | | 93.3 | % |
Freddie Mac | | | 26,232 | | | | 40.2 | % | | | 14,499 | | | | 6.7 | % |
Ginnie Mae | | | - | | | | 0.0 | % | | | 21 | | | | 0.0 | % |
Total Portfolio | | $ | 65,178 | | | | 100.0 | % | | $ | 217,841 | | | | 100.0 | % |
| | | December 31, 2020 | | | December 31, 2019 | |
Weighted Average Pass-through Purchase Price | | $ | 109.51 | | | $ | 107.12 | |
Weighted Average Structured Purchase Price | | $ | 4.28 | | | $ | 6.39 | |
Weighted Average Pass-through Current Price | | $ | 112.67 | | | $ | 108.77 | |
Weighted Average Structured Current Price | | $ | 3.20 | | | $ | 6.91 | |
Effective Duration (1) | | | 3.309 | | | | 3.196 | |
($ in thousands) | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | | December 31, 2021 | |
| | | | | | | Percentage of | | | | | | | Percentage of | |
Agency | | Fair Value | | | Entire Portfolio | | | Fair Value | | | Entire Portfolio | |
Fannie Mae | | $ | 33,883 | | | | 73.8 | % | | $ | 39,703 | | | | 65.3 | % |
Freddie Mac | | | 12,010 | | | | 26.2 | % | | | 21,100 | | | | 34.7 | % |
Total Portfolio | | $ | 45,893 | | | | 100.0 | % | | $ | 60,803 | | | | 100.0 | % |
| | | December 31, 2022 | | | December 31, 2021 | |
Weighted Average Pass-through Purchase Price | | $ | 105.30 | | | $ | 109.33 | |
Weighted Average Structured Purchase Price | | $ | 4.48 | | | $ | 4.81 | |
Weighted Average Pass-through Current Price | | $ | 95.58 | | | $ | 109.30 | |
Weighted Average Structured Current Price | | $ | 13.37 | | | $ | 9.87 | |
Effective Duration (1) | | | 4.323 | | | | 2.103 | |
| Effective duration is the approximate percentage change in price for a 100 bp change in rates. An effective duration of 3.3094.323 indicates that an interest rate increase of 1.0% would be expected to cause a 3.309%4.323% decrease in the value of the MBS in our investment portfolio at December 31, 2020.2022. An effective duration of 3.1962.103 indicates that an interest rate increase of 1.0% would be expected to cause a 3.196%2.103% decrease in the value of the MBS in our investment portfolio at December 31, 2019.2021. These figures include the structured securities in the portfolio but do include the effect of our funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. |
The following table presents a summary of our portfolio assets acquired during the years ended December 31, 20202022 and 2019.
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | |
| | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | |
PT MBS | | $ | 43,130 | | | $ | 111.44 | | | | 1.99 | % | | $ | 65,781 | | | $ | 108.77 | | | | 2.73 | % |
2021.($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | | 2021 | |
| | | Total Cost | | | Average Price | | | Weighted Average Yield | | | Total Cost | | | Average Price | | | Weighted Average Yield | |
PT MBS | | $ | 23,192 | | | $ | 99.13 | | | | 4.22 | % | | $ | 23,338 | | | $ | 106.48 | | | | 1.41 | % |
Structured MBS | | | - | | | | - | | | | - | | | | 2,852 | | | | 10.01 | | | | 3.44 | % |
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages, loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolio will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IO’s may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIO’s similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) cause their price movements - and model duration - to be affected by changes in both prepayments and one month LIBOR - both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying our MBS can alter the timing of the cash flows received by us. As a result, we gauge the interest rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration and effective duration using various third-party models or obtain these quotes from third-parties. However, empirical results and various third-party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of December 31, 2020,2022, 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 | | $ | 64,902 | | | $ | 2,017 | | | $ | (2,568 | ) | | $ | (5,782 | ) | | | 3.11 | % | | | (3.96 | )% | | | (8.91 | )% |
Interest-Only MBS | | | 251 | | | | (45 | ) | | | 96 | | | | 170 | | | | (18.07 | )% | | | 38.15 | % | | | 67.49 | % |
Inverse Interest-Only MBS | | | 25 | | | | 1 | | | | (3 | ) | | | (7 | ) | | | 3.36 | % | | | (13.94 | )% | | | (29.36 | )% |
Total MBS Portfolio | | $ | 65,178 | | | $ | 1,973 | | | $ | (2,475 | ) | | $ | (5,619 | ) | | | 3.03 | % | | | (3.80 | )% | | | (8.62 | )% |
| ($ in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | Notional | | | $ Change in Fair Value | | | % Change in Fair Value | |
| | | Amount(1) | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
| Eurodollar Futures Contracts | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1,000 | | | $ | (10 | ) | | $ | 10 | | | $ | 20 | | | | (1.00 | )% | | | 1.00 | % | | | 2.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross Totals | | | | | | $ | 1,963 | | | $ | (2,465 | ) | | $ | (5,599 | ) | | | | | | | | | | | | |
(1)
| Represents the average contract/notional amount of Eurodollar futures contracts.
|
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | $ Change in Fair Value | | | % Change in Fair Value | |
MBS Portfolio | | Fair Value | | | -100BPS | | | +100BPS | | | +200BPS | | | -100BPS | | | +100BPS | | | +200BPS | |
Fixed Rate MBS | | $ | 42,974 | | | $ | 1,948 | | | $ | (2,164 | ) | | $ | (4,468 | ) | | | 4.53 | % | | | (5.04 | )% | | | (10.40 | )% |
Interest-Only MBS | | | 2,914 | | | | (131 | ) | | | 68 | | | | 92 | | | | (4.50 | )% | | | 2.33 | % | | | 3.16 | % |
Inverse Interest-Only MBS | | | 5 | | | | 2 | | | | (2 | ) | | | (3 | ) | | | 40.00 | % | | | (40.00 | )% | | | (60.00 | )% |
Total MBS Portfolio | | $ | 45,893 | | | $ | 1,819 | | | $ | (2,098 | ) | | $ | (4,379 | ) | | | 3.96 | % | | | (4.57 | )% | | | (9.54 | )% |
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.
As of December 31, 2020,2022, 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 the Company. These borrowings are secured by our MBS and cash.
As of December 31, 2020,2022, we had obligations outstanding under the repurchase agreements of approximately $65.1$43.8 million with a net weighted average borrowing cost of 0.25%4.48%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 612 to 13331 days, with a weighted average maturity of 3315 days. Securing the repurchase agreement obligation as of December 31, 20202022 are MBS with an estimated fair value, including accrued interest, of $65.4 $45.9 million and a weighted average maturity of 334328 months, and cash posted as collateral of $3.4 million.$0.5 million. Through March 15, 2021,10, 2023, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 20202022 with maturities through August 5, 2021.
April 28, 2023.The table below presents information about our period-end and average repurchase agreement obligations for each quarter in 20202022 and 2019.2021.
($ in thousands) | |
| | | Ending Balance of Repurchase | | | Maximum Balance of Repurchase | | | Average Balance of Repurchase | | | Difference Between Ending Repurchase Agreements and Average Repurchase Agreements | |
Three Months Ended | | Agreements | | | Agreements | | | Agreements | | | Amount | | | Percent | |
December 31, 2022 | | $ | 43,818 | | | $ | 44,780 | | | $ | 43,656 | | | $ | 162 | | | | 0.37 | % |
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 | % |
- 47 -
| ($ in thousands) | |
| | | Ending | | | Maximum | | | Average | | | Difference Between Ending | |
| | | Balance | | | Balance | | | Balance | | | Repurchase Agreements and | |
| | | of Repurchase | | | of Repurchase | | | of Repurchase | | | Average Repurchase Agreements | |
| Three Months Ended | | Agreements | | | Agreements | | | Agreements | | | Amount | | | Percent | |
December 31, 2020 | | $ | 65,071 | | | $ | 70,684 | | | $ | 67,878 | | | $ | (2,807 | ) | | | (4.14 | )% |
September 30, 2020 | | | 70,685 | | | | 70,794 | | | | 61,151 | | | | 9,534 | | | | 15.59 | %(1) |
June 30, 2020 | | | 51,617 | | | | 52,068 | | | | 51,987 | | | | (370 | ) | | | (0.71 | )% |
March 31, 2020 | | | 52,357 | | | | 214,921 | | | | 131,156 | | | | (78,799 | ) | | | (60.08 | )%(2) |
December 31, 2019 | | | 209,954 | | | | 239,243 | | | | 182,215 | | | | 27,739 | | | | 15.22 | %(3) |
September 30, 2019 | | | 154,475 | | | | 200,552 | | | | 177,566 | | | | (23,091 | ) | | | (13.00 | )%(4) |
June 30, 2019 | | | 200,656 | | | | 200,776 | | | | 199,901 | | | | 755 | | | | 0.38 | % |
March 31, 2019 | | | 199,146 | | | | 200,113 | | | | 199,771 | | | | (625 | ) | | | (0.31 | )% |
(1) | The higher ending balance relative to the average balance during the quarter ended September 30, 2020 reflects the increase in the portfolio. During the quarter ended September 30, 2020, the Company's investment in PT MBS increased $20.4 million.
|
(2) | The lower ending balance relative to the average balance during the quarter ended March 31, 2020 reflects the Company’s response to the COVID-19 pandemic. During the quarter ended March 31, 2020, the Company's investment in PT MBS decreased $162.4 million.
|
(3) | The higher ending balance relative to the average balance during the quarter ended December 31, 2019 reflects the reinvestment of the portfolio. During the quarter ended December 31, 2019, the Company's investment in PT MBS increased $54.7 million.
|
(4) | The lower ending balance relative to the average balance during the quarter ended September 31, 2019 reflects the decrease in the portfolio to fund the July 2019 Tender Offer. During the quarter ended September 31, 2019, the Company's investment in PT MBS decreased $47.5 million.
|
Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead and fulfill margin calls. Our primary immediateWe have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets the availabilityand our ability to borrow under repurchase agreements, and fees and dividends received from Orchid.sell encumbered assets to raise cash. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our investmentsbalance sheet also generategenerates liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio. In addition, during the year ended December 31, 2020,portfolio and dividends we received U.S. Federal income tax refunds of approximately $1.4 million related to the 2018 tax year and approximately $0.2 million related to the 2019 tax year.
The COVID-19 pandemic has adversely affected our liquidity, assets under management and operating results. As disclosed in detail elsewhere in this report, during March 2020, we significantly reduced our MBS assets to meet margin calls and repay debt. This reduction inreceive on our investment
portfolio will impactin Orchid common stock.Internal Sources of Liquidity
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to generate income in the future. However, management believes thatliquidate our encumbered security holdings. Our balance sheet also generated liquidity on an ongoing basis through payments of principal and interest we currently have sufficient liquidity and capital resources available for at least one year from the date of issuance of this Form 10-K for (a) the management ofreceive on our existing MBS portfolio (b) to serviceand dividends we receive on our management agreement toinvestment in Orchid (c) to make all scheduled payments on borrowings, (d) for the payment of overhead and operating expenses, and (e) the payment of other accrued obligations.
Ourcommon stock.We employ a hedging strategy that typically involves taking short positions in Eurodollar futures, T-Note futures, TBAs or other instruments. Since inception we have primarily used short positions in Eurodollar futures. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
External Sources of Liquidity
Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements and (ii) use the TBA security market. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repurchaserepo transaction basis.
As discussed above, we We did not experience any significant margin call activity during 2022.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 repurchaserepo 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.agreements and through revenues from our advisory services business. As of December 31, 2020,2022, we had cash and cash equivalents of $7.6$6.0 million. We generated cash flows of $18.2$10.1 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $78.0$46.6 million during the year ended December 31, 2020.2022. In addition, during the year ended December 31, 2020,2022, we received approximately $6.8$13.0 million in management fees and expense reimbursements as manager of Orchid and approximately $1.8$1.3 million in dividends from our investment in Orchid common stock.
In order to generate additional cash to be invested in our MBS portfolio, on October 30, 2019, we obtained a $680,000 loan secured by a mortgage on the Company’s office property. The loan is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrued at 4.89%, through October 30, 2024. Thereafter, interest accrued based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of five years, plus 3.25%. Net loan proceeds were approximately $651,000. In addition, during 2020, we completed the sale of real property that was not used in the Company’s business. The net proceeds from this sale were approximately $462,000.
On April 13, 2020, we received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan. PPP loans may be forgiven, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The Company believes that all of the proceeds were used for eligible purposes and the outstanding principal and accrued interest will ultimately be forgiven.
The table below summarizes the effect that certain future contractual obligations existing as
| (in thousands) | | | | | | | | | | | | | | | |
| | | Obligations Maturing | |
| | | Within | | | One to Three | | | Three to Five | | | More than Five | | | Total | |
| | | Year | | | Years | | | Years | | | Years | | | Total | |
Repurchase agreements | | $ | 65,071 | | | $ | - | | | $ | - | | | $ | - | | | $ | 65,071 | |
Interest expense on repurchase agreements(1) | | | 77 | | | | - | | | | - | | | | - | | | | 77 | |
Junior subordinated notes(2) | | | - | | | | - | | | | - | | | | 26,000 | | | | 26,000 | |
Interest expense on junior subordinated notes(1) | | | 1,025 | | | | 1,959 | | | | 1,962 | | | | 9,760 | | | | 14,706 | |
Principal and interest on mortgage loan(1) | | | 54 | | | | 107 | | | | 107 | | | | 750 | | | | 1,018 | |
Totals | | $ | 66,227 | | | $ | 2,066 | | | $ | 2,069 | | | $ | 36,510 | | | $ | 106,872 | |
(1)
| Interest expense on repurchase agreements, junior subordinated notes and mortgage loan are based on current interest rates as of December 31, 2020 and the remaining term of liabilities existing at that date.
|
(2)
| The Company holds a common equity interest in Bimini Capital Trust II. The amount presented represents the net cash outlay of the Company.
|
Orchid Island Capital Inc.
ToOrchid Island Capital reported fourth quarter 2022 income of $34.9 million and its shareholders equity increased from $400.4 million to $438.8 million from September 30, 2022 to December 31, 2022. The market conditions described below led to the extent Orchid is able to increase its capital base over time, we will benefit via increased management fees. In addition, in income as agency MBS generally outperformed comparable duration treasuries during the period and Orchid’s hedge positions also benefited from increases in interest rates.
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.
Economic Summary
As 2022 ended, the markets' and the Fed's outlook for the economy, inflation and the path of monetary policy began to diverge. The independent Boardseeds for the divergence were planted as the third quarter of Directors2022 came to an end and the Fed had finally succeeded in convincing the market that they had much work to do in removing accommodation and that the process would take longer than the market had expected. Public comments by Fed officials became uniformly hawkish – pointing to substantially more rate increases – and the incoming inflation data for July, August and September of Orchid has2022 was quite strong. The combined effect of the abilitydata and the clear intentions of the Fed to terminateaggressively fight to prevent inflation from spiraling out of control and becoming entrenched in consumer behavior dispelled any notion that the management agreementFed would not succeed in their pursuit of their dual mandate – price stability and thus end our abilityfull employment. In fact, the Fed was so successful at convincing the market it would aggressively remove accommodation and slow inflation that the market began to collect management fees and share overhead costs. Should Orchid terminate the management agreement without cause, it will be obligated to pay us a termination fee equal to three times the average annual management fee, as definedlook beyond this step in the management agreement, before orprocess and instead focus on the last dayramifications of such policy removal – namely a slowing of the current automatic renewal term.
Economic Summary
COVID-19economy.The change of focus – or “pivot” – on the part of the market occurred in late October and early November of 2022, largely in response to inflation data. The consumer price index ("CPI") for October and November of 2022, released in November and December of 2022, were much lower than previous months. While such figures were revised higher in early February 2023, at the time, the market interpreted this development as evidence that inflation had peaked and was coming down quickly. The market reaction reflected an assumption that the Fed would succeed in taming inflation quicker than the Fed was expecting and that the rate hikes envisioned by the Fed and reflected in their summary of economic projections would instead cause the economy to slow too much and that the Fed would have to lower rates beginning in late 2023.
The divergence in expectations emanated from service sector inflation expectations. As the first quarter of 2023 began, it became clear goods inflation was dropping quickly. This was a result of Covid-19 induced supply constraints abating and consumer demand shifting from goods to services. The market expected that the real estate sector, always very sensitive to interest rates, was in decline and would no longer be a source of inflation outside of the lagged effects of rents, which was anticipated to ebb soon. What remained was non-shelter related events dominated marketsservices inflation. The Fed recognizes wage pressures are the primary source of inflation in this case. Accordingly measures of labor market tightness and wage inflation have become the Fed’s focus. To the extent such measures remain elevated, Fed actions will likely continue to reflect their tightening bias. As we move further into 2023, incoming economic data implies inflation is not slowing as appeared to be the case during the fourth quarter of 2020. 2022 nor has economic activity slowed materially. Hence, market expectations for additional rate hikes and the possible time frame over which the Fed will be required to maintain higher rates has converged with the Fed's expectations.
Interest Rates
The feared winter surge materialized, and new cases of COVID-19, hospitalizations and deaths exceededFed raised the levels seenFed Funds target range twice during the spring or summer surgefourth quarter of 2022 and the high end of the range was 4.50% at the end of the year – an increase of 125 basis points during the quarter. The Fed raised the target rate by another 25 basis points in February 2023. Moreover, the market expects the Fed will continue to raise the target further in 2023, perhaps as much as 100 basis points including the February 2023 increase. Importantly, the Fed, as evidenced by their own “dot plot”, a summary of committee members' expectations of the Fed Funds rate over their forecast period, anticipates the Fed Funds rate will peak at approximately 5.125% by mid-2023 and remain above 5% throughout the balance of 2023. The market now appears to agree with this outcome as evidenced by current pricing in the Southernfutures market. Yields on U.S. Treasury securities with maturities of one year or less increased substantially during the fourth quarter of 2022, with the shortest maturities increasing the most – reflective of the actual and anticipated increases in overnight funding levels driven by the Fed. Such increases were as much as 134 basis points in the case of the one-month U.S. Treasury bill.
As the fourth quarter unfolded, with the market expecting the Fed to succeed in containing inflation and ultimately slowing the economy in the process, longer maturity interest rates were essentially unchanged during the fourth quarter. During the month of October 2022, the hawkish rhetoric from the Fed and strong inflation data initially caused long-term rates to increase substantially from August 2022 levels near 2.6% to approximately 4.25% in late October 2022 in the case of the 10-year U.S. Treasury. However, longer-term rates slowly declined for much of the balance of the fourth quarter before a 40-basis point increase over the last two weeks of the year. The late December 2022 increase was triggered by additional hawkish comments by the Fed at their December meeting reinforced by similar language by the European Central Bank and illiquid holiday trading conditions. For the fourth quarter of 2022, U.S. Treasury maturities beyond the 2-year point were largely unchanged.
The combination of the extreme upward movement in short maturity yields described above and the essentially unchanged yields for longer maturity U.S. Treasuries resulted in an extreme flattening of the yield curve to the point the curve became inverted. This continued the trend that began in early July of 2022. Over the course of the fourth quarter of 2022, the extent of the inversion increased substantially. In the case of the spread between the 2-year and 10-year U.S. Treasuries the inversion reached 84 basis points in early December and 88 basis points in the case of the spread between the 10-year U.S. Treasury and the Fed Funds rate. Historically such inversions signaled market expectations of a recession on the horizon, as was the case in late 2022.
The Agency MBS Market
The Agency MBS market returns for 2022 were negative – down 11.9%. However, the sector posted positive returns for the fourth quarter of 2.1%, which was 110 bps higher than comparable duration swaps. As described above, expectations for the economy and rates diverged between those of the Fed and the markets during the last two months of the fourth quarter of 2022. During the fourth quarter, the markets' appetite for riskier assets improved in anticipation that the Fed was nearing the end of its tightening cycle and would be easing monetary conditions by the end of 2023. This led the higher risk sectors of the fixed income markets to outperform, as investment and non-investment grade corporates outperformed U.S. Treasuries, Agency MBS and Agency debt by a considerable margin. This
The performance of the Agency MBS sector was not uniformly positive for the case bothfourth quarter. As described above, early in the quarter U.S. Treasury yields achieved their highest levels in many years in late October of 2022. Agency MBS spreads to comparable duration spreads also reached their widest levels since the great financial crisis, easily surpassing the levels observed in March of 2020. As market sentiment turned mid-quarter and acrossrisk appetite improved the globe. Perversely,attractive levels of Agency MBS, like most other asset classes, were viewed as very attractive. The sector’s performance was driven to a large extent by the effectsextremes reached in late October 2022. However, the spreads available in the sector remain wider than those observed prior to the onset of the pandemic spread, and it became clear the Federal government would need to pass another stimulus package to offset the effectin early 2020. The absence of the pandemic on the economy, interest rates began to rise. While the yield on the benchmark ten-year U.S. Treasury Note was under 0.70% as the third quarter came to a close, the yield exceeded 0.90% by quarter end, and nearly hit 1.00% in November. The spike in yield in November followed the news that a vaccine with 90% effectiveness had been found and would become available by year end. The equity markets looked past the near-term negative impactslargest of the pandemic on economic activity and rallied, as investors focused on a potential return to normalcy in 2021 and beyond. However, the effectstraditional buyers of the pandemic on economic activity did indeed take hold as the quarter unfolded. The labor market recovery reversed somewhat,asset class – banks, and initial unemployment claims started to increase again. Retail sales, having rebounded so strongly over the summer and fall, declined. These events overshadowed the national elections in early November.
As the election approached, polls indicated a potential “Blue Wave” where Democrats would sweep the elections, winning the presidential election and gaining control of both houses of Congress. Markets expected a substantially larger stimulus package if this outcome was realized than would be likely under Republican control. This potential outcome also buoyed equity markets and risk sentiment. Once the outcome of the election was known, it became clear the “Blue Wave” failed to materialize, although there was to be a run-off election for two Senate seats in Georgia on January 5, 2021. While this left open the possibility Democrats could control the presidency and both houses of Congress, it was not considered the likely outcome. Further, the Democratic majority in the House of Representatives shrank and the presidential election outcome was much closer than polls indicated. The “Blue Wave” did not come to pass. This outcome tempered market enthusiasm for an outsized stimulus package in 2021 and market attention refocused on the prospects for a stimulus package before year end. This ultimately came to pass with strong bipartisan support in the form of a $900 billion stimulus bill signed by President Trump in late December.
On January 5, 2021, the Democrats won both Senate seats in the run-off election and the “Blue Wave,” while more of a wavelet, was realized after all. The Senate was split 50/50 between Republicans and Democrats with the Vice-President able to break any ties in the favor of Democrats. Interest rates spiked as the prospects for additional stimulus were resurrected. The yield on the 10-year U.S. Treasury Note broke above 1.00% and nearly reached 1.20% before retreating, settling into a range between approximately 1.02% and 1.15%. This range did not hold for long and rates have since moved higher still, surpassing 1.50% in March. After early troubles with the roll-out of the vaccine, inoculations accelerated and risk sentiment improved as the new year unfolded. Equity markets reached new all-time high levels, and the slope of the U.S. Treasury curve steepened as the market anticipated the out-sized fiscal stimulus would stimulate inflation. The repeated statements from Fed officials that they would be very patient in removing accommodation reinforced market sentiment and risk tolerance increased.
Legislative Response and the Federal Reserve
Congress passed the CARES Act (described below) quickly in response to the pandemic’s emergence in the spring of 2020 and followed with additional legislation over the ensuing months. However, as certain provisions of the CARES Act have expired, such as supplemental unemployment insurance at the end of July, there appeared to be a need for additional stimulus for the economy to deal with the surge in the pandemic that occurred as cold weather set in, particularly over the Christmas holiday. As mentioned above, the Federal government eventually passed an additional stimulus package in late December. In addition, the Fed has provided, and continues to provide, as much support to the markets and the economy as it can within the constraints of its mandate. During the third quarterMarch of 2020, the Fed,
unveiled a new monetary policy framework focused on average inflation rate targeting that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target level. Further, the Fed will look past the presence of very tight labor markets, should they be present at the time. This marks a significant shift from their prior policy framework, which was focused on the unemployment rate as a key indicator of impending inflation. Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for a considerable period but longer-term rates could rise given the Fed’s intention to let inflation potentially run above 2%may result in the
future assector recovering slowly towards pre-pandemic levels, if it can do so at all. Within the economy more fully recovers. As mentioned above, this appears to be occurring early in 2021 now that effective vaccines have been found and inoculations are distributed to the most vulnerable amongst the population.
Interest Rates
Interest rates steadily increased throughout the fourth quarter as described above although levels of implied volatility remain very low by historical norms. Mortgage rates continued to slowly decline into year-end as originators added capacity and could handle ever increasing levels of production volume. As a result, the spread between rates available to borrowers and the implied yield on a current coupon mortgage, known as the Primary/Secondary spread, has continued to compress. The spread is still slightly above long-term average levels so further compression is possible, meaning rates available to borrowers can remain at current levels even if U.S. Treasury rates increased. To date, interest rates have continued to increase during the first quarter of 2021, with the yield on the 10-year U.S. Treasury rate surpassing 1.60% in early March. Rates available to borrowers have increased during the quarter, although less so than treasury rates, implying the primary/secondary spread is continuing to compress. Prepayment speeds released during the first quarter of 2021 for January and February have not shown any significant slowing since they reflect rates available to borrowers before the recent run-up in interest rates. The effect of the recent increase in rates will be felt in the months to come.
The Agency MBS Market
The Agency MBS market continues to be essentially bifurcated with two separate and distinct sub-markets. Lower couponsector, 30-year fixed rate mortgages, coupons of 1.5% through 2.5%, are purchased byslightly outperformed 15-year and GNMA fixed rate securities, both in absolute and relative terms. Within the Fed. Fed purchase activity maintains substantial price pressure under these coupons,30-year fixed rate sector lower/discount coupon securities generated the best relative/excess returns to comparable duration U.S. Treasuries and they benefit from attractive TBA dollar roll drops. Higher coupons in the TBA market do not have the benefit of Fed purchases and trade poorly. Importantly, the Fed tends to take the worst performing collateral out of the market. The absence of Fed purchases of higher coupons means the market is left to absorb very high prepayment speeds on these securities. For these coupons, specified pools are in very high demand and continue to trade at very high premiums. These premiums have ceased rising as interest rates have begun to increase, although they remain at very high levels by historical standards. The market expects prepayments on higher coupons will eventually decline as “burn out” sets in – a phenomenon whereby refinancing activity declines as borrowers are exposed to refinancing incentives for an extended period of time. Through the February prepayment report released in early March of 2021, this has yet to meaningfully occur.
swaps.Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 until July 2020 to address disruptions in the U.S. Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully tamed volatile funding costs that had threatened to cause disruption across the financial system.
The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell announced expectations to maintain interest rates at this level until the Fed is confident that the economy has weathered recent events and is on track to achieve maximum employment and price stability goals. The Federal Open Market Committee (“FOMC”) has continued to reaffirm this commitment at all subsequent meetings through January of 2021, as well as an intention to allow inflation to climb modestly above their 2% target and maintain that level for a period sufficient for inflation to average 2% long term.
In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets as investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the COVID-19 pandemic, on March 23, 2020, the Fed announcedimplemented a program to acquire U.S. Treasuries and Agency MBS in the amounts needed to support smooth market functioning. With these purchases, market conditions improved substantially, and in early April,of quantitative easing. Through November of 2021, the Fed began to gradually reduce the pace of these purchases. Currently, the Fed iswas committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. Chairman PowellIn November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September 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 have reiterated their commitment to this levelbegan reducing its balance sheet by a maximum of asset purchases at every meeting since their meeting on June 30, 2020, including their most recent meeting in January of 2021. Since March 2020, the Fed has taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provided many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. This over $2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health providers, loans and investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provides an additional $484$30 billion of
fundingU.S. Treasuries and $17.5 billion of Agency MBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to
individuals, small businesses, hospitals, health care providerscontinue reducing the balance sheet by a maximum of $60 billion of U.S Treasuries and
additional coronavirus testing efforts. Various provisions$35 billion of
Agency MBS per month.On January 29, 2021, the CARES Act began to expire in July 2020, including a moratorium on evictions (July 25, 2020), expanded unemployment benefits (July 31, 2020), and a moratorium on foreclosures (August 31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the Department of Health and Human Services, the CentersCenter for Disease Control and Prevention (“CDC”), the Department of Housing and Urban Development, and Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures, including through temporary financial assistance.
On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package as part of the Consolidated Appropriations Act, 2021, providing for extensions of many of the CARES Act policies and programs as well as additional relief. The package provided for, among other things, direct payments to most Americans with a gross income of less than $75,000 a year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health providers, loans to qualified businesses, funding for rental assistance and funding for schools. On January 19, 2021, the CDC issued guidance extending eviction moratoriums for covered persons
put in place by the CARES Act through March 31, 2021.
In addition, on February 9, 2021, theThe FHFA
announced thatsubsequently extended the foreclosure moratorium
begun under the CARES Act for loans backed by
Fannie Mae and Freddie Mac the Enterprisesand the eviction moratorium for real estate owned by
Fannie Maethe Enterprisesuntil July 31, 2021 and
Freddie Mac were extended until March 31, 2021. On February 16,September 30, 2021,
therespectively. The U.S. Housing and Urban Development Department
announcedsubsequently extended the
extensionFHA 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
FHA evictionmoratorium, with foreclosure starts in 2022 up 169% from 2021, but remaining 26% lower than pre-pandemic levels in 2019 and
foreclosure moratorium to June 30, 2021.88% lower than the peak in 2009.
In January 2019, the Trump administration made statementsOn September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac the Enterpriseswere 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 the Enterprisesbeing privatized and represents the first concrete step on the road to GSEEnterprise reform. On June 30,In December 2020, the FHFA released a proposedfinal rule on a new regulatory framework for the GSEs Enterpriseswhich 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 Enterprisesto 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 GSEEnterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the GSEs Enterpriseswill 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 GSEEnterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs,Enterprises, or materially reducing the roles of the GSEsEnterprises 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 Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would 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 Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted 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 possible extension, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021.
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 Alternative Reference Rates Committee,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 steering committee comprised of large U.S. financial institutions,comparable rate for closed-end products and states that for open-end products, the CFPB has proposed replacing USD-LIBOR with a new SOFR, a ratedetermined that ARRC’s recommended spread-adjusted indices based on U.S. repo trading. Many banks believeSOFR 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 may take fourobtained 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 five years to complete the transition toLIBOR Act, SOFR despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will potentially becomebecomes the new benchmark rate by operation of law for hedgesany 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, which was adopted on December 16, 2022. The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, will extend the timeframe12-month LIBOR contracts and provides mechanisms 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 will apply 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.
Forconverting most existing LIBOR contracts, including Agency MBS,
investors, whento SOFR no later than June 30, 2023.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 delinquent loan is bought outreplacement rate neither impairs or affects the rights of a poolparty to receive payment under such contracts, nor allows a party to discharge their performance obligations or to declare a breach of mortgage loans,contract. It amends the removalTrust Indenture Act of 1939 to state that the “the right of any holder of any indenture security to receive payment of the loan from the pool is the same as a total prepaymentprincipal of and interest on such indenture security shall not be deemed to be impaired or affected” by application of the loan. The respective GSEs currently anticipate, however, that delinquent loans will be repurchased in most cases before the 24-month deadline under oneLIBOR Act to any indenture security.
• 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;Contents
• a loan subject to a short sale or deed-in-lieu of foreclosure; or
• a loan referred to foreclosure.
Because of these exceptions, the GSEs currently 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, especially in light of the COVID-19 pandemic, President Biden’s new administration and the new Congress in the United States.
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
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-couponour Agency MBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon /yields available in the market. To the extent such securities per-pay slower than would otherwise be the case, we benefit from an above market yields.coupon/yield for longer, enhancing the return from the security. 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 useswe use to hedge our Agency MBS assets, such as Euro Dollar futures, swaps, interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency MBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency MBS.
As described above, the Agency MBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency MBS market, a commitment it reaffirmed on June 30, 2020, September 16, 2020, December 16, 2020but ended these purchases in March 2022 and January 27, 2021. If the Fed modifies, reduces or suspendsannounced plans to reduce its purchasesbalance sheet. The Fed’s planned reduction of Agency MBS,its balance sheet could negatively impact our investment portfolio could be negatively impacted.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’sour securities until such time. AsTo the majority of the Company’sextent our 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, such as short-term fixed and floating rate CMOs.durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than 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 market levels of both the Federal Funds Rate and LIBOR. An increaseshort term interest rate markets. Increases in the FederalFed Funds Raterate, SOFR or LIBOR wouldtypically 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.
COVID-19 continuesDuring the fourth quarter of 2022 the trends in incoming economic data began to dominatechange, indicating the performanceactions of the marketsFed to remove accommodation and economy. While both have recovered from the depthsslow demand were starting to take hold. The most interest rate sensitive sectors of March 2020, especially the financial markets, the economy, continuesmainly housing and housing related, were slowing precipitously. Demand and consumption for goods – reflected in sales and production data – were clearly slowing. Even inflation data, as evidenced by the CPI and Personal Consumption Expenditures data, slowed during the quarter as well although such data was subsequently revised higher in early February of 2023. The one big exception was the labor market and wages – which were still tight in the case of the labor market and increasing in the case of wages. To central bankers, and in particular the Fed, this was problematic. As consumers migrated their consumption from goods to languish. The recovery has provenservices as the effects of the pandemic wore off service inflation remained elevated due to be very uneven, with some sectors backpersistent worker shortages and the resulting wage pressures as employers struggled to or near pre-pandemic levels of activity while others remain far below with little prospect for getting back to those levels soon. The unemployment rate remains elevated - with the most recent read at 6.2% - as over nine million Americans remain out of work.
fill positions. The Fed
identified non-shelter related services inflation as the focus of their efforts to contain inflation and inflation expectations. In their efforts to rein in service related inflation, the Fed has
taken, and continuescontinued to
take, steps to support markets and the economy. Stimulus from Washington and the federal government, in spite of political hurdles and a change in presidential administrations, has also provided meaningful support. The new Biden administration has proposed another $1.9 trillion stimulus package that is currently making its way through Congress. The market expectsraise the Fed Funds rate
– and plans to
remaincontinue doing so into 2023. In fact, the Fed raised the Fed Funds rate at their February 2023 meeting and indicated additional hikes were likely while simultaneously stating their intention to hold rates at what they deem to be restrictive territory into 2024.The financial markets were reluctant to accept that the Fed would be so aggressive in their tightening until late in the third quarter of 2022 when the Fed appeared to finally convince the markets of the extent and timing of the tightening plans. The market reacted swiftly as interest rates increased rapidly from August through late October of 2022. Short maturity rates increased the most, in anticipation of the Fed raising Fed Funds as high as 5.0% in 2023. However, the market view, as expressed in interest rates, futures and the shape of the U.S. Treasury curve, differed from the view of the Fed, during the last two months of 2022 and early 2023. Market pricing at the effective lower bound near zero for an extended periodend of time. Henceforth,2022 indicated a belief that the Fed appearswould succeed in reining in inflation sooner than the Fed did, and that in so doing it would ultimately slow the economy so much that the Fed would have to pivot and move to lower rates by the end of 2023. The result of this view was a deeply inverted U.S. Treasury yield curve, with short term rates of maturities of two-years or less far in excess of longer maturity U.S. Treasuries. However, economic data released in early 2023 has not been consistent with the market's view, as inflation measures remain stubbornly high, the economy does not appear to be willing to let inflation run aboveslowing and wage pressures have not abated. The market's view has moved into alignment with the 2% target level, even when unemployment is very low, before removing accommodation.Fed's expectations as evidenced by pricing in the futures markets.
The Agency MBS market continues to be bifurcated between the production coupons - the target of Fed asset purchases - and higher coupons in specified pool form. The TBA marketreturns for higher coupons remains weak as2022 were -11.9%. However, the sector lacks support fromreturned +2.1% for the fourth quarter of 2022. The turning point coincided with the markets pivot towards believing the Fed tightening cycle was nearing its end and prepayment speeds are extremely high, resultingthat the economy would slow in poor expected returns for investors. This leads investors to look to the specified pool market - with lower expected prepayment speeds - for attractive returns. With rates moving higher2023. In October 2022, spreads on Agency MBS reached levels not seen since the endgreat financial crisis. However, as market sentiment turned in November and December of 2020 investors anticipate prepayment activity will diminish as borrowers have been exposed to refinancing incentives for such an extended period, but this has yet to materialize. Working against2022, these spread levels appeared quite attractive. This was also true of most risk assets. As a result, the burnout effect is compressionsector performed very well over the balance of the primary/secondary spread, keeping mortgage rates lowfourth quarter of 2022, which resulted in an increase in the valuation of our assets. In the case of even as U.S. Treasury rates have increased.riskier asset classes the performance has been even better. As interest rates have continued to increase during the first quarter of 2021, rates available2023 unfolds, the Agency MBS sector is still trading at spread levels well above levels observed prior to borrowers have risen as well and now exceed 3%, although the increase in mortgage rates has been less thanCOVID-19 pandemic. However, the increase in treasury rates, implying the primary/secondary spread has continued to compress.
Now that we are closer to containmentabsence of two of the COVID-19largest buyers of the sector, banks and, since the onset of the pandemic, with the emergence of several very effective vaccines, market participants expect the economy will fully recover over the next year or two. Interest rates have begun to drift higher and are likely to continue to do so absent an unexpected turn in efforts to contain the pandemic. Nonetheless, the Fed has stated that it will stay committed to providing maximum supportmay result in the sector recovering more slowly towards pre-pandemic levels, if such levels are even obtained at all. The risk to the economysector would be a re-acceleration of inflation and Washington continuesthe need for the Fed to provide fiscal stimulus, albeit subject to considerable political haggling that slows progress. Prepayment speeds for Agency MBS will likely remain elevated until interest rates move well above current levels, and we expect that the most attractive returns available will be eithertighten monetary policy even further. Data released in the TBA dollar roll market with lower coupons or with specified pools in higher coupons.
February of 2023 heightens this concern.Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. Management has identified the following as its most critical accounting estimates:
Mortgage-Backed Securities
Our investments in MBS are accounted for at fair value. We acquire our MBS for the purpose of generating long-term returns, and not for the short-term investment of idle capital. Changes
As discussed in Note 14 to the fair value of securities are reflected as part of our net income or loss in our consolidated statement of operations. We elected to account for all offinancial statements, our MBS at fair value to reflect changes in the fair value of our MBS in our consolidated statement of operations, which we believe more appropriately reflects the results of our operations for a particular reporting period.
Our MBS are valued using Level 2 valuations, and such valuations currently are determined based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our positions in MBS determined by either an independent third-party or do so internally. In managing our portfolio, the Company employs the following four-step process at each valuation date to determine the fair value of our MBS.
| ● | First, the Company obtains fair values from subscription-based independent pricing services. |
| ● | Second, the Company requests non-binding quotes from one to four broker-dealers for certain MBS in order to validate the values obtained by the pricing service. The Company requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested. |
| ● | Third, the Company reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets. |
| ● | Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with management’s market observations, the Company makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent management believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, the Company may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency MBS backed by fixed-rate mortgages, the Company generally uses the quoted or observed market price. For assets such as Agency MBS backed by ARMs or structured Agency MBS, the Company may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained. |
Management believes its pricing methodology to be consistent with the definition of fair value described in Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements.
First, the Company obtains fair values from subscription-based independent pricing services.
Second, the Company requests non-binding quotes from one to four broker-dealers for certain MBS in order to validate the values obtained by the pricing service. The Company requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested.- 54 -
Third, the Company reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets.Table of ContentsFinally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with management’s market observations, the Company makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent management believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, the Company may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency MBS backed by fixed-rate mortgages, the Company generally uses the quoted or observed market price. For assets such as Agency MBS backed by ARMs or structured Agency MBS, the Company may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained.
All of our MBS are either PT MBS or structured MBS, including CMOs, IOs, IIOs or POs. Income on PT MBS, POs and CMOs that contain principal balances is based on the stated interest rate of the security. As a result of accounting for our MBS under the fair value option, premium or discount present at the date of purchase is not amortized. For IOs, IIOs and CMOs that do not contain principal balances, income is accrued based on the carrying value and the effective yield. As cash is received it is first applied to accrued interest and then to reduce the carrying value of the security. At each reporting date, the effective yield is adjusted prospectively from the reporting period based on the new estimate of prepayments, current interest rates and current asset prices. The new effective yield is calculated based on the carrying value at the end of the previous reporting period, the new prepayment estimates and the contractual terms of the security. Changes in fair value of all of our MBS during the period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it is more likely than not that they will not be realized. A majority of the Company’s net deferred tax assets, which consist primarily of NOLs, are expected to be realized over an extended number of years. Management’s conclusion is supported by taxable income projections which include forecasts of management fees, Orchid dividends and net interest income, and the subsequent reinvestment of those amounts into the MBS portfolio. However, management reassesses its valuation allowance conclusions whenever there is a material change in taxable income projections.
At December 31, 2020,2022, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At December 31, 2020, we did not have any off-balance sheet arrangements.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide disclosure pursuant to this Item. However, we have elected to include much of the information in Item 7 above, beginning on page 46.
ITEM 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Bimini Capital Management, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bimini Capital Management, Inc. (the “Company”) as of December 31, 20202022 and 2019,2021, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20202022 and 2019,2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020,2022, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating thesethe critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Realizability of Deferred Tax Assets
deferred tax assetsAs described in Note 1312 to the consolidated financial statements, the Company has recorded $66.6$65.2 million in gross deferred tax assets as of December 31, 20202022 and recorded a related valuation allowance of $32.0$42.0 million. ManagementThe Company applies significant judgment in assessing the projections of future taxable income in the determination of the amount of deferred tax assets that arewere more-likely-than-not to be realized in the future. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We identified assessing the realizability of deferred tax assets as a critical audit matter. The principal consideration for our determinationSpecifically, we identified that there is the significant judgment required by managementthe Company in formulating the forecast of taxable income over the net operating loss expiration periods to determine the amount of deferred tax assets that were more-likely-than-not to be realized in the future. Auditing these forecasts involved especially challenging auditor judgment, including the need for the involvement of individuals with specialized knowledge and skill in assessing these elements.
The primary procedures we performed to address this critical audit matter included:
Evaluating the positive and negative evidence in assessing whether the deferred tax assets are more-likely-than-not to be utilized, including evaluating the trends of historical financial results, projected sources of taxable income in future periods, and market information, such as interest yield curves.
Assessing the reasonableness of management’s historical ability to make forecasts of future taxable income, by performing a retrospective review of the prior year’s estimates.
Utilizing personnel with specialized knowledge and skill in tax to evaluate the forecasts of future income and tax implications.
• | Evaluating the positive and negative evidence in assessing whether the deferred tax assets are more likely than not to be utilized, including evaluating the trends of historical financial results, projected sources of taxable income in future periods, and market information (such as interest yield curves). |
• | Assessing the reasonableness of the Company’s historical ability to make forecasts of future taxable income, by performing a retrospective review of the prior year’s estimate. |
• | Utilizing personnel with specialized knowledge and skill in income taxes to assist in the evaluation of the appropriateness of the Company’s analysis of the realizability of the deferred tax assets. |
Valuation of Investments in Mortgage-Backed Securities
As described in Notes 1 and 1514 to the consolidated financial statements, the Company accounts for its mortgage-backed securities at fair value, which totaled $65.2$45.9 million atas of December 31, 2020.2022. The fair value of mortgage-backed securities is based on independent pricing sources and/or third-party broker quotes, when available. Because the price estimates may vary, managementthe Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values based on various techniques including observing the most recent market for like or identical assets (including security coupon rate, maturity, yield, prepayment speed), market credit spreads, and model driven approaches.
We identified the valuation of mortgage-backed securities as a critical audit matter. The principal considerations for our determination are: (i) the potential for bias in how managementthe Company subjectively selects the price from multiple pricing sources to determine the fair value of the mortgage-backed securities and (ii) the audit effort involved, including the useinvolvement of valuation professionals with specialized skill and knowledge.
The primary procedures we performed to address this critical audit matter included:
Evaluating the design and implementation of controls relating to the valuation of mortgaged-backed securities, including controls over management’s process to select the price from multiple pricing sources.
Reviewing the range of values used for each investment position, and assessing the price selected for potential management bias by comparing the price to the high, low and average of the range of pricing sources.
Testing the reasonableness of fair values determined by management by comparing the fair value of certain securities to recent transactions, if applicable.
Utilizing personnel with specialized knowledge and skill in valuation to develop an independent estimate of the fair value of each investment position by considering the stated security coupon rate, yield, maturity, and prepayment speeds, and comparing to the fair value used by management.
| ● | Reviewing the range of values used for each investment position, and assessing the price selected for potential bias by comparing the price to the high, low and average of the range of pricing sources. |
| ● | Utilizing personnel with specialized knowledge and skill in valuation to develop an independent estimate of the fair value of each investment position by: |
| o | considering the stated security coupon rate, maturity, yield, and prepayment speeds, and comparing to the fair value used by the Company; |
| o | comparing the Company’s fair value estimate of certain securities to recent available market transactions. |
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2008.
BIMINI CAPITAL MANAGEMENT, INC. |
CONSOLIDATED BALANCE SHEETS |
December 31, 2022 and 2021 |
| | | 2022 | | | 2021 | |
ASSETS: | | | | | | | | |
Mortgage-backed securities, at fair value | | | | | | | | |
Pledged to counterparties | | $ | 45,716,793 | | | $ | 60,788,129 | |
Unpledged | | | 176,643 | | | | 15,015 | |
Total mortgage-backed securities | | | 45,893,436 | | | | 60,803,144 | |
Cash and cash equivalents | | | 6,010,799 | | | | 8,421,410 | |
Restricted cash | | | 763,000 | | | | 1,391,000 | |
Investment in Orchid Island Capital, Inc. common stock, at fair value | | | 5,975,248 | | | | 11,679,107 | |
Accrued interest receivable | | | 204,018 | | | | 229,942 | |
Property and equipment, net | | | 1,997,313 | | | | 2,024,190 | |
Deferred tax assets, net of allowances | | | 23,178,243 | | | | 35,036,312 | |
Due from affiliates | | | 1,130,713 | | | | 1,062,155 | |
Other assets | | | 1,164,181 | | | | 1,437,381 | |
Total Assets | | $ | 86,316,951 | | | $ | 122,084,641 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
LIABILITIES: | | | | | | | | |
Repurchase agreements | | $ | 43,817,999 | | | $ | 58,877,999 | |
Long-term debt | | | 27,416,239 | | | | 27,438,976 | |
Accrued interest payable | | | 194,629 | | | | 55,610 | |
Other liabilities | | | 2,764,005 | | | | 2,712,206 | |
Total Liabilities | | | 74,192,872 | | | | 89,084,791 | |
| | | | | | | | | |
Commitments and Contingencies (Note 11) | | | | | | | | |
| | | | | | | | | |
STOCKHOLDERS' EQUITY: | | | | | | | | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; no shares issued and outstanding | | | - | | | | - | |
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 10,019,888 shares and 10,702,194 shares issued and outstanding, respectively | | | 10,020 | | | | 10,702 | |
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding | | | 32 | | | | 32 | |
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding | | | 32 | | | | 32 | |
Additional paid-in capital | | | 329,828,268 | | | | 330,880,252 | |
Accumulated deficit | | | (317,714,273 | ) | | | (297,891,168 | ) |
Stockholders' Equity | | | 12,124,079 | | | | 32,999,850 | |
Total Liabilities and Equity | | $ | 86,316,951 | | | $ | 122,084,641 | |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED BALANCE SHEETS | |
| DECEMBER 31, 2020 and 2019 | |
| | | | | | | |
| | | 2020 | | | 2019 | |
| ASSETS: | | | | | | |
Mortgage-backed securities, at fair value | | | | | | |
Pledged to counterparties | | $ | 65,153,274 | | | $ | 217,793,209 | |
Unpledged | | | 24,957 | | | | 47,744 | |
Total mortgage-backed securities | | | 65,178,231 | | | | 217,840,953 | |
Cash and cash equivalents | | | 7,558,342 | | | | 8,070,067 | |
Restricted cash | | | 3,353,015 | | | | 4,315,050 | |
Investment in Orchid Island Capital, Inc. common stock, at fair value | | | 13,547,764 | | | | 8,892,211 | |
Accrued interest receivable | | | 202,192 | | | | 750,875 | |
Property and equipment, net | | | 2,093,440 | | | | 2,162,975 | |
Real property held for sale | | | - | | | | 450,000 | |
Deferred tax assets | | | 34,668,467 | | | | 33,288,536 | |
Due from affiliates | | | 632,471 | | | | 622,120 | |
Other assets | | | 1,466,647 | | | | 3,096,161 | |
| Total Assets | | $ | 128,700,569 | | | $ | 279,488,948 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | | |
| LIABILITIES: | | | | | | | | |
Repurchase agreements | | $ | 65,071,113 | | | $ | 209,954,000 | |
Long-term debt | | | 27,612,781 | | | | 27,481,121 | |
Accrued interest payable | | | 107,417 | | | | 645,302 | |
Other liabilities | | | 1,421,409 | | | | 1,431,534 | |
| Total Liabilities | | | 94,212,720 | | | | 239,511,957 | |
| | | | | | | | | |
Commitments and contingencies (Note 12) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares | | | | | | | | |
designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; | | | | | | | | |
no shares issued and outstanding as of December 31, 2020 and 2019 | | | - | | | | - | |
Class A Common stock, $0.001 par value; 98,000,000 shares designated: 11,608,555 | | | | | | | | |
shares issued and outstanding as of December 31, 2020 and 2019 | | | 11,609 | | | | 11,609 | |
Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
issued and outstanding as of December 31, 2020 and 2019 | | | 32 | | | | 32 | |
Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares | | | | | | | | |
issued and outstanding as of December 31, 2020 and 2019 | | | 32 | | | | 32 | |
Additional paid-in capital | | | 332,642,758 | | | | 332,642,758 | |
Accumulated deficit | | | (298,166,582 | ) | | | (292,677,440 | ) |
| Stockholders' Equity | | | 34,487,849 | | | | 39,976,991 | |
| Total Liabilities and Equity | | $ | 128,700,569 | | | $ | 279,488,948 | |
| See Notes to Consolidated Financial Statements | |
See Notes to Consolidated Financial Statements |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| For the Years Ended December 31, 2020 and 2019 | |
| | | | | | | |
| | | 2020 | | | 2019 | |
| Revenues: | | | | | | |
Advisory services | | $ | 6,795,072 | | | $ | 6,907,910 | |
Interest income | | | 3,764,003 | | | | 7,868,940 | |
Dividend income from Orchid Island Capital, Inc. common stock | | | 1,752,730 | | | | 1,459,235 | |
Total revenues | | | 12,311,805 | | | | 16,236,085 | |
Interest expense: | | | | | | | | |
Repurchase agreements | | | (1,073,528 | ) | | | (4,602,837 | ) |
Long-term debt | | | (1,150,613 | ) | | | (1,572,038 | ) |
Net revenues | | | 10,087,664 | | | | 10,061,210 | |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
Unrealized gains on mortgage-backed securities | | | 111,615 | | | | 6,338,000 | |
Realized (losses) gains on mortgage-backed securities | | | (5,744,589 | ) | | | 23,078 | |
Unrealized gains (losses) on Orchid Island Capital, Inc. common stock | | | 583,961 | | | | (820,819 | ) |
Losses on derivative instruments | | | (5,292,521 | ) | | | (5,817,825 | ) |
Gains on retained interests in securitizations | | | 58,735 | | | | 314,984 | |
Impairment of real property held for sale | | | - | | | | (673,438 | ) |
Other income | | | 3,478 | | | | 32,884 | |
Other expense, net | | | (10,279,321 | ) | | | (603,136 | ) |
| | | | | | | | | |
| Expenses: | | | | | | | | |
Compensation and related benefits | | | 4,235,487 | | | | 4,115,743 | |
Directors' fees and liability insurance | | | 690,713 | | | | 653,825 | |
Audit, legal and other professional fees | | | 576,662 | | | | 489,243 | |
Administrative and other expenses | | | 1,164,039 | | | | 1,180,898 | |
Total expenses | | | 6,666,901 | | | | 6,439,709 | |
| | | | | | | | | |
Net (loss) income before income tax benefit | | | (6,858,558 | ) | | | 3,018,365 | |
Income tax benefit | | | (1,369,416 | ) | | | (10,281,612 | ) |
| | | | | | | | | |
| Net (loss) income | | $ | (5,489,142 | ) | | $ | 13,299,977 | |
| | | | | | | | | |
| Basic and Diluted Net (Loss) Income Per Share of: | | | | | | | | |
CLASS A COMMON STOCK | | | | | | | | |
Basic and Diluted | | $ | (0.47 | ) | | $ | 1.09 | |
CLASS B COMMON STOCK | | | | | | | | |
Basic and Diluted | | $ | (0.47 | ) | | $ | 1.09 | |
| Weighted Average Shares Outstanding: | | | | | | | | |
CLASS A COMMON STOCK | | | | | | | | |
Basic and Diluted | | | 11,608,555 | | | | 12,178,160 | |
CLASS B COMMON STOCK | | | | | | | | |
Basic and Diluted | | | 31,938 | | | | 31,938 | |
| See Notes to Consolidated Financial Statements | |
BIMINI CAPITAL MANAGEMENT, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
For the Years Ended December 31, 2022 and 2021 |
| | | 2022 | | | 2021 | |
Revenues: | | | | | | | | |
Advisory services | | $ | 12,995,504 | | | $ | 9,788,340 | |
Interest income | | | 1,862,480 | | | | 2,237,217 | |
Dividend income from Orchid Island Capital, Inc. common stock | | | 1,292,701 | | | | 2,024,379 | |
Total revenues | | | 16,150,685 | | | | 14,049,936 | |
Interest expense: | | | | | | | | |
Repurchase agreements | | | (715,386 | ) | | | (116,179 | ) |
Long-term debt | | | (1,415,624 | ) | | | (996,794 | ) |
Net revenues | | | 14,019,675 | | | | 12,936,963 | |
| | | | | | | | | |
Other income (expense): | | | | | | | | |
Unrealized losses on mortgage-backed securities | | | (5,915,904 | ) | | | (3,098,866 | ) |
Realized losses (gains) on mortgage-backed securities | | | (858,001 | ) | | | 69,498 | |
Unrealized losses on Orchid Island Capital, Inc. common stock | | | (6,239,189 | ) | | | (1,868,657 | ) |
Gains (losses) on derivative instruments | | | 800,820 | | | | (198 | ) |
Gains on retained interests in securitizations | | | 65,928 | | | | - | |
Other income | | | 341 | | | | 154,191 | |
Other expense, net | | | (12,146,005 | ) | | | (4,744,032 | ) |
| | | | | | | | | |
Expenses: | | | | | | | | |
Compensation and related benefits | | | 6,530,349 | | | | 5,721,315 | |
Directors' fees and liability insurance | | | 804,186 | | | | 762,735 | |
Audit, legal and other professional fees | | | 504,602 | | | | 513,925 | |
Administrative and other expenses | | | 1,999,569 | | | | 1,287,387 | |
Total expenses | | | 9,838,706 | | | | 8,285,362 | |
| | | | | | | | | |
Net loss before income tax provision (benefit) | | | (7,965,036 | ) | | | (92,431 | ) |
Income tax provision (benefit) | | | 11,858,069 | | | | (367,845 | ) |
| | | | | | | | | |
Net (loss) income | | $ | (19,823,105 | ) | | $ | 275,414 | |
| | | | | | | | | |
Basic and Diluted Net (Loss) Income Per Share of: | | | | | | | | |
CLASS A COMMON STOCK | | | | | | | | |
Basic and Diluted | | $ | (1.90 | ) | | $ | 0.02 | |
CLASS B COMMON STOCK | | | | | | | | |
Basic and Diluted | | $ | (1.90 | ) | | $ | 0.02 | |
Weighted Average Shares Outstanding: | | | | | | | | |
CLASS A COMMON STOCK | | | | | | | | |
Basic and Diluted | | | 10,393,855 | | | | 11,198,434 | |
CLASS B COMMON STOCK | | | | | | | | |
Basic and Diluted | | | 31,938 | | | | 31,938 | |
See Notes to Consolidated Financial Statements |
| BIMINI CAPITAL MANAGEMENT, INC | |
| CONSOLIDATED STATEMENTS OF EQUITY | |
| Years Ended December 31, 2020 and 2019 | |
| | | | | | | | | | | | | | | | |
| | | | | | Stockholders' Equity | | | |
| | | Common Stock | | Additional | | Accumulated | | | |
| | | Shares | | | Par Value | | Paid-in Capital | | Deficit | | Total | |
Balances, January 1, 2019 | | | 12,773,145 | | | $ | 12,773 | | | $ | 334,919,265 | | | $ | (305,977,417 | ) | | $ | 28,954,621 | |
Net income | | | - | | | | - | | | | - | | | | 13,299,977 | | | | 13,299,977 | |
Class A common shares repurchased and retired | | | (1,100,714 | ) | | | (1,100 | ) | | | (2,276,507 | ) | | | - | | | | (2,277,607 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2019 | | | 11,672,431 | | | | 11,673 | | | | 332,642,758 | | | | (292,677,440 | ) | | | 39,976,991 | |
Net loss | | | - | | | | - | | | | - | | | | (5,489,142 | ) | | | (5,489,142 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2020 | | | 11,672,431 | | | $ | 11,673 | | | $ | 332,642,758 | | | $ | (298,166,582 | ) | | $ | 34,487,849 | |
| See Notes to Consolidated Financial Statements | |
BIMINI CAPITAL MANAGEMENT, INC |
CONSOLIDATED STATEMENTS OF EQUITY |
Years Ended December 31, 2022 and 2021 |
| | | Stockholders' Equity | | | | | |
| | | Common Stock | | | Additional | | | Accumulated | | | | | |
| | | Shares | | | Par Value | | | Paid-in Capital | | | Deficit | | | Total | |
Balances, January 1, 2021 | | | 11,672,431 | | | $ | 11,673 | | | $ | 332,642,758 | | | $ | (298,166,582 | ) | | $ | 34,487,849 | |
Net income | | | - | | | | - | | | | - | | | | 275,414 | | | | 275,414 | |
Class A common shares repurchased and retired | | | (906,361 | ) | | | (907 | ) | | | (1,762,506 | ) | | | - | | | | (1,763,413 | ) |
Balances, December 31, 2021 | | | 10,766,070 | | | | 10,766 | | | | 330,880,252 | | | | (297,891,168 | ) | | | 32,999,850 | |
Net loss | | | - | | | | - | | | | - | | | | (19,823,105 | ) | | | (19,823,105 | ) |
Class A common shares repurchased and retired | | | (682,306 | ) | | | (682 | ) | | | (1,051,984 | ) | | | - | | | | (1,052,666 | ) |
Balances, December 31, 2022 | | | 10,083,764 | | | $ | 10,084 | | | $ | 329,828,268 | | | $ | (317,714,273 | ) | | $ | 12,124,079 | |
See Notes to Consolidated Financial Statements |
| BIMINI CAPITAL MANAGEMENT, INC. | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| Years Ended December 31, 2020 and 2019 | |
| | | | | | | |
| | | 2020 | | | 2019 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net (loss) income | | $ | (5,489,142 | ) | | $ | 13,299,977 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 69,536 | | | | 73,057 | |
Deferred income tax | | | (1,379,931 | ) | | | (10,085,715 | ) |
Losses (gains) on mortgage-backed securities | | | 5,632,974 | | | | (6,361,078 | ) |
Gains on retained interests in securitizations | | | (58,735 | ) | | | (314,984 | ) |
Gain from disposition of real property held for sale | | | (11,591 | ) | | | - | |
Impairment of real property held for sale | | | - | | | | 673,438 | |
Realized losses on forward settling to-be-announced securities | | | 1,441,406 | | | | 2,196,582 | |
Unrealized (gains) losses on Orchid Island Capital, Inc. common stock | | | (583,961 | ) | | | 820,819 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accrued interest receivable | | | 548,683 | | | | 29,660 | |
Due from affiliates | | | (10,351 | ) | | | 31,964 | |
Other assets | | | 1,629,514 | | | | (71,105 | ) |
Accrued interest payable | | | (537,885 | ) | | | (32,960 | ) |
Other liabilities | | | 48,469 | | | | (255,913 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 1,298,986 | | | | 3,742 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
From mortgage-backed securities investments: | | | | | | | | |
Purchases | | | (43,129,835 | ) | | | (65,780,690 | ) |
Sales | | | 176,249,711 | | | | 43,975,274 | |
Principal repayments | | | 13,909,872 | | | | 22,749,733 | |
Payments received on retained interests in securitizations | | | 58,735 | | | | 314,984 | |
Net settlement of forward settling TBA contracts | | | (1,500,000 | ) | | | (3,075,488 | ) |
Purchases of Orchid Island Capital, Inc. common stock | | | (4,071,592 | ) | | | - | |
Proceeds from disposition of real property held for sale | | | 461,590 | | | | - | |
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | | | 141,978,481 | | | | (1,816,187 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from repurchase agreements | | | 538,558,549 | | | | 1,200,646,000 | |
Principal repayments on repurchase agreements | | | (683,441,436 | ) | | | (1,191,088,000 | ) |
Proceeds from issuance of long-term debt | | | 152,165 | | | | 680,000 | |
Principal repayments on long-term debt | | | (20,505 | ) | | | (3,319 | ) |
Class A common shares repurchased and retired | | | - | | | | (2,277,607 | ) |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | (144,751,227 | ) | | | 7,957,074 | |
| | | | | | | | | |
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | (1,473,760 | ) | | | 6,144,629 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the year | | | 12,385,117 | | | | 6,240,488 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the year | | $ | 10,911,357 | | | $ | 12,385,117 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid (received) during the year for: | | | | | | | | |
Interest | | $ | 2,762,026 | | | $ | 6,207,835 | |
Income taxes | | $ | (1,581,828 | ) | | $ | (46,700 | ) |
| See Notes to Consolidated Financial Statements | |
BIMINI CAPITAL MANAGEMENT, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
Years Ended December 31, 2022 and 2021 |
| | | 2022 | | | 2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net (loss) income | | $ | (19,823,105 | ) | | $ | 275,414 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 73,053 | | | | 69,250 | |
Deferred income tax provision (benefit) | | | 11,858,069 | | | | (367,845 | ) |
Unrealized losses on mortgage-backed securities | | | 5,915,904 | | | | 3,098,866 | |
Realized losses (gains) on mortgage-backed securities | | | 858,001 | | | | (69,498 | ) |
Gains retained interests in securitizations | | | (65,928 | ) | | | - | |
PPP loan forgiveness | | | - | | | | (153,724 | ) |
Unrealized losses on Orchid Island Capital, Inc. common stock | | | 6,239,189 | | | | 1,868,657 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accrued interest receivable | | | 25,924 | | | | (27,750 | ) |
Due from affiliates | | | (68,558 | ) | | | (429,684 | ) |
Other assets | | | 273,200 | | | | 29,266 | |
Accrued interest payable | | | 139,019 | | | | (50,248 | ) |
Other liabilities | | | 51,799 | | | | 1,290,797 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 5,476,567 | | | | 5,533,501 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
From mortgage-backed securities investments: | | | | | | | | |
Purchases | | | (23,191,724 | ) | | | (26,189,505 | ) |
Sales | | | 23,096,853 | | | | 13,063,248 | |
Principal repayments | | | 8,230,674 | | | | 14,471,976 | |
Payments received on retained interests in securitizations | | | 65,928 | | | | - | |
Purchases of Orchid Island Capital, Inc. common stock | | | (535,330 | ) | | | - | |
Acquisition of property and equipment | | | (46,176 | ) | | | - | |
NET CASH PROVIDED BY INVESTING ACTIVITIES | | | 7,620,225 | | | | 1,345,719 | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from repurchase agreements | | | 391,823,690 | | | | 293,283,000 | |
Principal repayments on repurchase agreements | | | (406,883,690 | ) | | | (299,476,114 | ) |
Principal repayments on long-term debt | | | (22,737 | ) | | | (21,640 | ) |
Class A common shares repurchased and retired | | | (1,052,666 | ) | | | (1,763,413 | ) |
NET CASH USED IN FINANCING ACTIVITIES | | | (16,135,403 | ) | | | (7,978,167 | ) |
| | | | | | | | | |
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | | (3,038,611 | ) | | | (1,098,947 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the year | | | 9,812,410 | | | | 10,911,357 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the year | | $ | 6,773,799 | | | $ | 9,812,410 | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
Cash paid during the year for: | | | | | | | | |
Interest | | $ | 1,991,991 | | | $ | 1,164,780 | |
Income taxes | | $ | - | | | $ | - | |
See Notes to Consolidated Financial Statements |
BIMINI CAPITAL MANAGEMENT,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 (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."
The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.
Variable Interest Entities (VIEs)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note 10 for a description of the accounting used for this VIE.
We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not consolidate these VIEs and we account for our interests in these VIEs as mortgage-backed securities. See Note 3 for additional information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's consolidated financial position, results of operations and cash flows have been included and are of a normal and recurring nature.
COVID-19 Impact
Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency MBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions. In order to maintain our leverage ratio at prudent levels, maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we sold assets at levels significantly below their carrying values and closed several hedge positions. During this period, we sold approximately $171.2 million of MBS during the three months ended March 31, 2020, realizing losses of approximately $5.8 million.
The Agency MBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of December 31, 2020, we had timely satisfied all margin calls.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2021.
In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has provided billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. On April 13, 2020, the Company received $152,000 through the Paycheck Protection Program of the CARES Act in the form of a low interest rate loan. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria.
The CARES Act also makes technical corrections to, or modifies on a temporary basis, certain provisions of the U.S. Income Tax Code. Significant income tax impacts of the CARES Act include the ability to carry back a net operating loss for 5 years and an increase in the interest expense disallowance limitations from 30% to 50% of adjusted taxable income. Those changes did not significantly impact the consolidated financial statements or the Company’s 2019 income tax return.
The Company has evaluated the other provisions of the CARES Act and does not believe it will have a material effect on the Company’s business, results of operations and financial condition.
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 investment in Orchid common shares, and derivatives, determining the amounts of asset valuation allowances, the impairment for the real property held for sale, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period. Management believes the estimates and assumptions underlying the consolidated financial statements are reasonable based on the information available as of December 31, 2020, however uncertainty over the ultimate impact that COVID-19 will have on the global economy generally, and on our business in particular, makes any estimates and assumptions as of December 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.
The Company’s operations are classified into two principal reportable segments: the asset management segment and the investment portfolio segment. These segments are evaluated by management in deciding how to allocate resources and in assessing performance. The accounting policies of the operating segments are the same as the Company’s accounting policies described in this note with the exception that inter-segment revenues and expenses are included in the presentation of segment results. For further information see Note 16.15.
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. 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 December 31, 2020 2022 and 2019.
| | | 2020 | | | 2019 | |
Cash and cash equivalents | | $ | 7,558,342 | | | $ | 8,070,067 | |
Restricted cash | | | 3,353,015 | | | | 4,315,050 | |
| Total cash, cash equivalents and restricted cash | | $ | 10,911,357 | | | $ | 12,385,117 | |
2021.| | | 2022 | | | 2021 | |
Cash and cash equivalents | | $ | 6,010,799 | | | $ | 8,421,410 | |
Restricted cash | | | 763,000 | | | | 1,391,000 | |
Total cash, cash equivalents and restricted cash | | $ | 6,773,799 | | | $ | 9,812,410 | |
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$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.
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.
performed in accordance with FASB Accounting Standards Codification ("ASC") Topic 606,Revenue from Contracts with Customers. Further information regarding the management agreement is presented in Note 2 to the consolidated financial statements.Mortgage-Backed Securities
The Company invests primarily in pass-through mortgage backed certificates(“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. We referThe Company refers to MBS and CMOs as PT MBS. We referThe 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 our 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-partythird-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 backedmortgage-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.
Realized gains and losses on sales of MBS and U.S. Treasury Notes, using the specific identification method, are reported as a separate component of net portfolio income on the statement of operations.Orchid Island Capital, Inc. Common Stock
The Company accounts for its investment in Orchid common shares at fair value. The change in the fair value and dividends received on this investment are reflected in the consolidated statements of operations. We estimate the fair value of our investment in OrchidOrchid'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.
Derivative Financial Instruments
The Company useshas 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 to date are Treasury Note (“T-Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities, but it may enter into other derivatives in the future.
securities.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 TBA securitiesderivative transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.
During the year ended December 31, 2022, the Company only held T-Note futures contracts. The Company recorded income of approximately $0.8 million on these instruments during the year ended December 31, 2022. Losses recorded during the year ended December 31, 2021 were negligible.
Derivative instruments are carried at fair value, and changes in fair value are recorded in the consolidated statements of operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities. Gains and losses on derivatives, except those that result in cash receipts or payments, are included in operating activities on the statements of cash flows. Cash payments and cash receipts from settlements of derivatives, including current period net cash settlements on interest rate swaps, is classified as an investing activity on the statements of cash flows. The Company's derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, related assets and liabilities are reported on a gross basis in the Company's consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the consolidated balance sheets.
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.
The Company’s futures contracts are exchange traded contracts that are valued based on exchange pricing with daily margin requirements. The margin requirement varies based on the market value of the open position and the equity retained in the account. Margin posted is treated as settlement of the outstanding value of the futures contract. Any margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s balance sheets. The Company realizes gains and losses on these contracts upon expiration equal to the difference between the current fair value of the underlying asset and the contractual price of the futures contract.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 1514 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 Level 2 assets under the fair value hierarchy as of December 31, 2022 and 2021due to the short-term nature of these financial instruments.
It is impractical to estimate theThe fair value of the Company’s junior subordinated notes. Currently, therenote approximates its carrying value. The carrying value is a limited market for these typesreasonable estimate of instruments andfair value since the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments.instrument carries a floating rate that resets frequently. Further information regarding these instrumentsthis instrument is presented in Note 109 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30 years. Property and equipment is recorded at acquisition cost and depreciated to their respective salvage values using the straight-line method over the estimated useful lives of the assets. Depreciation is included in administrative and other expenses in the consolidated statement of operations.
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.
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-classtwo-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-classtwo-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 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, 2017 2019 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm and its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.
Recent Accounting Pronouncements
On January 1,In March 2020, we adoptedthe FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss model). The Company’s adoption of this ASU did not have a material impact on its consolidated financial statements as its financial assets were already measured at fair value through earnings.
In March 2020 the FASB issued ASU 2020-04-04 “Reference Rate Reform (Topic 848)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-042020-04 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 2020-042020-04 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 2020-042020-04 is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. In December 2022, the FASB issued ASU 2022-06 “Reference Rate Reform (Topic 848)," deferring the sunset date provided in ASU 2020-04 from December 31, 2022 to December 31, 2024. 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 2021-012021-01 “Reference Rate Reform (Topic 848)848). ASU 2021-012021-01 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 2021-012021-01 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 2021-012021-01 is effective immediately and available generally through December 31, 2022, 2024, 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 the Orchid’s month-end equity, as defined in the management agreement, |
| ● | One-twelfth of 1.25% of the Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and |
| ● | One-twelfth of 1.00% of the Orchid’s month-end equity that is greater than $500 million. |
On April 1, 2022, pursuant to the third amendment to the management agreement
One-twelfth of 1.25% of entered into on November 16, 2021, the Orchid’s month-end equityCompany began providing certain repurchase agreement trading, clearing and administrative services to Orchid that is greater than $250 million and less than or equalhad 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 $500 million, and
One-twelfth of 1.00% of the Orchid’s month-end equity that is greater than $500 million.
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. |
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. Orchid is required to pay Bimini Advisors by the 15th day of the month following the month the services are performed. The management agreement has been renewed through February 20, 2022 2024 and provides for automatic one-yearone-year extension options thereafter. Should Orchid terminate the management agreement without cause, it will be obligated to pay Bimini Advisors a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the automatic renewal term.
The following table summarizes the advisory services revenue from Orchid for the years ended December 31, 2020 2022 and 2019.
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Management fee | | $ | 5,281 | | | $ | 5,528 | |
Allocated overhead | | | 1,514 | | | | 1,380 | |
Total | | $ | 6,795 | | | $ | 6,908 | |
2021.(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Management fee | | $ | 10,447 | | | $ | 8,156 | |
Allocated overhead | | | 2,042 | | | | 1,632 | |
Repurchase, clearing and administrative fee | | | 507 | | | | - | |
Total | | $ | 12,996 | | | $ | 9,788 | |
At December 31, 2020 2022 and 2019,2021, the net amount due from Orchid was approximately $0.6$1.1 million and $0.6$1.1 million, respectively. These amounts are included in “other assets” in the consolidated balance sheets.
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s MBS portfolio as of December 31, 2020 2022 and 2019:2021:
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Fixed-rate MBS | | $ | 42,974 | | | $ | 58,029 | |
Structured MBS | | | 2,919 | | | | 2,774 | |
Total | | $ | 45,893 | | | $ | 60,803 | |
The following table is a summary of the Company's net loss (gain) from the sale of MBS for the years ended December 31, 2022 and 2021:
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Proceeds from sales of MBS | | $ | 23,097 | | | $ | 13,063 | |
Carrying value of MBS sold | | | 23,955 | | | | 12,994 | |
Net loss (gain) on sales of MBS | | $ | (858 | ) | | $ | 69 | |
| | | | | | | | | |
Gross gain sales of MBS | | $ | - | | | $ | 69 | |
Gross loss on sales of MBS | | | (858 | ) | | | - | |
Net loss (gain) on sales of MBS | | $ | (858 | ) | | $ | 69 | |
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Fixed-rate Mortgages | | $ | 64,902 | | | $ | 216,231 | |
Interest-Only Securities | | | 251 | | | | 1,024 | |
Inverse Interest-Only Securities | | | 25 | | | | 586 | |
Total | | $ | 65,178 | | | $ | 217,841 | |
NOTE 4. PROPERTY AND EQUIPMENT, NET
The composition of property and equipment at December 31, 2020 2022 and 20192021 follows:
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Land | | $ | 1,185 | | | $ | 1,185 | |
Buildings and improvements | | | 1,827 | | | | 1,827 | |
Computer equipment and software | | | 45 | | | | 26 | |
Office furniture and equipment | | | 220 | | | | 193 | |
Total cost | | | 3,277 | | | | 3,231 | |
Less accumulated depreciation and amortization | | | (1,280 | ) | | | (1,207 | ) |
Property and equipment, net | | $ | 1,997 | | | $ | 2,024 | |
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Land | | $ | 1,185 | | | $ | 1,185 | |
Buildings and improvements | | | 1,827 | | | | 1,827 | |
Computer equipment and software | | | 181 | | | | 181 | |
Office furniture and equipment | | | 198 | | | | 198 | |
Total cost | | | 3,391 | | | | 3,391 | |
Less accumulated depreciation and amortization | | | 1,298 | | | | 1,228 | |
Property and equipment, net | | $ | 2,093 | | | $ | 2,163 | |
Depreciation of property and equipment totaled approximately $70,000 and $73,000 for the years ended December 31, 2020 and 2019, respectively.
In August 2019, the Company transferred one its real estate properties to held for sale to generate additional cash to be invested in the MBS portfolio. The Company transferred the property at fair value, which resulted in an impairment charge of approximately $0.7 million during the year ended December 31, 2019. In October 2020, the Company completed the sale of this property, receiving proceeds of approximately $0.5 million. The transaction resulted in a gain of approximately $12,000.
AND OTHER LIABILITIESThe composition of other assets at December 31, 2020 2022 and 20192021 follows:
| (in thousands) | |
| | | 2020 | | | 2019 | |
Investment in Bimini Capital Trust II | | $ | 804 | | | $ | 804 | |
Prepaid expenses | | | 278 | | | | 215 | |
Servicing advances | | | 205 | | | | 205 | |
Servicing sale receivable, including accrued interest | | | - | | | | 159 | |
Refundable income taxes withheld | | | - | | | | 1,578 | |
Other | | | 180 | | | | 135 | |
Total other assets | | $ | 1,467 | | | $ | 3,096 | |
Receivables are carried(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Investment in Bimini Capital Trust II | | $ | 804 | | | $ | 804 | |
Prepaid expenses | | | 261 | | | | 297 | |
Servicing advances | | | - | | | | 159 | |
Other | | | 99 | | | | 177 | |
Total other assets | | $ | 1,164 | | | $ | 1,437 | |
The composition of other liabilities at their estimated collectible amounts. The Company maintains an allowance for credit losses for expected losses, if any. Management considers the following factors when determining the expected losses of specific accounts: past transaction activity, current economic conditions, changes in payment terms and reasonable and supportable forecasts. Adjustments to the allowance for credit losses are recorded with a corresponding adjustment included in the consolidated statement of operations. As of December 31, 2020 2022 and 2019, management determined that no allowance for credit losses was necessary. Collections on amounts previously written off are included in income as received.2021 follows:
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Accrued payroll | | $ | 2,600 | | | $ | 2,600 | |
Accrued liabilities | | | 104 | | | | 81 | |
Accounts payable | | | 60 | | | | 31 | |
Total other assets | | $ | 2,764 | | | $ | 2,712 | |
NOTE 6. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBSMBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of December 31, 2020,2022, the Company had met all margin call requirements.
As of December 31, 2020 2022 and December 31, 2019,2021, 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 | |
| December 31, 2020 | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | |
interest receivable | | $ | - | | | $ | 49,096 | | | $ | 8,853 | | | $ | 7,405 | | | $ | 65,354 | |
Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | |
these securities | | $ | - | | | $ | 49,120 | | | $ | 8,649 | | | $ | 7,302 | | | $ | 65,071 | |
Net weighted average borrowing rate | | | - | | | | 0.25 | % | | | 0.23 | % | | | 0.30 | % | | | 0.25 | % |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued | | | | | | | | | | | | | | | | | | | | |
interest receivable | | $ | - | | | $ | 137,992 | | | $ | 80,550 | | | $ | - | | | $ | 218,542 | |
Repurchase agreement liabilities associated with | | | | | | | | | | | | | | | | | | | | |
these securities | | $ | - | | | $ | 132,573 | | | $ | 77,381 | | | $ | - | | | $ | 209,954 | |
Net weighted average borrowing rate | | | - | | | | 2.02 | % | | | 1.92 | % | | | - | | | | 1.98 | % |
($ in thousands) | | | | | | | | | | | | | | | | | | | | |
| | | OVERNIGHT | | | BETWEEN 2 | | | BETWEEN 31 | | | GREATER | | | | | |
| | | (1 DAY OR | | | AND | | | AND | | | THAN | | | | | |
| | | LESS) | | | 30 DAYS | | | 90 DAYS | | | 90 DAYS | | | TOTAL | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued interest receivable | | $ | - | | | $ | 42,553 | | | $ | 3,364 | | | $ | - | | | $ | 45,917 | |
Repurchase agreement liabilities associated with these securities | | $ | - | | | $ | 40,492 | | | $ | 3,326 | | | $ | - | | | $ | 43,818 | |
Net weighted average borrowing rate | | | - | | | | 4.50 | % | | | 4.29 | % | | | - | | | | 4.48 | % |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | |
Fair value of securities pledged, including accrued interest receivable | | $ | - | | | $ | 60,859 | | | $ | 159 | | | $ | - | | | $ | 61,018 | |
Repurchase agreement liabilities associated with these securities | | $ | - | | | $ | 58,793 | | | $ | 85 | | | $ | - | | | $ | 58,878 | |
Net weighted average borrowing rate | | | - | | | | 0.14 | % | | | 0.70 | % | | | - | | | | 0.14 | % |
In addition, cash pledged to counterparties as collateral for repurchase agreements was approximately $3.4$0.5 million and $3.8$1.4 million as of December 31, 2020 2022 and 2019,2021, 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 December 31, 2020 2022 and December 31, 2019,2021, 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 $3.6$2.5 million and $11.8$3.5 million, respectively. Summary information regarding amounts at risk with individual counterparties greater than 10% of equity at December 31, 2022 is presented in the table below. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at December 31, 2020 and December 31, 2019.2021.
($ in thousands) | | | | | | | | | | | | |
| | | | | | | % of | | | Weighted | |
| | | | | | | Stockholders' | | | Average | |
| | | Amount | | | Equity | | | Maturity | |
Repurchase Agreement Counterparty | | at Risk | | | at Risk | | | (in Days) | |
Mirae Asset Securities (USA) Inc. | | $ | 1,322 | | | | 10.9 | % | | | 14 | |
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
The table below summarizes fair value information about our derivative assets and liabilities as of December 31, 2020 and 2019.
| (in thousands) | | | | |
| Derivative Instruments and Related Accounts | Balance Sheet Location | December 31, 2020 | December 31, 2019 |
| Liabilities | | | | |
TBA Securities | Other liabilities | $ | - | $ | 59 |
Total derivative liabilities, at fair value | | $ | - | $ | 59 |
| | | | | | |
| Margin Balances Posted to (from) Counterparties | | | | | |
Futures contracts | Restricted cash | $ | 1 | $ | 537 |
Total margin balances on derivative contracts | | $ | 1 | $ | 537 |
Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar and T-note futures positions at December 31, 2020 and December 31, 2019.
| ($ in thousands) | | | | |
| As of December 31, 2020 | | | | |
| | Junior Subordinated Debt Funding Hedges |
| | Average | Weighted | Weighted | |
| | Contract | Average | Average | |
| | Notional | Entry | LIBOR | Open |
| Expiration Year | Amount | Rate | Rate | Equity(1) |
2021 | $1,000 | 1.02% | 0.18% | $(8) |
| ($ in thousands) | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | | | | | |
| | | Repurchase Agreement Funding Hedges | |
| | | Average | | | Weighted | | | Weighted | | | | |
| | | Contract | | | Average | | | Average | | | | |
| | | Notional | | | Entry | | | LIBOR | | | Open | |
| Expiration Year | | Amount | | | Rate | | | Rate | | | Equity(1) | |
| Eurodollar Futures Contracts (Short Positions) | | | | | | | | | | | | |
2020 | | $ | 120,000 | | | | 2.90 | % | | | 1.67 | % | | $ | (1,480 | ) |
2021 | | | 80,000 | | | | 2.80 | % | | | 1.57 | % | | | (984 | ) |
Total / Weighted Average | | $ | 200,000 | | | | 2.86 | % | | | 1.63 | % | | $ | (2,464 | ) |
Treasury Note Futures Contracts (Short Positions)(2) | | | | | | | | | | | | | | | | |
March 2020 5-year T-Note futures | | $ | 20,000 | | | | 1.96 | % | | | 2.06 | % | | | 88 | |
| | | | | | | | | | | | | | | | | |
| ($ in thousands) | | | | |
| As of December 31, 2019 | | | | |
| | Junior Subordinated Debt Funding Hedges |
| | Average | Weighted | Weighted | |
| | Contract | Average | Average | |
| | Notional | Entry | LIBOR | Open |
| Expiration Year | Amount | Rate | Rate | Equity(1) |
2020 | $19,500 | 1.92% | 1.68% | $(46) |
(1)
| Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
|
(2)
| T-Note futures contracts were valued at a price of $118.61 at December 31, 2019. The contract value of the short positions was $23.7 million.
|
The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019. There were no open TBA contracts as of December 31, 2020.
| ($ in thousands) | | | | | | |
| | | | Notional | | | | | | Net |
| | | | Amount | | Cost | | Market | | Carrying |
| | | | Long (Short)(1) | | Basis(2) | | Value(3) | | Value(4) |
| December 31, 2019 | | | | | | | | |
| 30-Year TBA Securities: | | | | | | | | |
| | 3.5% | $ | (50,000) | $ | (51,414) | $ | (51,438) | $ | (24) |
| | 4.5% | | (50,000) | | (52,621) | | (52,656) | | (35) |
| | Totals | $ | (100,000) | $ | (104,035) | $ | (104,094) | $ | (59) |
(1)
| Notional amount represents the par value (or principal balance) of the underlying Agency MBS.
|
(2)
| Cost basis represents the forward price to be paid (received) for the underlying Agency MBS.
|
(3)
| Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) as of period-end.
|
(4)
| Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our consolidated balance sheets.
|
Losses on Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2020 and 2019.
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Eurodollar futures contracts (short positions) | | | | | | |
Repurchase agreement funding hedges | | $ | (2,328 | ) | | $ | (2,709 | ) |
Junior subordinated debt funding hedges | | | (517 | ) | | | (390 | ) |
T-Note futures contracts (short positions) | | | | | | | | |
Repurchase agreement funding hedges | | | (1,007 | ) | | | (522 | ) |
Net TBA securities | | | (1,441 | ) | | | (2,197 | ) |
Losses on derivative instruments | | $ | (5,293 | ) | | $ | (5,818 | ) |
Credit Risk-Related Contingent Features
The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk in several ways. For instruments which are not centrally cleared on a registered exchange, the Company limits it counterparties to major financial institutions with acceptable credit ratings, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty recovering its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company’s derivative instruments are included in restricted cash on the consolidated balance sheets.
It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
NOTE 8. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of December 31, 2020 2022 and 2019.2021.
($ in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | | December 31, 2021 | |
| | | Repurchase | | | Derivative | | | | | | | Repurchase | | | Derivative | | | | | |
Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | |
PT MBS - at fair value | | $ | 42,975 | | | $ | - | | | $ | 42,975 | | | $ | 58,029 | | | $ | - | | | $ | 58,029 | |
Structured MBS - at fair value | | | 2,742 | | | | - | | | | 2,742 | | | | 2,759 | | | | - | | | | 2,759 | |
Accrued interest on pledged securities | | | 200 | | | | - | | | | 200 | | | | 230 | | | | - | | | | 230 | |
Cash | | | 454 | | | | 309 | | | | 763 | | | | 1,391 | | | | - | | | | 1,391 | |
Total | | $ | 46,371 | | | $ | 309 | | | $ | 46,680 | | | $ | 62,409 | | | $ | - | | | $ | 62,409 | |
| ($ in thousands) | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 | | | December 31, 2019 | |
| | | Repurchase | | | Derivative | | | | | | Repurchase | | | Derivative | | | | |
| Assets Pledged to Counterparties | | Agreements | | | Agreements | | | Total | | | Agreements | | | Agreements | | | Total | |
PT MBS - at fair value | | $ | 64,902 | | | $ | - | | | $ | 64,902 | | | $ | 216,231 | | | $ | - | | | $ | 216,231 | |
Structured MBS - at fair value | | | 251 | | | | - | | | | 251 | | | | 1,562 | | | | - | | | | 1,562 | |
Accrued interest on pledged securities | | | 201 | | | | - | | | | 201 | | | | 749 | | | | - | | | | 749 | |
Cash | | | 3,352 | | | | 1 | | | | 3,353 | | | | 3,778 | | | | 537 | | | | 4,315 | |
Total | | $ | 68,706 | | | $ | 1 | | | $ | 68,707 | | | $ | 222,320 | | | $ | 537 | | | $ | 222,857 | |
Assets Pledged from Counterparties
The table below summarizes assets pledged to Bimini from counterparties under repurchase agreements as of December 31, 2020 2022 and 2019.2021. 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 | | 2022 | | | 2021 | |
Cash | | $ | 148 | | | $ | 106 | |
Total | | $ | 148 | | | $ | 106 | |
| ($ in thousands) | | | | | | |
| Assets Pledged to Bimini | December 31, 2020 | | December 31, 2019 | |
Repurchase agreements | | $ | 80 | | | $ | - | |
Total | | $ | 80 | | | $ | - | |
NOTE 9.8. OFFSETTING ASSETS AND LIABILITIES
The Company’s repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis. The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of December 31, 2020 2022 and 2019.
| (in thousands) | | | | | | | | | | | | | | | | | | |
| Offsetting of Liabilities | |
| | | | | | Net Amount | | Gross Amount Not Offset in the | | | |
| | | | | | of Liabilities | | Consolidated Balance Sheet | | | |
| | | | Gross Amount | | Presented | | Financial | | | | | |
| | Gross Amount | | Offset in the | | in the | | Instruments | | Cash | | | |
| | of Recognized | | Consolidated | | Consolidated | | Posted as | | Posted as | | Net | |
| | Liabilities | | Balance Sheet | | Balance Sheet | | Collateral | | Collateral | | Amount | |
| December 31, 2020 | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 65,071 | | | $ | - | | | $ | 65,071 | | | $ | (61,719 | ) | | $ | (3,352 | ) | | $ | - | |
| | | $ | 65,071 | | | $ | - | | | $ | 65,071 | | | $ | (61,719 | ) | | $ | (3,352 | ) | | $ | - | |
| December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 209,954 | | | $ | - | | | $ | 209,954 | | | $ | (206,176 | ) | | $ | (3,778 | ) | | $ | - | |
TBA securities | | | 59 | | | | - | | | | 59 | | | | - | | | | - | | | | 59 | |
| | | $ | 210,013 | | | $ | - | | | $ | 210,013 | | | $ | (206,176 | ) | | $ | (3,778 | ) | | $ | 59 | |
2021.(in thousands) | | | | | | | | | | | | | | | | | | | | | | | | |
Offsetting of Liabilities | |
| | | | | | | | | | | Net Amount | | | Gross Amount Not Offset in the | | | | | |
| | | | | | | | | | | of Liabilities | | | Consolidated Balance Sheet | | | | | |
| | | | | | | Gross Amount | | | Presented | | | Financial | | | | | | | | | |
| | | Gross Amount | | | Offset in the | | | in the | | | Instruments | | | Cash | | | | | |
| | | of Recognized | | | Consolidated | | | Consolidated | | | Posted as | | | Posted as | | | Net | |
| | | Liabilities | | | Balance Sheet | | | Balance Sheet | | | Collateral | | | Collateral | | | Amount | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 43,818 | | | $ | - | | | $ | 43,818 | | | $ | (43,364 | ) | | $ | (454 | ) | | $ | - | |
| | | $ | 43,818 | | | $ | - | | | $ | 43,818 | | | $ | (43,364 | ) | | $ | (454 | ) | | $ | - | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase Agreements | | $ | 58,878 | | | $ | - | | | $ | 58,878 | | | $ | (57,487 | ) | | $ | (1,391 | ) | | $ | - | |
| | | $ | 58,878 | | | $ | - | | | $ | 58,878 | | | $ | (57,487 | ) | | $ | (1,391 | ) | | $ | - | |
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 87 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.
NOTE 10.9. LONG-TERM DEBT
Long-term debt at December 31, 2020 2022 and 20192021 is summarized as follows:
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Junior subordinated debt | | $ | 26,804 | | | $ | 26,804 | |
Note payable | | | 612 | | | | 635 | |
Total | | $ | 27,416 | | | $ | 27,439 | |
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Junior subordinated debt | | $ | 26,804 | | | $ | 26,804 | |
Note payable | | | 657 | | | | 677 | |
Paycheck Protection Plan ("PPP") loan | | | 152 | | | | - | |
Total | | $ | 27,613 | | | $ | 27,481 | |
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-partythird-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital. The debt securities held by BCTII are the sole assets of BCTII.
As of December 31, 2020 2022 and 2019,2021, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-monththree-month LIBOR rate. As of December 31, 2020,2022, the interest rate was 3.72%8.27%. 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 After June 30, 2023, an appropriate SOFR index will be used to determine 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 forrate on the equity method.
junior subordinated notes.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.
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500$5,000 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $152,000 through the Paycheck Protection Program (“PPP”) of the CARES Act in the form of a low interest loan. As discussed in Note 1,The PPP loans may be forgiven, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP and if certain other requirements are met. These loans carryloan had a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. Payments are deferred forThe Small Business Administration notified the first ten months afterCompany that, effective April 22, 2021, all principal and accrued interest under the completion of thePPP loan forgiveness covered period.
was forgiven.The table below presents the future scheduled principal payments on the Company’s long-term debt.
(in thousands) | | | | |
Year Ending December 31, | | Amounts | |
2023 | | $ | 24 | |
2024 | | | 25 | |
2025 | | | 26 | |
2026 | | | 28 | |
2027 | | | 29 | |
Thereafter | | | 27,284 | |
Total | | $ | 27,416 | |
| (in thousands) | | | |
Year Ending December 31, | | Amounts | |
2021 | | $ | 21 | |
2022 | | | 174 | |
2023 | | | 24 | |
2024 | | | 25 | |
2025 | | | 26 | |
Thereafter | | | 27,343 | |
Total | | $ | 27,613 | |
NOTE 11.10. CAPITAL STOCK
The total number of shares of capital stock which the Company has the authority to issue is 110,000,000 shares, classified as 100,000,000 shares of common stock, and 10,000,000 shares of preferred stock. The Board of Directors has the authority to classify any unissued shares by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares.
Of the 100,000,000 authorized shares of common stock, 98,000,000 shares were designated as Class A common stock, 1,000,000 shares were designated as Class B common stock and 1,000,000 shares were designated as Class C common stock. Holders of shares of common stock have no sinking fund or redemption rights and have no pre-emptive rights to subscribe for any of the Company’s securities. All common shares have a $0.001 par value.
Each outstanding share of Class A common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Holders of shares of Class A common stock are not entitled to cumulate their votes in the election of directors.
Subject to the preferential rights of any other class or series of stock and to the provisions of the Company's charter, as amended, regarding the restrictions on transfer of stock, holders of shares of Class A common stock are entitled to receive dividends on such stock if, as and when authorized and declared by the Board of Directors.
Each outstanding share of Class B common stock entitles the holder to one vote on all matters submitted to a vote of common stockholders, including the election of directors. Holders of shares of Class B common stock are not entitled to cumulate their votes in the election of directors. Holders of shares of Class A common stock and Class B common stock shall vote together as one class in all matters except that any matters which would adversely affect the rights and preferences of Class B common stock as a separate class shall require a separate approval by holders of a majority of the outstanding shares of Class B common stock. Holders of shares of Class B common stock are entitled to receive dividends on each share of Class B common stock in an amount equal to the dividends declared on each share of Class A common stock if, as and when authorized and declared by the Board of Directors.
Each share of Class B common stock shall automatically be converted into one share of Class A common stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A common stock, calculated on a pro forma basis as if conversion of the Class B common stock (or portion thereof to be converted) had occurred, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class B common stock to be converted into Class A common stock in any quarter shall not exceed an amount that will cause the stockholders' equity attributable to the Class A common stock calculated as set forth above to be less than $150.00 per share; provided further, that such conversions shall continue to occur until all shares of Class B common stock have been converted into shares of Class A common stock; and provided further, that the total number of shares of Class A common stock issuable upon conversion of the Class B common stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A common stock.
No dividends will be paid on the Class C common stock. Holders of shares of Class C common stock are not entitled to vote on any matter submitted to a vote of stockholders, including the election of directors, except that any matters that would adversely affect the rights and privileges of the Class C common stock as a separate class shall require the approval of a majority of the Class C common stock.
Each share of Class C common stock shall automatically be converted into one share of Class A common stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A common stock, calculated on a pro forma basis as if conversion of the Class C common stock had occurred and giving effect to the conversion of all of the shares of Class B common stock as of such date, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class C common stock to be converted into Class A common stock shall not exceed an amount that will cause the stockholders' equity attributable to the Class A common stock calculated as set forth above to be less than $150.00 per share; and provided further, that such conversions shall continue to occur until all shares of Class C common stock have been converted into shares of Class A common stock and provided further, that the total number of shares of Class A common stock issuable upon conversion of the Class C common stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A common stock.
There are 10,000,000 authorized shares of preferred stock, with a $0.001 par value per share. The Company's Board of Directors has the authority to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series of preferred stock previously authorized by the Board of Directors. Prior to issuance of shares of each class or series of preferred stock, the Board of Directors is required by the Company’s charter to fix the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series.
Classified and Designated Shares
Pursuant to the Company’s supplementary amendment of its charter, effective November 3,2005, and by resolutions adopted on September 29,2005, the Company’s Board of Directors classified and designated 1,800,000 shares of the authorized but unissued preferred stock, $0.001 par value, as Class A Redeemable Preferred Stock and 2,000,000 shares of the authorized but unissued preferred stock as Class B Redeemable Preferred Stock.
The Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock rank equal to each other and shall have the same preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms; provided, however that the redemption provisions of the Class A Redeemable Preferred Stock and the Class B Redeemable Preferred Stock differ. Each outstanding share of Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock shall have one-fifthone-fifth of a vote on all matters submitted to a vote of stockholders (or such lesser fraction of a vote as would be required to comply with the rules and regulations of the NYSE relating to the Company’s right to issue securities without obtaining a stockholder vote). Holders of shares of preferred stock shall vote together with holders of shares of common stock as one class in all matters that would be subject to a vote of stockholders.
The previously outstanding shares of Class A Redeemable Preferred Stock were converted into Class A common stock on April 28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.
In 2015 the Board approved Articles Supplementary to the Company’s charter reclassifying and designating 1,800,000 shares of authorized but unissued Class A Redeemable Preferred Stock and 2,000,000 shares of authorized but unissued Class B Redeemable Preferred Stock into undesignated preferred stock, par value $0.001 per share, of the Company (“Preferred Stock”). After giving effect to the reclassification and designation of the shares of Class A Preferred Stock and Class B Preferred Stock, the Company has authority to issue 10,000,000 shares of undesignated Preferred Stock and no shares of Class A Preferred Stock or Class B Preferred Stock. The Articles Supplementary were filed with the State Department of Assessments and Taxation of Maryland (the “SDAT”) and became effective upon filing on December 21, 2015.
In 2015 the Board approved Articles Supplementary to the Company’s charter creating a new series of Preferred Stock designated as Series A Junior Preferred Stock, par value $0.001 per share, of the Company (the “Series A Preferred Stock”). The Articles Supplementary were filed with the SDAT and became effective upon filing on December 21, 2015.
On December 21, 2015 the Board adopted a rights agreement and declared a distribution of one preferred stock purchase right (“Right”) for each outstanding share of the Company’s Class A common stock, Class B common stock, and Class C common stock. The distribution was payable to stockholders of record as of the close of business on December 21, 2015.
The Rights
. Subject to the terms, provisions and conditions of the Rights Plan, if the Rights become exercisable, each Right would initially represent the right to purchase from the Company
one ten-thousandthten-thousandth of a share of Series A Preferred Stock for a purchase price of $4.76, subject to adjustment in accordance with the terms of the Rights Plan (the “Purchase Price”). If issued, each fractional share of Series A Preferred Stock would give the stockholder approximately the same distribution, voting and liquidation rights as does
one share of the Company’s Class A common stock. However, prior to exercise, a Right does
not give its holder any rights as a stockholder of the Company, including without limitation any distribution, voting or liquidation rights.
Exercisability. The Rights will generally not be exercisable until the earlier of (i) 10 business days after a public announcement by the Company that a person or group has acquired 4.9% or more of the outstanding Class A common stock without the approval of the Board of Directors (an “Acquiring Person”) and (ii) 10 business days after the commencement of a tender or exchange offer by a person or group for 4.9% or more of the Class A common stock.
The date that the Rights may first become exercisable is referred to as the “Distribution Date.” Until the Distribution Date, the Class A common stock, Class B common stock and Class C common stock certificates will represent the Rights and will contain a notation to that effect. Any transfer of shares of Class A common stock, Class B common stock and/or Class C common stock prior to the Distribution Date will constitute a transfer of the associated Rights. After the Distribution Date, the Rights may be transferred other than in connection with the transfer of the underlying shares of Class A common stock, Class B common stock or Class C common stock.
After the Distribution Date and following a determination by the Board that a person is an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of a Right and payment of the Purchase Price, that number of shares of Class A common stock, Class B common stock or Class C common stock, as the case may be, having a market value of two times the Purchase Price (or, at our option, shares of Series A Preferred Stock or other consideration as provided in the Rights Plan).
Exchange
. After the Distribution Date and following a determination by the Board that a person or group is an Acquiring Person, the Board
may exchange the Rights (other than Rights owned by such an Acquiring Person which will have become void), in whole or in part, at an exchange ratio of
one share of Class A common stock, Class B common stock or Class C common stock, as the case
may be, or a fractional share of Series A Preferred Stock (or of a share of a similar class or series of the Company’s preferred stock having similar Rights, preferences and privileges) of equivalent value, per Right (subject to adjustment).
Expiration
. The Rights and the Rights Plan will expire on the earliest of (i)
December 21,2025, (ii) the time at which the Rights are redeemed pursuant to the Rights Plan, (iii) the time at which the Rights are exchanged pursuant to the Rights Plan, (iv) the repeal of Section
382 of the Code or any successor statute if the Board determines that the Rights Plan is
no longer necessary for the preservation of the applicable tax benefits, (v) the beginning of a taxable year of the Company to which the Board determines that
no applicable tax benefits
may be carried forward and (vi) the close of business on
June 30,2016 if approval of the Rights Plan by the Company’s stockholders has
not been obtained.
Redemption.
At any time prior to the time an Acquiring Person becomes such, the Board
may redeem the Rights in whole, but
not in part, at a price of $0.001 per Right (the “Redemption Price”). The redemption of the Rights
may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion
may establish. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Anti-Dilution Provisions.
The Board
may adjust the Purchase Price, the number of shares of Series A Preferred Stock or other securities issuable and the number of outstanding Rights to prevent dilution that
may occur as a result of certain events, including among others, a stock dividend, a forward or reverse stock split or a reclassification of the preferred shares or Class A common stock, Class B common stock or Class C common stock.
No adjustments to the Purchase Price of less than 1% will be made.
Anti-Takeover Effects.
While this was
not the purpose of the Board when adopting the Rights Plan, the Rights will have certain anti-takeover effects. The Rights will cause substantial dilution to any person or group that attempts to acquire the Company without the approval of the Board. As a result, the overall effect of the Rights
may be to render more difficult or discourage any attempt to acquire the Company even if such acquisition
may be favorable to the interests of the Company’s stockholders. Because the Board can redeem the Rights, the Rights should
not interfere with a merger or other business combination approved by the Board.
Amendments.
Before the Distribution Date, the Board
may amend or supplement the Rights Plan without the consent of the holders of the Rights. After the Distribution Date, the Board
may amend or supplement the Rights Plan only to cure an ambiguity, to alter time period provisions, to correct inconsistent provisions, or to make any additional changes to the Rights Plan, but only to the extent that those changes do
not impair or adversely affect, in any material respect, any Rights holder and do
not result in the Rights again becoming redeemable, and
no such amendment
may cause the Rights again to become redeemable or cause this Rights Plan again to become amendable other than in accordance with the applicable timing of the Rights Plan.
There were no issuances of the Company's Class A Common Stock, Class B Common Stock or Class C Common Stock during the years ended December 31, 2020 2022 and 2019.2021.
PlansOn March 26, 2018, the Board of Directors of Bimini Capital Management, Inc.the Company (the “Company”“Board”) approved a Stock Repurchase Plan (“(the “2018Repurchase Plan”). Pursuant to the 2018Repurchase Plan, the Company maycould purchase up to 500,000 shares of its Class A Common Stock from time to time, subject to certain limitations imposed by Rule 10b-1810b-18 of the Securities Exchange Act of 1934. The 2018 Repurchase Plan was terminated on September 16, 2021. During the period beginning January 1, 2021 through September 16, 2021, the Company repurchased a total of 1,195 shares under the 2018 Repurchase Plan at an aggregate cost of approximately $2,298, including commissions and fees, for a weighted average price of $1.92 per share. From the inception of the 2018 Repurchase Plan through its termination, the Company repurchased a total of 71,598 shares at an aggregate cost of approximately $169,243, including commissions and fees, for a weighted average price of $2.36 per share.
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common 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 2021Repurchase Plan does not obligate the CompanyCompany to purchase any shares. shares, and it expires on September 16, 2023. The authorization for the 2021 Repurchase Plan was originally set to expire on November 15, 2018, but it has been extendedmay be terminated, increased or decreased by the Company’s Board of Directors and it is currently set to expire on November 15, 2021.
Fromin its discretion at any time. During the inception of the Repurchase Plan through year ended December 31, 2020,2022, the Company repurchased a total of 70,404682,306 shares at an aggregate cost of approximately $166,945,$1.1 million, including commissions and fees, for a weighted average price of $2.37$1.54 per share.
share under the 2021 repurchase Plan. During the year ended December 31, 2021, the Company repurchased a total of 92,287 shares at an aggregate cost of approximately $0.2 million, including commissions and fees, for a weighted average price of $2.09 per share under the 2021 repurchase Plan.The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023.
Tender Offer
In July 2019, 2021, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $2.2$1.5 million, excluding fees and related expenses, to repurchase 1.1 million812,879 shares of Bimini Capital’s Class A common stock at a price of $2.00$1.85 per share. The aggregate cost of the tender offer, including commissions and fees, was approximately $1.6 million.
NOTE 12.11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination operations ceased in 2007. In November 2021, Citigroup notified the Company of additional indemnity claims totaling $0.2 million. The demand isdemands 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 demanddemands vigorously. No provision or accrual has been recorded as of December 31, 2020 related2022.related to the Citigroup demand.
demands.Management is not aware of any other significant reported or unreported contingencies at December 31, 2020.2022.
In 2020,2022, the Company recorded an income tax benefitprovision of $1.4$11.9 million, including an $0.3a $12.2 million increase in the deferred tax asset valuation allowance, primarily as a result of management’s reassessment of the Company’s ability to utilize net operating losses (“NOLs”) and capital loss carryforwards to offset future taxable income. In 2019,2021, the Company recorded an income tax benefit of $10.3$0.4 million, including an $11.1a $2.2 million decrease in the deferred tax asset valuation allowance as a result of management’s reassessment of the Company’s ability to utilize NOLs and capital loss carryforwards to offset future taxable income.
The income tax benefit included in the consolidated statements of operations consists of the following for the years ended December 31, 2020 2022 and 2019:
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Current | | $ | 10 | | | $ | (196 | ) |
Deferred | | | (1,379 | ) | | | (10,086 | ) |
Income tax benefit, net | | $ | (1,369 | ) | | $ | (10,282 | ) |
2021:(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Current | | $ | - | | | $ | - | |
Deferred | | | 11,858 | | | | (368 | ) |
Income tax provision (benefit), net | | $ | 11,858 | | | $ | (368 | ) |
The income tax provision differs from the amount computed by applying the federal income tax statutory rate of 21 percent on income or loss before income tax expense. A reconciliation for the years ended December 31, 2020 2022 and 20192021 is presented in the table below.
| (in thousands) | | | | | | |
| | | 2020 | | | 2019 | |
Federal tax (benefit) provision based on statutory rate applicable for each year | | $ | (1,440 | ) | | $ | 634 | |
State income tax (benefit) provision | | | (302 | ) | | | 164 | |
Increase (decrease) of deferred tax asset valuation allowance | | | 349 | | | | (11,109 | ) |
Other | | | 24 | | | | 29 | |
Income tax benefit | | $ | (1,369 | ) | | $ | (10,282 | ) |
(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Federal tax benefit based on statutory rate applicable for each year | | $ | (1,673 | ) | | $ | (19 | ) |
State income tax benefit | | | (344 | ) | | | (8 | ) |
Non-deductible expenses | | | 1,249 | | | | 631 | |
Increase (decrease) of deferred tax asset valuation allowance | | | 12,188 | | | | (2,191 | ) |
Other | | | 438 | | | | 1,219 | |
Income tax provision (benefit) | | $ | 11,858 | | | $ | (368 | ) |
Deferred tax assets consisted of the following as of December 31, 2020 2022 and 2019:
| (in thousands) | |
| | | 2020 | | | 2019 | |
Deferred tax assets: | | | | | | |
Net operating loss carryforwards | | $ | 58,701 | | | $ | 58,250 | |
Orchid Island Capital, Inc. common stock | | | 3,083 | | | | 3,338 | |
MBS unrealized losses and (gains)
| | | 241 | | | | (377 | ) |
Capital loss carryforwards | | | 2,573 | | | | 1,743 | |
Management agreement | | | 813 | | | | 813 | |
Other | | | 1,232 | | | | 1,148 | |
| | | | 66,643 | | | | 64,915 | |
Valuation allowance | | | (31,975 | ) | | | (31,626 | ) |
Net deferred tax assets | | $ | 34,668 | | | $ | 33,289 | |
2021:(in thousands) | | | | | | | | |
| | | 2022 | | | 2021 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 56,278 | | | $ | 58,391 | |
Orchid Island Capital, Inc. common stock | | | 4,530 | | | | 3,198 | |
MBS unrealized losses and gains | | | 1,118 | | | | 582 | |
Capital loss carryforwards | | | 2,395 | | | | 1,423 | |
Management agreement | | | 813 | | | | 813 | |
Other | | | 16 | | | | 413 | |
| | | | 65,150 | | | | 64,820 | |
Valuation allowance | | | (41,972 | ) | | | (29,784 | ) |
Net deferred tax assets | | $ | 23,178 | | | $ | 35,036 | |
As of December 31, 2020 2022 and 2019,2021, the Company had federal NOL carryforwards of approximately $268.9approximately $260.6 million and $267.1$267.7 million, respectively, and Florida NOL carryforwards of $40.8$35.5 million and $39.1$39.6 million, respectively.respectively. The NOL carryforwards can be used to offset future taxable income and will begin to expire in 2026, and the capital loss carryforwards will begin to expire in 2022.
In connection with Orchid’s 2013 IPO, Bimini Advisors paid for, and expensed for GAAP purposes, certain offering costs totaling approximately $3.2 million. For tax purposes, these offering costs created an intangible asset related to the Orchid management agreement with a tax basis of $3.2 million. The deferred tax asset related to the intangible asset at December 31, 2020 2022 and 20192021 totaled $0.8 million and $0.8 million, respectively.
In assessing the realizability of deferred tax assets, management considers both positive and negative evidence 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. TheAs of December 31, 2022, the valuation allowance recognized against the deferred tax asset is based on management’s estimated projections of future taxable income, and the projected ability to utilize the NOL carryforwards to offset that projected taxable income before the NOLs expire. Utilization of the NOLs is based on these estimates and the assumptions that management will be able to reinvest retained earnings in order to grow the MBS portfolio going forward and that market value will not be eroded due to adverse market conditions or hedging inefficiencies. With respect to the taxable income projections, management estimates the dividends expected to be received on its Orchid share holdings as well as the management fees and overhead sharing payments it will receive from Orchid. With respect to the MBS portfolio, management makes estimates of various metrics such as the yields on the assets it plans to acquire, its future funding and interest costs, future prepayment speeds and net interest margin, among others. Estimates arewere also made for other assets and expenses. Changes in the taxable income projections have a direct impact on the amount of the valuation allowance, and the impact in any reporting period may be significant. Utilization of the NOLs is based on these estimates and the assumptions that management will be able to reinvest retained earnings in order to grow the MBS portfolio going forward and that market value will not be eroded due to adverse market conditions or hedging inefficiencies. These estimates and assumptions may change from year to year to the extent Orchid’s book value changes, thus changing projected management fees and overhead sharing payments, and/or market conditions, including changes in interest rates, such that estimates with respect to the portfolio metrics warrant revisions.
During 2020 and 2019, the
The Company continues to hold a minimal amount of residual interests in real estate mortgage investment conduits (“REMICs”), some of which generate excess inclusion income (“EII”). These residual interests have no recorded value on the balance sheet. In its 2009 tax return, the Company disclosed a tax filing position related to the EII taxable income and has since included a notice of inconsistent treatment in its tax returns to disclose the position. The tax filing position will continue to be disclosed with respect to the remaining securitizations as long as they are held.
The Company has not identified any unrecognized tax benefits that would result in liabilities its consolidated financial statements. The Company has not had any settlements in the current period with taxing authorities and is not currently under audit. Additionally, no tax benefits have been recognized in the consolidated financial statements as a result of a lapse of the applicable statute of limitations.
NOTE 14.13. EARNINGS PER SHARE
Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. The Class B common stock is included in the computation of basic EPS using the two-classtwo-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at December 31, 2020 2022 and 2019.
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 December 31, 2020 2022 and 2019.
2021.The table below reconciles the numerators and denominators of the basic and diluted EPS.
(in thousands, except per-share information) | | | | | | | | |
| | | 2022 | | | 2021 | |
Basic and diluted EPS per Class A common share: | | | | | | | | |
(Loss) income attributable to Class A common shares: | | | | | | | | |
Basic and diluted | | $ | (19,762 | ) | | $ | 274 | |
Weighted average common shares: | | | | | | | | |
Class A common shares outstanding at the balance sheet date | | | 10,020 | | | | 10,702 | |
Effect of weighting | | | 374 | | | | 496 | |
Weighted average shares-basic and diluted | | | 10,394 | | | | 11,198 | |
(Loss) income per Class A common share: | | | | | | | | |
Basic and diluted | | $ | (1.90 | ) | | $ | 0.02 | |
(in thousands, except per-share information) | | | | | | | | |
| | | 2022 | | | 2021 | |
Basic and diluted EPS per Class B common share: | | | | | | | | |
(Loss) income attributable to Class B common shares: | | | | | | | | |
Basic and diluted | | $ | (61 | ) | | $ | 1 | |
Weighted average common shares: | | | | | | | | |
Class B common shares outstanding at the balance sheet date | | | 32 | | | | 32 | |
Effect of weighting | | | - | | | | - | |
Weighted average shares-basic and diluted | | | 32 | | | | 32 | |
(Loss) income per Class B common share: | | | | | | | | |
Basic and diluted | | $ | (1.90 | ) | | $ | 0.02 | |
| (in thousands, except per-share information) | | | | | | |
| | | 2020 | | | 2019 | |
| Basic and diluted EPS per Class A common share: | | | | | | |
(Loss) income attributable to Class A common shares: | | | | | | |
Basic and diluted | | $ | (5,474 | ) | | $ | 13,265 | |
Weighted average common shares: | | | | | | | | |
Class A common shares outstanding at the balance sheet date | | | 11,609 | | | | 11,609 | |
Effect of weighting | | | - | | | | 569 | |
Weighted average shares-basic and diluted | | | 11,609 | | | | 12,178 | |
(Loss) income per Class A common share: | | | | | | | | |
Basic and diluted | | $ | (0.47 | ) | | $ | 1.09 | |
| (in thousands, except per-share information) | | | | | | |
| | | 2020 | | | 2019 | |
| Basic and diluted EPS per Class B common share: | | | | | | |
(Loss) income attributable to Class B common shares: | | | | | | |
Basic and diluted | | $ | (15 | ) | | $ | 35 | |
Weighted average common shares: | | | | | | | | |
Class B common shares outstanding at the balance sheet date | | | 32 | | | | 32 | |
Effect of weighting | | | - | | | | - | |
Weighted average shares-basic and diluted | | | 32 | | | | 32 | |
(Loss) income per Class B common share: | | | | | | | | |
Basic and diluted | | $ | (0.47 | ) | | $ | 1.09 | |
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- 78 -
| ● | 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 20202022 and 2019.2021. 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. FairRetained interests have a recorded fair value measurements forof zero as of December 31, 2022 and 2021, as the prospect of future cash flows is uncertain. Any cash received from the retained interests are generated byis reflected as a model that requires management to make a significant numbergain in the consolidated statements of assumptions, and this model resulted in a value of zero at both December 31, 2020 and 2019.
operations.The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes, when available.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 the volatility). The appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2 valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 2022 and 2019:
| (in thousands) | | | | | | | | | | | | |
| | | | | | Quoted Prices | | | | | | | |
| | | | | | in Active | | | Significant | | | | |
| | | | | | Markets for | | | Other | | | Significant | |
| | | | | | Identical | | | Observable | | | Unobservable | |
| | | Fair Value | | | Assets | | | Inputs | | | Inputs | |
| | | Measurements | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| December 31, 2020 | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 65,178 | | | $ | - | | | $ | 65,178 | | | $ | - | |
Orchid Island Capital, Inc. common stock | | | 13,548 | | | | 13,548 | | | | - | | | | - | |
| December 31, 2019 | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 217,841 | | | $ | - | | | $ | 217,841 | | | $ | - | |
Orchid Island Capital, Inc. common stock | | | 8,892 | | | | 8,892 | | | | - | | | | - | |
TBA securities | | | (59 | ) | | | - | | | | (59 | ) | | | - | |
The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2020 and 2019:
| (in thousands) | | | | | | |
| | | Retained Interests | |
| | | 2020 | | | 2019 | |
Gain included in earnings | | | 59 | | | | 315 | |
Collections | | | (59 | ) | | | (315 | ) |
Balances, 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) | |
December 31, 2022 | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 45,893 | | | $ | - | | | $ | 45,893 | | | $ | - | |
Orchid Island Capital, Inc. common stock | | | 5,975 | | | | 5,975 | | | | - | | | | - | |
December 31, 2021 | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 60,803 | | | $ | - | | | $ | 60,803 | | | $ | - | |
Orchid Island Capital, Inc. common stock | | | 11,679 | | | | 11,679 | | | | - | | | | - | |
During the years ended December 31, 2020 2022 and 2019,2021, there were no transfers of financial assets or liabilities between levels 1,2 or 3.
NOTE 16.15. SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments; the asset management segment and the investment portfolio segment.
The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid. Total revenue received under this management agreement for the years ended December 31, 2020 2022 and 2019,2021, were approximately $6.8$13.0 million and $6.9$9.8 million, respectively, accounting for approximately 55%80% and 43%70% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted by Royal Palm. The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.
Segment information for the years ended December 31, 2020 2022 and 20192021 is as follows:
(in thousands) | | | | | | | | | | | | | | | | | | | | | |
| | | Asset Management | | | Investment Portfolio | | | Corporate | | | | Eliminations | | | Total | |
2022 | | | | | | | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 12,996 | | | $ | - | | | $ | - | | | | $ | - | | | $ | 12,996 | |
Advisory services, other operating segments(1) | | | 115 | | | | - | | | | - | | | | | (115 | ) | | | - | |
Interest and dividend income | | | - | | | | 3,155 | | | | - | | | | | - | | | | 3,155 | |
Interest expense | | | - | | | | (715 | ) | | | (1,416 | ) | (2) | | | - | | | | (2,131 | ) |
Net revenues | | | 13,111 | | | | 2,440 | | | | (1,416 | ) | | | | (115 | ) | | | 14,020 | |
Other (expense) income | | | - | | | | (12,212 | ) | | | 66 | | (3) | | | - | | | | (12,146 | ) |
Operating expenses(4) | | | (7,805 | ) | | | (2,034 | ) | | | - | | | | | - | | | | (9,839 | ) |
Intercompany expenses(1) | | | - | | | | (115 | ) | | | - | | | | | 115 | | | | - | |
Income (loss) before income taxes | | $ | 5,306 | | | $ | (11,921 | ) | | $ | (1,350 | ) | | | $ | - | | | $ | (7,965 | ) |
Year end assets | | $ | 1,970 | | | $ | 77,483 | | | $ | 6,864 | | | | $ | - | | | $ | 86,317 | |
- 80 -
| (in thousands) | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2020 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 6,795 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,795 | |
Advisory services, other operating segments(1) | | | 152 | | | | - | | | | - | | | | (152 | ) | | | - | |
Interest and dividend income | | | - | | | | 5,517 | | | | - | | | | - | | | | 5,517 | |
Interest expense | | | - | | | | (1,074 | ) | | | (1,151 | )(2) | | | - | | | | (2,225 | ) |
Net revenues | | | 6,947 | | | | 4,443 | | | | (1,151 | ) | | | (152 | ) | | | 10,087 | |
Other expense | | | - | | | | (9,825 | ) | | | (454 | )(3) | | | - | | | | (10,279 | ) |
Operating expenses(4) | | | (3,653 | ) | | | (3,014 | ) | | | - | | | | - | | | | (6,667 | ) |
Intercompany expenses(1) | | | - | | | | (152 | ) | | | - | | | | 152 | | | | - | |
Income (loss) before income taxes | | $ | 3,294 | | | $ | (8,548 | ) | | $ | (1,605 | ) | | $ | - | | | $ | (6,859 | ) |
Assets | | $ | 1,469 | | | $ | 113,764 | | | $ | 13,468 | | | $ | - | | | $ | 128,701 | |
| | | | | | | | | | | | | | | | |
| | | Asset | | | Investment | | | | | | | | | | |
| | | Management | | | Portfolio | | | Corporate | | | Eliminations | | | Total | |
| 2019 | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 6,908 | | | $ | - | | | $ | - | | | $ | - | | | $ | 6,908 | |
Advisory services, other operating segments(1) | | | 271 | | | | - | | | | - | | | | (271 | ) | | | - | |
Interest and dividend income | | | - | | | | 9,327 | | | | 1 | | | | - | | | | 9,328 | |
Interest expense | | | - | | | | (4,603 | ) | | | (1,572 | )(2) | | | - | | | | (6,175 | ) |
Net revenues | | | 7,179 | | | | 4,724 | | | | (1,571 | ) | | | (271 | ) | | | 10,061 | |
Other income (expense) | | | - | | | | 112 | | | | (715 | )(3) | | | - | | | | (603 | ) |
Operating expenses(4) | | | (2,750 | ) | | | (3,690 | ) | | | - | | | | - | | | | (6,440 | ) |
Intercompany expenses(1) | | | - | | | | (271 | ) | | | - | | | | 271 | | | | - | |
Income (loss) before income taxes | | $ | 4,429 | | | $ | 875 | | | $ | (2,286 | ) | | $ | - | | | $ | 3,018 | |
Assets | | $ | 1,457 | | | $ | 263,223 | | | $ | 14,809 | | | $ | - | | | $ | 279,489 | |
| | | Asset Management | | | Investment Portfolio | | | Corporate | | | | Eliminations | | | Total | |
2021 | | | | | | | | | | | | | | | | | | | | | |
Advisory services, external customers | | $ | 9,788 | | | $ | - | | | $ | - | | | | $ | - | | | $ | 9,788 | |
Advisory services, other operating segments(1) | | | 147 | | | | - | | | | - | | | | | (147 | ) | | | - | |
Interest and dividend income | | | - | | | | 4,262 | | | | - | | | | | - | | | | 4,262 | |
Interest expense | | | - | | | | (116 | ) | | | (997 | ) | (2) | | | - | | | | (1,113 | ) |
Net revenues | | | 9,935 | | | | 4,146 | | | | (997 | ) | | | | (147 | ) | | | 12,937 | |
Other expense | | | - | | | | (4,898 | ) | | | 154 | | (3) | | | - | | | | (4,744 | ) |
Operating expenses(4) | | | (5,676 | ) | | | (2,609 | ) | | | - | | | | | - | | | | (8,285 | ) |
Intercompany expenses(1) | | | - | | | | (147 | ) | | | - | | | | | 147 | | | | - | |
Income (loss) before income taxes | | $ | 4,259 | | | $ | (3,508 | ) | | $ | (843 | ) | | | $ | - | | | $ | (92 | ) |
Year end assets | | $ | 1,901 | | | $ | 111,022 | | | $ | 9,162 | | | | $ | - | | | $ | 122,085 | |
(1)
(1) | Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
(2)
(2) | Includes interest on long-term debt. |
(3)
(3) | Includes income recognized on the forgiveness of the PPP loan and gains (losses) on Eurodollar futures contracts entered into as a hedge on junior subordinated notes and fair value adjustments on retained interests in securitizations. |
(4)
(4) | Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
NOTE 17.16. RELATED PARTY TRANSACTIONS
Other Relationships with Orchid
At December 31, 2020 2022 and 2019,2021, the Company owned 2,595,357 and 1,520,036 shares of Orchid common stock respectively, representing approximately 3.4%1.6% and 2.4%1.5%, respectively, of Orchid’s outstanding common stock, on such dates. During the years ended December 31, 2020 2022 and 2019,2021, the Company received dividends on this common stock investment of approximately $1.8$1.3 million and $1.5$2.0 million, respectively.
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, receivesis eligible to receive compensation from Orchid and owns shares of common stock of Orchid. Also, Hunter Haas, our Chief Financial Officer, Chief Investment Officer and Treasurer, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors, receivesis eligible to receive compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our independent directors, each own shares of common stock of Orchid.
NOTE 18. SUBSEQUENT EVENTS
COVID-19 and CARES Act Update
The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency MBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons through March 31, 2021. In addition, on February 9, 2021, the FHFA announced that the foreclosure moratorium begun under the CARES Act for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate owned by Fannie Mae and Freddie Mac were extended until March 31, 2021. On February 16, 2021, the U.S. Housing and Urban Development Department announced the extension of the FHA eviction and foreclosure moratorium to June 30, 2021. The moratoriums on foreclosures and evictions will likely delay potential defaults on loans that would otherwise be bought out of Agency MBS pools. Depending on the ultimate resolution of the foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As the majority of the Company’s Agency MBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in question.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
We had no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting principles or practices or financial statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“the CEO”) and Chief Financial Officer (“the CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company and its subsidiaries is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information the Company must disclose in its periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.
Changes in Internal ControlsControl over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. In response to the COVID-19 pandemic, Company employees began working from home on March 23, 2020.2020 and generally returned to the office in June 2021. Management has takentook measures to ensure that the Company’s internal control over financial reporting arewere unchanged during this period.
Management’sManagement’s Report of Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of consolidated financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.2022. In making this assessment, the Company’s management used criteria set forth in Internal Control—Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s assessment, the Company’s management believes that, as of December 31, 2020,2022, the Company’s internal control over financial reporting was effective based on those criteria.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
ITEM 10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Company’s 20212022 Annual Meeting of Stockholders, which the Company expects to file with the U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after December 31, 20202022 (the "Proxy Statement").
ITEM 11.
Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference to the Proxy Statement and to Part II, Item 5 of this Form 10-K.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.
ITEM 14.
Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated herein by reference to the Proxy Statement.
PART IV
ITEM 15.
Exhibits, Financial Statement Schedules.
a. | Financial Statements. The consolidated financial statements of the Company, together with the report of Independent Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form 10-K and are incorporated herein by reference. |
The following information is filed as part of this Form 10-K:
b. | Financial Statement Schedules.
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b. Financial Statement Schedules.
Not applicable.
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10.2 | |
10.3 | Second Amendment to Management Agreement dated as of June 30, 2014, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated July 3, 2014. |
10.4 | Third Amendment to Management Agreement dated as of November 16, 2021, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 17, 2021, filed with the SEC on November 18, 2021. |
10.5 | Investment Allocation Agreement among the Company, Orchid Island Capital, Inc. and Bimini Advisors, LLC dated February 20, 2013, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated February 20, 2013, filed with the SEC on February 20, 2013.* |
10.6 | |
10.7 | Agreement between the Company and G. Hunter Haas, IV dated June 30, 2009, regarding compensation payable in connection with certain termination or change of control events, incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed with the SEC on July 2, 2009.* |
21.1 | Subsidiaries of the Registrant** |
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101.INS | Inline Instance Document**** |
101.SCH | Inline Taxonomy Extension Schema Document**** |
101.CAL | Inline Taxonomy Extension Calculation Linkbase Document**** |
101.DEF | Additional Inline Taxonomy Extension Definition Linkbase Document**** |
101.LAB | Inline Taxonomy Extension Label Linkbase Document**** |
101.PRE | Inline Taxonomy Extension Presentation Linkbase Document**** |
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
* | Management compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K. |
**** | Submitted electronically herewith. |
* Management compensatory plan or arrangement required to be filed by Item 601- 86 -
** Filed herewith.
*** Furnished herewith
**** Submitted electronically herewith.
ITEM 16.
Form 10-K Summary.The Company has elected not to provide summary information.
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.
| | BIMINI CAPITAL MANAGEMENT, INC.
Date: March 15, 2021
| | By:
| /s/ Robert E. Cauley
| | | | | | Robert E. Cauley
Chairman and Chief Executive Officer
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Date: March 15, 2021
| | By:
| /s/ G. Hunter Haas, IV
| | | | | | | | | | | | | | | | | | Date: March 10, 2023 | | By: | /s/ Robert E. Cauley | | | | | Robert E. Cauley Chairman and Chief Executive Officer |
Date: March 10, 2023 | | By: | /s/ G. Hunter Haas, IV | | | | | G. Hunter Haas, IV President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2021. | | | | | | | | | | | | Director, Chairman of the Board and | | | | | | | | | | President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | | | | | | | | | | | | | | | | | | | | |
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