bmnm10q20210930p1i0.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☑
QUARTERLY
 
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31,September 30, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________
to ___________
Commission File Number
:
 
001-32171
Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
72-1571637
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check
 
check mark
whether the
 
registrant (1) has filed
 
filed all
reports required
 
to be filed
 
filed by
Section 13 or
 
15(d) of the
 
the Securities
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such reports),
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
ý
 
No
☐
Indicate by check
mark whether the registrant
 
the registrant has submitted electronically every
 
every Interactive Data File required
 
to be submitted pursuant to
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
 
(ormonths (or for such shorter period that the registrant was required
 
required to submit such
files).
 
Yes
ý
 
No
☐
Indicate by check mark whether the registrant is a
 
a large accelerated filer, an accelerated filer,
 
an accelerated filer, a non-accelerated filer,
a smaller reporting company,
 
company, or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☐
 
(Do not check if a smaller reporting company)
Smaller reporting company
☒
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes
☐
 
No
ý
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
May 14,November 9, 2021
11,608,55510,726,864
Class B Common Stock, $0.001 par value
May 14,November 9, 2021
31,938
Class C Common Stock, $0.001 par value
May 14,November 9, 2021
31,938
 
BIMINI CAPITAL MANAGEMENT, INC.
 
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Consolidated
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Consolidated
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Consolidated
 
Statement
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Consolidated
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to
Condensed
 
Consolidated
 
Financial
Statements
(unaudited)
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
21
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
About Market
 
Risk
4344
ITEM 4. Controls
 
and Procedures
4355
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
4446
ITEM 1A. Risk
 
Risk Factors
4446
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
4446
ITEM 3. Defaults
 
Upon Senior
 
Securities
4446
ITEM 4. Mine
 
Safety Disclosures
4446
ITEM 5. Other
 
Information
4446
ITEM 6. Exhibits
4446
SIGNATURES
4648
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 1 -
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED BALANCE
 
BALANCE SHEETS
(Unaudited)
March 31,September 30, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
72,833,00664,371,408
$
65,153,274
Unpledged
22,82618,869
24,957
Total mortgage
 
-backed securities
72,855,83264,390,277
65,178,231
Cash and cash equivalents
5,973,2477,854,843
7,558,342
Restricted cash
4,037,6551,690,160
3,353,015
Orchid Island Capital, Inc. common stock, at fair value
15,598,09612,691,296
13,547,764
Accrued interest receivable
212,051247,716
202,192
Property and equipment, net
2,076,1272,041,503
2,093,440
Deferred tax assets
34,204,36434,332,078
34,668,467
Due from affiliates
711,657934,797
632,471
Other assets
1,564,0051,551,073
1,466,647
Total Assets
$
137,233,034125,733,743
$
128,700,569
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
73,135,99963,159,999
$
65,071,113
Long-term debt
27,607,36127,444,508
27,612,781
Accrued interest payable
91,84153,868
107,417
Other liabilities
619,5541,322,784
1,421,409
Total Liabilities
101,454,75591,981,159
94,212,720
 
COMMITMENTS AND CONTINGENCIES (Note 10)
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 March 31,September 30, 2021 and December
 
31, 2020
0
0
Class A Common stock, $
0.001
 
par value;
98,000,000
 
shares designated:
11,608,55510,794,481
and 11,608,555 shares issued and
outstanding as of March 31,September 30, 2021
and December 31, 2020, respectively.
11,60910,794
11,609
Class B Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of March 31,September 30, 2021 and December 31, 2020
32
32
Class C Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of March 31,September 30, 2021 and December 31, 2020
32
32
Additional paid-in capital
332,642,758331,073,064
332,642,758
Accumulated deficit
(296,876,152)(297,331,338)
(298,166,582)
Stockholders’ Equity
35,778,27933,752,584
34,487,849
Total Liabilities
 
and Stockholders' Equity
$
137,233,034125,733,743
$
128,700,569
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 2 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the threeNine and Three Months Ended March 31,September 30, 2021 and 2020
Nine Months Ended September
Three Months Ended March 31,September
2021
2020
2021
2020
Revenues:
Advisory services
$
2,025,4096,757,799
$
1,724,5974,969,143
$
2,546,578
$
1,629,463
Interest income
610,6181,726,268
2,039,9943,167,439
537,200
604,158
Dividend income from Orchid Island Capital, Inc. common stock
1,518,284
1,246,636
506,095
364,809493,118
Total revenues
3,142,12210,002,351
4,129,4009,383,218
3,589,873
2,726,739
Interest expense
Repurchase agreements
(39,858)(94,926)
(927,816)(1,030,372)
(23,729)
(42,955)
Long-term debt
(249,548)(747,577)
(349,501)(893,299)
(248,465)
(261,341)
Net revenues
2,852,7169,159,848
2,852,0837,459,547
3,317,679
2,422,443
Other income (expense):
Unrealized losses(losses) gains on mortgage-backed securities
(1,392,261)(2,221,521)
(574,281)303,651
(323,659)
275,796
Realized lossesgains (losses) on mortgage-backed securities
069,498
(5,804,656)
69,498
0
Unrealized (losses) gains (losses) on Orchid Island Capital, Inc. common stock
2,050,332(856,468)
(4,408,105)38,935
Gains (losses)(778,607)
793,727
(Losses) gains on derivative instruments
243(280)
(5,290,731)(5,292,346)
(147)
75
Gains on retained interests in securitizations
-
58,735
-
58,735
Other income (expense)
86154,122
324(8,248)
149
(8,890)
Total other (expense)
income (expense)
658,400(2,854,649)
(16,077,449)(10,703,929)
(1,032,766)
1,119,443
Expenses:
Compensation and related benefits
1,123,5303,219,685
1,100,0443,157,074
1,029,465
1,010,407
Directors' fees and liability insurance
188,020568,087
164,581511,786
190,453
166,093
Audit, legal and other professional fees
137,168405,828
159,293467,015
133,925
120,374
Administrative and other expenses
307,865939,966
282,039870,919
298,719
318,874
Total expenses
1,756,5835,133,566
1,705,9575,006,794
1,652,562
1,615,748
Net income (loss) before income tax provision
1,754,5331,171,633
(14,931,323)(8,251,176)
632,351
1,926,138
Income tax provision
464,103336,389
7,401,6249,295,859
167,751
608,351
Net income (loss)
$
1,290,430835,244
$
(22,332,947)(17,547,035)
$
464,600
$
1,317,787
Basic and Diluted Net income (loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
0.110.07
$
(1.92)(1.51)
$
0.04
$
0.11
CLASS B COMMON STOCK
Basic and Diluted
$
0.110.07
$
(1.92)(1.51)
$
0.04
$
0.11
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
11,358,346
11,608,555
10,866,087
11,608,555
CLASS B COMMON STOCK
Basic and Diluted
31,938
31,938
31,938
31,938
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the threeNine and Three Months Ended March 31,September 30, 2021 and 2020
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2020
11,672,431
$
11,673
$
332,642,758
$
(292,677,440)
$
39,976,991
Net loss
-
0
0
(22,332,947)
(22,332,947)
Balances, March 31, 2020
11,672,431
$
11,673
$
332,642,758
$
(315,010,387)
$
17,644,044
Net income
-
0
0
3,468,125
3,468,125
Balances, June 30, 2020
11,672,431
$
11,673
$
332,642,758
$
(311,542,262)
$
21,112,169
Net income
-
0
0
1,317,787
1,317,787
Balances, September 30, 2020
11,672,431
$
11,673
$
332,642,758
$
(310,224,475)
$
22,429,956
Balances, January 1, 2021
11,672,431
$
11,673
$
332,642,758
$
(298,166,582)
$
34,487,849
Net income
-
0
0
1,290,430
1,290,430
Balances, March 31, 2021
11,672,431
$
11,673
$
332,642,758
$
(296,876,152)
$
35,778,279
Net loss
-
0
0
(919,786)
(919,786)
Balances, June 30, 2021
11,672,431
$
11,673
$
332,642,758
$
(297,795,938)
$
34,858,493
Net income
-
0
0
464,600
464,600
Class A common shares repurchased and retired
(814,074)
(815)
(1,569,694)
0
(1,570,509)
Balances, September 30, 2021
10,858,357
$
10,858
$
331,073,064
$
(297,331,338)
$
33,752,584
See Notes to Condensed Consolidated Financial Statements
��
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 4 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the ThreeNine Months Ended March 31,September 30, 2021 and 2020
2021
2020
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net income (loss)
$
1,290,430835,244
$
(22,332,947)(17,547,035)
Adjustments to reconcile net income (loss) to net cash provided by operating
 
(used in) operating activities:
Depreciation
17,31351,937
17,59852,223
Deferred income tax provision
464,103336,389
7,400,8529,285,344
Losses on mortgage-backed securities, net
1,392,2612,152,023
6,378,9375,501,005
Gains on retained interests in securitizations
-
(58,735)
PPP loan forgiveness
(153,724)
0
Unrealized losses (gains) losses on Orchid Island Capital, Inc. common stock
(2,050,332)856,468
4,408,105(38,935)
Realized and unrealized losses on forward settling TBA securities
0
1,441,406
Changes in operating assets and liabilities:
Accrued interest receivable
(9,859)(45,524)
527,542516,444
Due from affiliates
(79,186)(302,326)
101,80032,057
Other assets
(97,358)(84,426)
(126,771)1,558,632
Accrued interest payable
(15,576)(51,990)
(535,734)(561,918)
Other liabilities
(801,855)(98,625)
(849,083)(26,123)
NET CASH PROVIDED BY (USED IN) OPERATING
 
ACTIVITIES
109,9413,495,446
(3,568,295)154,365
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(12,367,589)(26,189,505)
(20,823,373)(43,129,835)
Sales
013,063,248
171,155,249
Principal repayments
3,297,72711,762,188
6,687,74011,170,005
Costs associated with termination of retained interests
0
58,735
Net settlement of forward settling TBA contracts
0
(1,500,000)
Purchases of Orchid Island Capital, Inc. common stock
0
(4,071,593)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(9,069,862)(1,364,069)
155,519,616133,682,561
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
74,799,000195,962,000
361,393,397501,460,570
Principal repayments on repurchase agreements
(66,734,114)(197,873,114)
(518,990,000)(640,729,398)
Proceeds from long-term debt
0
152,165
Principal repayments on long-term debt
(5,420)(16,108)
(5,077)(15,238)
Class A common shares repurchased and retired
(1,570,509)
0
NET CASH PROVIDED BY (USED IN)USED IN FINANCING ACTIVITIES
8,059,466(3,497,731)
(157,601,680)(139,131,901)
NET DECREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(900,455)(1,366,354)
(5,650,359)(5,294,975)
CASH, CASH EQUIVALENTS AND
 
AND RESTRICTED CASH, beginning of the period
10,911,357
12,385,117
CASH, CASH EQUIVALENTS AND
 
AND RESTRICTED CASH, end of the period
$
10,010,9029,545,003
$
6,734,7587,090,142
SUPPLEMENTAL DISCLOSURES OF CASH
 
FLOW INFORMATION:
Cash paid (received) during the period for:
Interest expense
$
304,982896,052
$
1,813,0512,485,589
Income taxes
$
0
$
13,465(1,568,363)
See Notes to Condensed Consolidated Financial Statements
- 5 -
BIMINI CAPITAL
 
MANAGEMENT, INC.
NOTES TO CONDENSED
 
CONSOLIDATED FINANCIAL
 
STATEMENTS
(Unaudited)
March 31,September
 
30, 2021
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
 
Description
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”)
 
formed in September 2003, is a
holding company.
 
The Company operates in two business segments through its principal wholly-owned
 
wholly-owned operating subsidiary, Royal
Palm Capital LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an
investment advisor registered with
the
Securities and Exchange Commission), are collectively referred to as "Bimini
Advisors."
 
Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.
 
Inc. ("Orchid") and receives fees for providing these services.
Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments
 
and shares of Orchid common
stock, for its own benefit. Royal
Palm Capital, LLC and its wholly-owned subsidiaries
are collectively referred to as "Royal
Palm."
COVID-19
Impact
Beginning
in mid-March
2020, the
global pandemic
associated
with the novel
coronavirus
(“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 MBS market
experienced
severe dislocations.
This resulted
in falling
prices of our
assets and
increased
margin
calls from
our repurchase
agreement
lenders, resulting
in material
adverse effects
on our results
of operations
and to our
financial
condition.
The MBS market
largely stabilized
after the
Federal Reserve
announced
on March 23,
2020 that
it would purchase
MBS and U.S.
Treasuries in
the amounts
needed to
support smooth
market functioning.
As of March
31, 2020,
and at all
times since
then, we
have timely
satisfied all
margin calls.
The MBS
market continues
to react to
the pandemic
and the various
measures put
in place to
stabilize
the
market. 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.
Although
the
Company cannot
estimate the
length or
gravity of
the impact
of the COVID-19
pandemic at
this time, if
the pandemic
continues,
it may
continue to
have materially
adverse effects
on the Company’s
results of
future operations,
financial position,
and liquidity
during 2021.
 
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini
 
Capital, Bimini Advisors and Royal Palm.
 
All
inter-company accounts and transactions have been eliminated from the consolidated
 
financial statements.
Variable Interest Entities (“VIEs”)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the
 
primary beneficiary of the VIE. Bimini Capital
has a common share investment
in a trust used in connection with the issuance of Bimini
Capital's junior subordinated
notes. See Note
8 for a description of the accounting used for this VIE.
- 6 -
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.
Basis of
 
Presentation
 
The accompanying unaudited condensed consolidated financial statements have
 
have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial information
 
information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X.
 
Accordingly, they may not include all of the information and footnotes required by GAAP for complete
financial statements.
 
In the opinion of management, all adjustments (consisting of normal recurring
 
accruals) considered necessary for
a fair presentation have been included.
 
Operating results for the nine and three-month periodperiods ended March 31, 2021September
 
30, 2021 are not necessarily
necessarily indicative of the results that may be expected
for the year ending December
31, 2021.
 
- 6 -
The consolidated balance sheet at December 31, 2020 has been derived from the
 
audited financial statements at that date but
does not include all of the information and footnotes required by GAAP for complete
 
complete consolidated financial statements.
 
For further
information, refer to the financial statements and footnotes thereto included in the
 
Company’s Annual Report on Form 10-K for the year
ended December 31, 2020.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management
 
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
 
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, and the
computation of the income tax provision or benefit and the deferred tax asset allowances
 
recorded for each accounting period.
Segment Reporting
The Company’s operations are classified into two principal reportable segments: the asset
 
management segment and the
investment portfolio segment. These segments are evaluated by management in deciding
 
how to allocate resources and in assessing
performance.
 
The accounting policies of the operating segments are the same as the
 
Company’s accounting policies with the
exception that inter-segment revenues and expenses are included in the presentation
 
of segment results.
 
For further information see
Note 14.
Cash and Cash Equivalents and Restricted Cash
Cash and cash
 
cash equivalents
 
include cash
 
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
 
March 31,September
 
30, 2021 and
and December 31,
 
31, 2020.
March 31,September 30, 2021
December 31, 2020
Cash and cash equivalents
$
5,973,2477,854,843
$
7,558,342
Restricted cash
4,037,6551,690,160
3,353,015
Total cash, cash equivalents
 
and restricted cash
$
10,010,9029,545,003
$
10,911,357
- 7 -
The Company
 
maintains cash
 
cash balances at
 
at several banks
 
banks and excess
 
excess margin with
 
with an exchange
 
clearing member.
 
At times,
 
balances
may exceed
 
federally
insured
 
limits. The
 
Company has
 
not experienced
 
any losses
 
related to
 
these balances.
 
The Federal
 
Deposit
Insurance
Corporation
 
insures eligible
 
accounts up
 
to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash balances
 
are
uninsured,
 
but are held
 
in separate
 
accounts that
 
are segregated
 
from the general
 
general funds
of the
counterparty.
 
The Company
 
limits
uninsured
 
balances to
 
only large,
 
well-known
 
banks
 
and exchange
 
clearing members
 
and believes
 
that it is
 
not exposed
 
to significant
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Advisory Services
Orchid is
externally
 
managed and
 
advised by
 
Bimini Advisors
 
pursuant to
 
to the terms
 
of a management
 
agreement.
 
Under the terms
 
terms of
the management
 
agreement,
 
Orchid is
 
obligated to
 
to pay Bimini
 
Advisors a
 
monthly management
 
fee and a
 
pro rata portion
 
portion of
certain
overhead costs
 
costs and
to reimburse
 
the Company
 
for any direct
 
expenses incurred
 
on its behalf.
 
Revenues from
 
from management
 
fees are
recognized
 
over the period
 
period of
time in which
 
which the service
 
service is
performed.
Mortgage-Backed
 
Securities
- 7 -
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed
 
certificates issued by Freddie Mac, Fannie Mae
or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only
 
(“IO”) securities and inverse interest-only (“IIO”)
securities representing interest in or obligations backed by pools of mortgage-backed
 
loans. We refer to MBS and CMOs as PT MBS.
We refer to IO and IIO securities as structured MBS. The Company has elected to account for
 
for its investment in MBS under the fair
value option.
 
Electing the fair value option requires the Company to record changes in
 
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-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
 
the carrying value
 
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
 
unrealized gains or losses on mortgage-backed securities
in the accompanying consolidated statements of operations.
The amount reported as unrealized gains or losses on mortgage-backed
securities thus captures the net effect of changes in the fair market value of securities caused by market
 
market developments and any
premium or discount lost as a result of principal repayments during the period.
Orchid Island Capital, Inc. Common Stock
- 8 -
The Company
 
accounts for
 
its investment
 
in Orchid common
 
common shares at
 
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
 
value of our
investment
 
in Orchid
 
on a
market approach
 
using “Level
 
1” inputs
 
based on the
 
the quoted market
 
market price
of Orchid’s
 
common stock
 
on a national
 
stock exchange.
Retained
 
Interests
 
in Securitizations
The Company
 
holds retained
 
interests in
 
in the subordinated
 
tranches of
 
of securities
 
created in
 
securitization
 
transactions.
 
These retained
interests
currently
 
have a recorded
 
fair value
 
of zero, as
 
as the prospect
 
of future
 
cash flows
 
being received
 
is uncertain.
 
Any cash
 
received
from the
retained
 
interests is
 
is reflected
 
in the consolidated
 
statements
 
of operations.
Derivative
 
Financial Instruments
 
Instruments
The Company
 
uses derivative
 
instruments
 
to manage
 
interest rate
 
rate risk,
facilitate
 
asset/liability
 
strategies
 
and manage
 
other
exposures,
 
and it may
 
continue to
 
to do so
in the future.
 
future. The principal
 
principal instruments
 
that the
Company
 
has used to
 
date are Treasury
 
Treasury Note (“
(“T-
Note”) and
 
Eurodollar
 
futures contracts,
 
and “to-be-announced”
 
(“TBA”) securities
 
transactions,
 
but it may
 
enter into
 
other derivative
- 8 -
instruments
 
in the future.
The Company
 
accounts for
 
TBA securities
 
as derivative
 
instruments.
 
Gains and losses
 
losses associated
 
with TBA
 
securities
 
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
consolidated
 
statements
 
of operations.
 
Derivative
 
instruments
 
are carried
 
at fair value,
 
and changes
 
in fair value
 
value are
recorded
 
in the consolidated
 
operations
 
for each period.
 
period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge
accounting
 
relationships,
 
but rather
 
are used as
 
as economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
by counterparties
 
to honor their
 
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
 
the Company uses
 
uses only
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
 
banks as
counterparties,
monitors positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair value of financial instruments for which it is practicable to estimate that
 
value is disclosed, either in the body of the
consolidated financial statements or in the accompanying notes. MBS, Orchid
 
Orchid common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods and
 
and assumptions used to estimate fair value for these
instruments are presented in Note 13 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest
 
interest receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates
 
their carrying value as of March 31,September 30, 2021 and
December 31, 2020, due to the short-term nature of these financial instruments.
 
It is impractical to estimate the fair value of the Company’s junior subordinated notes.
 
Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates would
 
would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in Note
 
Note 8 to the consolidated financial statements.
Property
 
and Equipment,
 
net
- 9 -
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
 
and improvements with depreciable lives of 30
years.
 
Property and equipment is recorded at acquisition cost and depreciated
 
using the straight-line method over the estimated useful
lives of the assets. Depreciation is included in administrative and other expenses
 
in the consolidated statement of operations.
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its PT
 
MBS through
 
the use of
 
repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Earnings
 
Per Share
Basic EPS is calculated as income available to common stockholders divided
 
by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class
 
method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result
is anti-dilutive.
- 9 -
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
 
the two-class method and, consequently, are presented
separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation
 
as these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stock are not
 
not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A Common
 
Stock were not met.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax assets and
 
liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities using enacted
 
tax rates. The measurement of net
deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it
 
is more likely than not that they will
not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31, 2017 remain
 
2018 remain open for examination.
Although management believes its calculations for tax returns are correct and the positions
 
taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm
 
and
its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain
 
tax positions will be sustained upon
examination based on the facts, circumstances and information available at the
 
end of each period.
 
The measurement of uncertain tax
positions is adjusted when new information is available, or when an event occurs
 
that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely than
 
not that the position will be sustained upon
examination by the relevant taxing authority based on the technical merits
of the position.
A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realized upon
 
settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as an unrecognized
 
tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,
 
if applicable, within the income tax
provision.
- 10 -
Recent Accounting
 
Pronouncements
On January 1, 2020, we adopted 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 “Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate
Reform on Financial Reporting
.”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for
 
for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market
 
market transition from the London Interbank
Offered Rate (“LIBOR,”),
and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
 
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
 
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
 
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial
 
statements.
 
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
 
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In
 
addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
- 10 -
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
 
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
 
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
 
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the
 
terms of a management agreement.
 
As Manager,
Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its management
 
team, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervision and
 
and oversight of Orchid's board of directors and has only
such functions and authority as delegated to it. Bimini Advisors receives a monthly
 
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of 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.
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
 
the management agreement. The management
agreement has been renewed through February 20, 2022
and provides for automatic
one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated to
 
to pay Bimini Advisors a termination fee equal to three
times the average annual management fee, as defined in the management agreement,
 
agreement, before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue from
Orchid for the nine and three months ended September 30,
2021 and 2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Management fee
$
5,569
$
3,897
$
2,157
$
1,252
Allocated overhead
1,189
1,072
390
377
Total
$
6,758
$
4,969
$
2,547
$
1,629
At September 30, 2021 and December 31, 2020, the net amount due from Orchid was approximately $
0.9
million and
$
0.6
million, respectively.
NOTE 3.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
MBS portfolio
as of September
30, 2021
and December
31, 2020:
(in thousands)
September 30, 2021
December 31, 2020
Fixed-rate MBS
$
61,372
$
64,902
Interest-Only MBS
2,999
251
Inverse Interest-Only MBS
19
25
Total
$
64,390
$
65,178
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 11 -
The following table summarizes the advisory services revenue from Orchid
for the three months ended March 31, 2021 and 2020.
(in thousands)
Three Months Ended March 31,
2021
2020
Management fee
$
1,621
$
1,377
Allocated overhead
404
348
Total
$
2,025
$
1,725
At March 31, 2021 and December 31, 2020, the net amount due from Orchid was approximately $
0.7
million and $
0.6
million, respectively.
NOTE 3.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
MBS portfolio
as of March
31, 2021 and
December 31,
2020:
(in thousands)
March 31, 2021
December 31, 2020
Fixed-rate MBS
$
72,504
$
64,902
Interest-Only MBS
329
251
Inverse Interest-Only MBS
23
25
Total
$
72,856
$
65,178
NOTE 4.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its MBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest rates
 
rates are
generally fixed
 
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
 
will typically require
 
require the Company
 
Company to
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred to
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of the
 
the pledged
securities
 
increases,
 
lenders may
 
may release
collateral
 
back to the
 
Company. As of March
 
31,September
30, 2021,
 
the Company
 
had met all
 
margin call
requirements.
As of MarchSeptember
30, 2021
and December
 
31, 2021 and
December 31,
2020,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31,September 30, 2021
Fair value of securities pledged, including accrued
interest receivable
$
0
$
28,91046,857
$
13,05417,761
$
31,0810
$
73,04564,618
Repurchase agreement liabilities associated with
these securities
$
0
$
28,48845,730
$
13,28117,430
$
31,3670
$
73,13663,160
Net weighted average borrowing rate
-
0.14%
0.21%0.12%
0.27%-
0.20%
0.21%0.13%
December 31, 2020
Fair value of securities pledged, including accrued
interest receivable
$
0
$
49,096
$
8,853
$
7,405
$
65,354
Repurchase agreement liabilities associated with
these securities
$
0
$
49,120
$
8,649
$
7,302
$
65,071
Net weighted average borrowing rate
-
0.25%
0.23%
0.30%
0.25%
- 12 -
In addition,
 
cash pledged
 
to counterparties
 
for repurchase
 
agreements
 
was approximately
 
$
4.01.7
 
million and
 
$
3.4
 
million as
 
of March
31, 2021 andSeptember
 
December 31,30, 2021
 
2020, respectively.
and December
 
31, 2020,
respectively.
If, during
 
the term of
 
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 MarchSeptember
30, 2021
and December
 
31, 2021 and2020,
 
December 31,the Company
 
2020, the
Company had
an aggregate
amount at
 
risk (the
difference
 
between the
 
amount loaned
 
to the Company,
 
including
interest
 
payable, and
 
the fair value
 
value of securities
 
and
cash pledged
 
(if any),
 
including
 
accrued interest
 
on such securities)
 
with all
counterparties
 
of approximately
 
$
3.93.1
 
million and
 
$
3.6
 
million,
respectively.
 
As of MarchSeptember
 
31,30, 2021
 
and December
 
31, 2020,
 
the Company
 
did not have
 
an amount
 
at risk with
 
any individual
counterparty
 
counterparty
greater than
 
10% of the
 
Company’s equity.
NOTE 5. DERIVATIVE
 
FINANCIAL INSTRUMENTS
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
 
a daily basis.
 
A minimum balance,
 
balance, or “margin”
“margin”,
 
is required
 
to be maintained
 
in the
account on a
 
daily basis.
 
The tables below
 
below present
information
 
related to the
 
the Company’s
Eurodollar
 
and T-note futures
positions at
 
March 31, 2021September 30,
 
2021 and December
 
31, 2020.
 
($ in thousands)
As of March 31,September 30, 2021
Junior Subordinated Debt Funding Hedges
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
2021
$
1,000
1.01%
0.21%
$
(6)
Total /
Weighted Average
$
1,000
1.01%
0.21%
$
(6)
($ in thousands)
As of December 31, 2020
Junior Subordinated Debt Funding Hedges
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
2021
$
1,000
1.02%
0.18%
$
(8)
Total /
Weighted Average
$
1,000
1.02%
0.18%
$
(8)
(1)
Open equity represents the cumulative gains (losses) recorded on open
futures positions from inception.
(Losses) Gains on Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of
operations for the three months ended March 31, 2021 and 2020
.
(in thousands)
Three Months Ended March 31,
2021
2020
Eurodollar futures contracts (short positions)
Repurchase agreement funding hedges
$
0
$
(2,329)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 1312 -
Junior Subordinated Debt Funding Hedges
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
2021
$
1,000
1.01%
0.17%
$
(2)
($ in thousands)
As of December 31, 2020
Junior Subordinated Debt Funding Hedges
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
2021
$
1,000
1.02%
0.18%
$
(8)
(1)
Open equity represents the cumulative gains (losses) recorded on open
futures positions from inception.
(Losses) Gains on Derivative Instruments
The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of
operations for the nine and three months ended September 30, 2021 and 2020
.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Eurodollar futures contracts (short positions)
Repurchase agreement funding hedges
$
0
$
(2,328)
$
0
$
0
Junior subordinated debt funding hedges
0
(515)(517)
0
0
T-Note futures contracts (short positions)
Repurchase agreement funding hedges
0
(1,006)
0
0
Net TBA securities
0
(1,441)
0
0
Losses on derivative instruments
$
0
$
(5,291)(5,292)
$
0
$
0
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 its 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 6. 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
March 31,
2021 and December
31, 2020.
($ in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
72,504
$
0
$
72,504
$
64,902
$
0
$
64,902
Structured MBS - at fair value
329
0
329
251
0
251
Accrued interest on pledged securities
212
0
212
201
0
201
Restricted cash
4,037
1
4,038
3,352
1
3,353
Total
$
77,082
$
1
$
77,083
$
68,706
$
1
$
68,707
Assets Pledged
from Counterparties
The table
below summarizes
cash pledged
to Bimini from
counterparties
under repurchase
agreements
and derivative
agreements
as
of March 31,
2021 and December
31, 2020.
Cash received
as margin is
recognized
in cash and
cash equivalents
with a corresponding
amount recognized
as an increase
in repurchase
agreements
or other liabilities
in the consolidated
balance sheets.
($ in thousands)
Assets Pledged to Bimini
March 31, 2021
December 31, 2020
Repurchase agreements
$
0
$
80
Total
$
0
$
80
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 14 -
 
- 13 -
Assets Pledged
to Counterparties
The table
below summarizes
Bimini’s assets
pledged
as collateral
under its
repurchase
agreements
and derivative
agreements
as of
September
30, 2021
and December
31, 2020.
($ in thousands)
September 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
61,372
$
0
$
61,372
$
64,902
$
0
$
64,902
Structured MBS - at fair value
2,999
0
2,999
251
0
251
Accrued interest on pledged securities
248
0
248
201
0
201
Restricted cash
1,690
0
1,690
3,352
1
3,353
Total
$
66,309
$
0
$
66,309
$
68,706
$
1
$
68,707
Assets Pledged
from Counterparties
The table
below summarizes
cash pledged
to Bimini
from counterparties
under repurchase
agreements
and derivative
agreements
as
of September
30, 2021
and December
31, 2020.
Cash received
as margin
is recognized
in cash and
cash equivalents
with a
corresponding
amount recognized
as an increase
in repurchase
agreements
or other
liabilities
in the consolidated
balance sheets.
($ in thousands)
Assets Pledged to Bimini
September 30, 2021
December 31, 2020
Repurchase agreements
$
487
$
80
Total
$
487
$
80
NOTE 7. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivatives
 
and repurchase
 
agreements
 
are subject
 
to underlying
 
agreements
 
with master
 
netting or
 
similar
arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
bankruptcy
 
of either
 
party to the
 
transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
 
basis.
 
The following
 
tables present
 
information
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the Company
 
Company had
presented
 
them on a
 
net basis as
 
of March 31,September
30, 2021
and December
 
31, 2020.
(in thousands)
Offsetting of Liabilities
Gross Amount Not Offset in the
Net Amount
Consolidated Balance Sheet
Gross Amount
of Liabilities
Financial
Gross Amount
Offset in the
Presented in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
March 31,September 30, 2021
Repurchase Agreements
$
73,13663,160
$
0
$
73,13663,160
$
(69,099)(61,470)
$
(4,037)(1,690)
$
0
$
73,13663,160
$
0
$
73,13663,160
$
(69,099)(61,470)
$
(4,037)(1,690)
$
0
December 31, 2020
Repurchase Agreements
$
65,071
$
0
$
65,071
$
(61,719)
$
(3,352)
$
0
$
65,071
$
0
$
65,071
$
(61,719)
$
(3,352)
$
0
The amounts
 
disclosed for
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
are limited
 
to the amount
 
sufficient to
 
to reduce
the
asset or
liability
 
presented
 
in the consolidated
 
balance sheet
 
to zero.
 
The fair value
 
value of the actual
 
actual collateral
 
received by
 
or posted
 
to the
same counterparty
 
typically
 
exceeds the
 
amounts presented.
 
See Note
 
6 for a discussion
 
of collateral
 
posted for, or
 
received against,
- 14 -
repurchase
 
obligations
 
and derivative
 
instruments.
NOTE 8.
 
LONG-TERM DEBT
Long-term
 
debt at MarchSeptember
 
31,30, 2021 and
 
December 31,
 
31, 2020
is summarized
 
as follows:
(in thousands)
March 31,September 30, 2021
December 31, 2020
Junior subordinated debt
$
26,804
$
26,804
Note payable
651641
657
Paycheck Protection Plan ("PPP") loan
(1)
1520
152
Total
$
27,60727,445
$
27,613
(1)
The Small Business Administration has notified the Company that, effective
April 22, 2021, all principal and accrued interest under the PPP loan
has been forgiven.
Junior Subordinated Debt
During 2005,
 
Bimini Capital
 
sponsored the
 
the formation
 
of a statutory
 
trust, known
 
as Bimini Capital
 
Capital Trust
II (“BCTII”)
 
of which 100%
 
of
the common
 
equity is owned
 
by Bimini
 
Capital.
 
It was formed
 
for the purpose
 
of issuing
 
trust preferred
 
capital securities
 
to third-party
investors and
 
and investing the
 
the proceeds
 
from the sale
 
sale of such capital
 
capital securities
 
solely in
 
junior subordinated
 
debt securities
 
of Bimini
 
Capital.
The debt
securities
 
held by BCTII
 
are the sole
 
assets of BCTII.
 
BCTII.
As of MarchSeptember
 
31,30, 2021 and
 
and December
 
31, 2020,
 
the outstanding
 
principal balance
 
balance on
the junior
 
subordinated
 
debt securities
 
owed to
to BCTII was
 
was $
26.8
million.
 
The BCTII
 
trust preferred
 
securities
 
and Bimini
 
Capital's BCTII
 
BCTII Junior
Subordinated
 
Notes have
 
a rate of interest
interest
 
- 15 -
that floats
 
at a spread
 
of 3.50%
3.50
% over the
 
the prevailing
 
three-month
 
LIBOR rate.
 
As of MarchSeptember
 
31,30, 2021,
 
the interest
 
rate was 3.68%
3.62
%. The BCTII
 
The BCTII
trust preferred
 
securities
 
and Bimini
 
Capital's BCTII
 
BCTII Junior
Subordinated
 
Notes require
 
quarterly
interest
 
distributions
and are redeemable
at Bimini
Capital's
 
option, in
 
whole or in
 
in part and without
 
without penalty.
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes
are
subordinate
 
and junior
junior in right
 
of payment
 
to all present
 
and future
 
senior indebtedness.
 
BCTII is a
 
a VIE because
 
the holders
 
of the equity
 
investment
 
at risk do
 
not have
substantive
 
decision-making
 
ability over
 
BCTII’s
activities.
 
Since Bimini
 
Capital's
 
investment
 
in BCTII’s
 
common equity
 
securities
 
was financed
 
directly by
 
BCTII as
 
a result of
 
its loan of
 
the
proceeds to
 
to Bimini
Capital,
 
that investment
 
is not considered
 
to be an equity
 
equity investment
 
at risk. Since
 
Since Bimini
Capital's
 
common share
investment
 
in BCTII
 
is not a variable
 
interest,
 
Bimini Capital
 
is not the
 
primary beneficiary
 
of BCTII.
 
Therefore,
 
Bimini Capital
 
has not
consolidated
 
the financial
 
statements
 
of BCTII
 
into its consolidated
 
financial
statements,
 
and this
investment
 
is accounted
 
for on the
 
equity
method.
The accompanying
 
consolidated
 
financial
statements
 
present Bimini
 
Bimini Capital's BCTII
 
BCTII Junior
Subordinated
 
Notes issued
 
to BCTII
 
as a
liability and
 
and Bimini
Capital's
 
investment
 
in the common
 
equity securities
 
of BCTII
 
as an asset
 
(included in
 
in other
assets).
 
For financial
statement
 
purposes,
 
Bimini Capital
 
records payments
 
of interest
 
on the Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as interest
 
expense.
Note Payable
On October
 
30, 2019,
 
the Company
 
borrowed
 
$
680,000 from
 
from a bank. The
 
The note
is payable
 
in equal monthly
 
monthly principal and
 
and interest
installments
 
of approximately
 
$
4,500 through
 
through October 30,
 
30, 2039.
Interest
 
accrues at
 
4.89% through
 
October 30,
 
2024. Thereafter,
 
interest
accrues based
 
on the weekly
 
average yield
 
yield to the United
 
United States Treasury
 
Treasury securities
 
adjusted to
 
a constant
 
maturity of
 
5 years, plus
 
3.25%plus
3.25
%.
The note is
 
is secured by
 
by a mortgage
 
on the Company’s
 
office building.
Paycheck
 
Paycheck Protection
 
Plan Loan
On April 13,
 
13, 2020, the
 
the Company received
 
received approximately
 
$
152,000
 
through the
 
Paycheck Protection
 
Program (“PPP”)
 
of the CARES
Act in the
 
form of a
 
low interest
 
loan.
 
PPP 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 forThe
 
the first ten
 
months after
 
the completion
 
of the loan
 
forgiveness
 
covered period.
 
PPP loans
 
may be forgiven,
 
in
whole or in
 
part, if
- 15 -
Small Business
Administration
notified the
 
proceeds areCompany that,
 
used for payrolleffective as
 
and other
permitted
purposes in
accordance
with the requirements
of the PPP
and if
certain other
requirements
are met.
The Small
Business Administration
has notified
the Company
that, effective
as of April
 
22, 2021,
 
all
principal and
 
and accrued
interest
 
under the
 
PPP
loan has been
 
has been forgiven.
 
The table
 
below presents
 
the future
 
scheduled
principal
 
payments on
 
on the Company’s
 
long-term
 
debt. The
table gives
effect to
forgiveness
of all principal
and interest
under the
PPP loan.
 
(in thousands)
Last ninethree months of 2021
$
166
2022
23
2023
24
2024
25
2025
26
After 2025
27,341
Total
$
27,45527,445
NOTE 9.
 
COMMON STOCK
There were
 
no issuances
 
of Bimini Capital's
 
Capital's Class
A Common
 
Stock, Class
 
B Common Stock
 
Stock or Class C
 
C Common Stock
 
Stock during
the
threenine months
 
ended MarchSeptember
 
31,30, 2021 and
 
and 2020.
 
- 16 -
Stock Repurchase
 
Plan
Plans
On March 26,
 
2018, the
 
Board of
Directors
 
of Bimini Capitalthe Company
 
Management,
Inc. (the
“Company”(the “Board”)
 
approved a
 
a Stock Repurchase
 
Plan
(“Repurchase (the
 
“2018 Repurchase
Plan”).
 
Pursuant
to the 2018
 
Repurchase
 
Plan, the
 
Company maycould
 
purchase up
 
up to
500,000
 
shares of
 
its Class A
 
A Common Stock
 
Stock from
time to time,
 
subject to
 
certain limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange Act
 
Act of 1934.
 
Share repurchases
may be
executed through
various means,
including,
without limitation,
open market
transactions.
The 2018 Repurchase
 
Plan does
not obligate
the
Company to
purchase any
shares.
The Repurchase
Plan was originally
set to expireterminated
 
on NovemberSeptember
 
15, 2018, but16, 2021
.
 
it has been
extended byDuring the
 
Board of Directorsthree months
 
and it is currentlyended September
 
set to expire30, 2021,
 
on
November 15, 2021
.
the Company
 
From the inception
of the Repurchase
Plan through
March 31,
2021, the
Company repurchased
 
a total of
70,4041,195
 
shares atunder
 
anthe 2018 Repurchase
Plan at an
aggregate
 
cost of approximately
 
$
166,9452,298
, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of $
2.371.92
 
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 2021 Repurchase
Plan does
not obligate
the Company
to purchase
any shares,
and it expires
on September
16, 2023.
The authorization
for the 2021
Repurchase
Plan may
be terminated,
increased
or
decreased
by the Company’s
Board of
Directors
in its discretion
at any time.
There were
no shares
 
repurchased
 
during the
 
threenine months
ended September
 
ended March30, 2021
 
31, 2021.under 2021
Repurchase
Plan.
Tender Offer
In July 2021,
the Company
completed
a “modified
Dutch auction”
tender offer
and paid
$1.5 million,
excluding
fees and
related
expenses,
to repurchase
812,879
shares of
Bimini Capital’s
Class A common
stock at a
price of
$
1.85
per share.
The aggregate
cost of
the tender
offer, including
commissions
and fees,
was approximately
$
1.6
million.
 
NOTE 10.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal
 
legal actions arising in the ordinary course of
business.
 
 
- 16 -
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amount
 
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.
 
The demand is 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 demand vigorously.
 
No
provision or accrual has been recorded as of March 31,September 30, 2021 related to the Citigroup
 
demand.
Management is not aware of any other significant reported or unreported contingencies
 
at March 31,September 30, 2021.
NOTE 11.
 
INCOME TAXES
 
The total income tax provision recorded for the nine months ended September
30, 2021 and 2020 was $
0.3
million and $
9.3
million, respectively, on consolidated pre-tax book income (loss) of $
1.2
million and $(
8.3
) million in the nine months ended September
30, 2021 and 2020, respectively.
The total income tax provision recorded for the three months ended March 31, 2021September
 
30, 2021 and 2020
was $
0.50.2
 
million and $
7.40.6
 
million,
respectively, on consolidated pre-tax book income (loss) of $
1.80.6
 
million and $($
14.91.9
)
million in the three months
ended March 31,September 30, 2021
and 2020, respectively.
The Company’s tax provision is based on a projected effective rate based on annualized amounts applied to
 
to actual income to date
and includes the expected realization of a portion of the tax benefits of federal and
 
and state net operating losses carryforwards (“NOLs”).
In assessing the realizability of deferred tax assets, management considers whether it
 
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
 
loss and NOL carryforwards is dependent upon the
generation of future capital gains and taxable income in periods prior to their expiration.
 
The Company currently provides a valuation
allowance against a portion of the NOLs since the Company believes that it is more likely
 
than not that some of the benefits will not be
realized in the future. The Company will continue to assess the need for a valuation
 
allowance at each reporting date.
As a result of adverse economic impacts of COVID-19 on its business, the Company performed
 
performed an assessment of the need for
additional valuation allowances against existing deferred tax assets as of March 31,
 
2020. Following the more-likely-than-not standard
that benefits will not be realized in the future, the Company determined an additional
 
valuation allowance of approximately $
11.2
 
million
was necessary for the net operating loss carryforwards and capital loss carryforwards
 
during the three months ended March 31, 2020.
NOTE 12.
 
EARNINGS PER SHARE
- 17 -
Shares of
 
Class B common
 
stock,
 
participating
 
and convertible
 
into Class
 
A common stock,
 
stock, are entitled
 
entitled to receive
 
receive dividends
 
in an
amount equal
 
to the dividends
 
declared on
 
on each share
 
of Class A
 
common stock
 
if, and when,
 
authorized
 
and declared
 
by the Board
 
of
Directors.
 
The Class
 
B common stock
 
stock is included
 
in the computation
 
of basic EPS
 
using the
two-class
 
method, and
 
consequently
 
is
presented
 
separately
 
from Class
 
A common
stock.
 
Shares of
 
Class B common
 
stock are not
 
not included in
 
in the computation
 
of diluted
 
Class A
EPS as the
 
conditions
 
for conversion
 
to Class A
 
common stock
 
were not
 
met at MarchSeptember
 
31,30, 2021 and
 
2020.
Shares of
 
Class C common
 
stock are not
 
not included in
 
in the basic
 
EPS computation
 
as these shares
 
do not have
 
participation
 
rights.
Shares of
 
Class C common
 
stock are not
 
not included in
 
in the computation
 
of diluted
 
Class A EPS
 
as the conditions
 
for conversion
 
to Class A
common stock
 
were not
 
met at MarchSeptember
 
31,30, 2021 and
 
and 2020.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the three monthsnine
 
ended Marchand three
 
31, 2021 andmonths ended
 
September
30, 2021
and
2020.
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
- 17 -
Basic and diluted EPS per Class A common share:
Income (loss) attributable to Class A common shares:
Basic and diluted
$
1,286833
$
(22,272)(17,499)
$
464
$
1,314
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
10,794
11,609
10,794
11,609
Effect of weighting
564
0
72
0
Weighted average shares-basic and diluted
11,358
11,609
10,866
11,609
Income (loss) per Class A common share:
Basic and diluted
$
0.110.07
$
(1.92)(1.51)
$
0.04
$
0.11
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Basic and diluted EPS per Class B common share:
Income (loss) attributable to Class B common shares:
Basic and diluted
$
42
$
(61)(48)
$
1
$
4
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
Effect of weighting
32
-
-32
Weighted average shares-basic and diluted
32
32
32
32
Income (loss) per Class B common share:
Basic and diluted
$
0.110.07
$
(1.92)(1.51)
$
0.04
$
0.11
NOTE 13.
 
FAIR VALUE
Fair value
 
is the price
 
that would
 
be received
 
to sell an
 
asset or
 
paid to transfer
 
a liability
 
(an exit price).
 
price). A
fair value
 
measure should
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset or
 
or liability, including
 
the assumptions
 
about the
 
risk inherent
in a particular
 
valuation
technique,
 
the effect of
 
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
 
inputs the Company
 
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
 
assets or
liabilities
 
traded in
 
active markets
(which include
 
exchanges and
 
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
 
or similar
instruments
 
in markets
 
that are not
 
not active and
 
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
 
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. Valuation
MBS, Orchid
common stock,
retained
interests
and TBA
securities
were all recorded
at fair value
on a recurring
basis during
the nine
and three
months ended
September
30, 2021
and 2020.
When determining
fair value
measurements,
the Company
considers
the principal
or most advantageous
market in
which it
would transact
and considers
assumptions
that market
participants
would use
when pricing
the
asset. When
possible,
the Company
looks to active
and observable
markets to
price identical
assets.
When identical
assets are
not traded
in active
markets, the
Company
looks to market
observable
data for
similar assets.
Fair value
measurements
for the retained
interests
are
generated
by a model
that requires
management
to make a
significant
number of
assumptions,
and this model
resulted
in a value
of zero
at both September
30, 2021
and December
31, 2020.
The Company's
MBS and TBA
securities
are valued
using Level
2 valuations,
and such valuations
currently
are determined
by the
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 18 -
techniques
typically
include option
pricing models,
discounted
cash flow
models and
similar techniques,
but may also
include the
use of market
prices of assets
or liabilities
that are not
directly comparable
to the subject
asset or
liability.
MBS, Orchid
common stock,
retained
interests and
TBA securities
were all recorded
at fair value
on a recurring
basis during
the three
months ended
March 31,
2021 and
2020. When
determining
fair value
measurements,
the Company
considers the
principal
or most
advantageous
market in which
it would transact
and considers
assumptions
that market
participants
would use
when pricing
the asset.
When possible,
the Company
looks to active
and observable
markets to
price identical
assets.
When identical
assets are
not traded
in
active markets,
the Company
looks to market
observable
data for
similar assets.
Fair value
measurements
for the retained
interests are
generated
by a model
that requires
management
to make a
significant
number of
assumptions,
and this model
resulted in
a value of
zero
at both March
31, 2021 and
December 31,
2020.
The Company's
MBS and TBA
securities
are valued
using Level
2 valuations,
and such valuations
currently are
determined
by the
Company based
 
on independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, when
 
available.
 
Because the
 
price estimates
 
may vary,
the Company
 
must make
certain
 
judgments and
 
and assumptions
 
about the
 
appropriate
 
price to use
 
use to calculate
 
the fair values.
 
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
 
or identical assets
 
(includingassets (including
 
security coupon,
 
coupon, maturity, yield,
 
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
 
TBA security),
 
and model driven
 
driven approaches
 
(the discounted
 
cash flow
 
method, Black
Scholes and
 
SABR models
 
which rely
 
upon observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
volatility).
 
The
appropriate
 
spread pricing
 
method used
 
is based on
 
market convention.
 
The pricing
 
source determines
 
the spread
 
of recently
 
observed
trade activity
 
or observable
 
markets for
 
assets similar
 
to those being
 
being priced. The
 
The spread
is then adjusted
 
adjusted based on
 
on variances
 
in certain
characteristics
 
between the
 
market observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
of asset, the
 
the expected
life
of the asset,
 
the stability
 
and predictability
 
of the expected
 
future cash
 
flows of the
 
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
 
the underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
and other
 
variables if
 
if appropriate.
 
The fair value
 
value of the security
 
security is
determined
 
by using the
 
adjusted spread.
 
spread.
The Company’s
 
futures contracts
 
are Level
 
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
 
rate swaps and
 
and interest rate
 
rate swaptions
 
are Level
2
valuations.
 
The fair value
 
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
 
assets and
liabilities
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
March 31,September
 
30, 2021
and
December 31,
 
31, 2020:
(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)
March 31,September 30, 2021
Mortgage-backed securities
$
72,85664,390
$
0
$
72,85664,390
$
0
Orchid Island Capital, Inc. common stock
15,59812,691
15,59812,691
0
0
December 31, 2020
Mortgage-backed securities
$
65,178
$
0
$
65,178
$
0
Orchid Island Capital, Inc. common stock
13,548
13,548
0
0
During the
 
threenine months
 
ended MarchSeptember
 
31,30, 2021 and
 
and 2020, there
 
there were
no transfers
 
of financial
 
assets or
liabilities
 
between levels
1, 2 or 3.
NOTE 14.
 
1,SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments: the asset
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist
of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
Total revenues received under this management
agreement for the nine months ended September 30, 2021 and 2020, were approximately
$
6.8
million and $
5.0
million, respectively,
accounting for approximately
68
% and
53
% of consolidated revenues, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 19 -
or 3.
NOTE 14.
SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments: the asset
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist of
management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
Total revenues received under this management
agreement for the three months ended March 31, 2021 and 2020, were approximately $
2.0
million and $
1.7
million, respectively,
accounting for approximately
64
% and
42
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted by
 
by Royal Palm.
 
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the threenine months ended March 31,September 30, 2021 and 2020 is as
 
as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,0256,758
$
0
$
0
$
0
$
2,0256,758
Advisory services, other operating segments
(1)
36108
0
0
(36)(108)
0
Interest and dividend income
0
1,1173,245
0
0
1,1173,245
Interest expense
0
(40)(95)
(250)(748)
(2)
0
(290)(843)
Net revenues
2,0616,866
1,0773,150
(250)(748)
(36)(108)
2,8529,160
Other income
0
658(3,008)
1154
(3)
0
659(2,854)
Operating expenses
(4)
(1,103)(3,396)
(653)(1,738)
0
0
(1,756)(5,134)
Intercompany expenses
(1)
0
(36)(108)
0
36108
0
Income (loss) before income taxes
$
9583,470
$
1,046(1,704)
$
(249)(594)
$
0
$
1,7551,172
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
1,7254,969
$
0
$
0
$
0
$
1,7254,969
Advisory services, other operating segments
(1)
59116
0
0
(59)(116)
0
Interest and dividend income
0
2,4054,414
0
0
2,4054,414
Interest expense
0
(928)(1,030)
(350)(893)
(2)
0
(1,278)(1,923)
Net revenues
1,7845,085
1,4773,384
(350)(893)
(59)(116)
2,8527,460
Other expenses
0
(15,563)(10,238)
(514)(466)
(3)
0
(16,077)(10,704)
Operating expenses
(4)
(709)(2,632)
(997)(2,375)
0
0
(1,706)(5,007)
Intercompany expenses
(1)
0
(59)(116)
0
59116
0
Income (loss) before income taxes
$
1,0752,453
$
(15,142)(9,345)
$
(864)(1,359)
$
0
$
(14,931)(8,251)
(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services
.
(2)
Includes interest on long-term debt.
(3)
Includes 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)
Corporate expenses are allocated based on each segment’s proportional
share of total revenues.
Assets in each reportable segment as of March 31,Segment information for the three months ended September 30, 2021 and December 31, 2020 were asis
 
as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,547
$
0
$
0
$
0
$
2,547
Advisory services, other operating segments
(1)
35
0
0
(35)
0
Interest and dividend income
0
1,043
0
0
1,043
Interest expense
0
(24)
(248)
(2)
0
(272)
Net revenues
2,582
1,019
(248)
(35)
3,318
Other
0
(1,033)
0
0
(1,033)
Operating expenses
(4)
(1,157)
(496)
0
0
(1,653)
Intercompany expenses
(1)
0
(35)
0
35
0
Income (loss) before income taxes
$
1,425
$
(545)
$
(248)
$
0
$
632
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
1,629
$
0
$
0
$
0
$
1,629
Advisory services, other operating segments
(1)
32
0
0
(32)
0
 
 
 
 
 
 
 
 
 
 
 
 
 
- 20 -
Interest and dividend income
0
1,097
0
0
1,097
Interest expense
0
(43)
(261)
(2)
0
(304)
Net revenues
1,661
1,054
(261)
(32)
2,422
Other
0
1,070
49
(3)
0
1,119
Operating expenses
(4)
(956)
(659)
0
0
(1,615)
Intercompany expenses
(1)
0
(32)
0
32
0
Income (loss) before income taxes
$
705
$
1,433
$
(212)
$
0
$
1,926
(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services
.
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)
on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportional
share of total revenues.
Assets in each reportable segment as of September 30, 2021 and December
31, 2020 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
March 31,September 30, 2021
$
1,7001,823
$
122,894110,711
12,63913,200
$
137,233125,734
December 31, 2020
1,469
113,764
13,468
128,701
NOTE 15. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both March 31,September 30, 2021 and December 31, 2020, the Company owned
2,595,357
 
shares of Orchid common stock, representing
approximately
2.81.7
% and
3.4
% of Orchid’s outstanding common stock on such dates.
 
The Company received dividends on this
common stock investment of approximately $
0.51.5
 
million and $
0.40.5
 
million during the nine and three months ended March 31,September 30, 2021,
and 2020,approximately $
respectively.1.2
million and $
0.5
million during the nine and three months ended September 30, 2020, respectively.
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief
Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation
 
from Orchid, and owns shares of common
stock of Orchid.
 
In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also
serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors,
receives compensation from Orchid, and owns shares of common stock of Orchid. Robert
 
Robert J. Dwyer and Frank E. Jaumot, our
independent directors, each own shares of common stock of Orchid.
 
- 21 -
ITEM 2. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS.
 
The
 
following
The following
discussion
of
our
financial
condition
and
results
of
operations
should
be
 
read
in
conjunction
with
the consolidated
financial
financial statements and
notes to
those statements
included in
Item 1
of this
Form 10-Q.
 
The discussion
may contain
certain forward-forward-looking
looking statements that involve
risks and uncertainties.
Forward-looking statements
 
are those that
are not historical
in nature. As
a
result of
many
factors, such
as those
set forth
under “Risk
Factors” in
our most recent
 
recent Annual
Report on
Form 10-K
and any
subsequent Quarterly
Reports on Form 10-K,10-Q, our actual results
may differ materially from those anticipated in such
forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company
 
company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital, LLC.
 
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
 
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
 
with the
Securities and Exchange Commission), are collectively referred to as “Bimini
 
“Bimini Advisors.”
 
Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement,
 
the Company receives management fees and
expense reimbursements.
 
As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day
operations.
 
Pursuant to the terms of the management agreement, Bimini Advisors
 
provides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all times
 
subject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated to
 
it.
 
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred
 
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS") issued
 
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). Our investment strategy focuses on,
and our
portfolio consists of, two categories of Agency
MBS: (i) traditional pass-through Agency MBS, such as mortgage pass-through
 
certificates issued by Fannie Mae, Freddie Mac or
Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued
 
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.
COVID-19
Impact
Beginning
in mid-March
2020, the
global pandemic
associated
with the novel
coronavirus
(“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 MBS market
experienced
severe dislocations.
This resulted
in falling
prices of our
assets and
increased
margin
calls from
our repurchase
agreement
lenders, resulting
in material
adverse effects
on our results
of operations
and to our
financial
condition.
The MBS market
largely stabilized
after the
Federal Reserve
announced
on March 23,
2020 that
it would purchase
MBS and U.S.
Treasuries in
the amounts
needed to
support smooth
market functioning.
As of March
31, 2020,
and at all
times since
then, we
have timely
satisfied all
margin calls.
The MBS
market continues
to react to
the pandemic
and the various
measures put
in place to
stabilize the
market. 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.
Although the
Company cannot
estimate the
length or
gravity of
the impact
of the COVID-19
pandemic at
this time, if
the pandemic
continues,
it may
continue to
have materially
adverse effects
on the Company’s
results of
future operations,
financial position,
and liquidity
during 2021.
- 22 -
Stock Repurchase
 
Plan
Plans
On March 26,
 
2018, the
 
Board of
Directors
 
of the Company
 
approved a
 
a Stock Repurchase
 
Plan (“the
“2018 Repurchase
 
Plan”).
 
Pursuant to
 
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
 
subject to certain
 
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
three months
ended September
30, 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 1934.$1.92
per share.
From commencement
of the 2018
Repurchase
Plan, through
its termination,
the Company
repurchased
a total of
71,599 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.
- 22 -
shares, and
 
The
Repurchase
Plan,
as currently
extended,it expires
 
on NovemberSeptember
 
15, 2021.16, 2023.
 
The authorization
 
for the Share2021
 
Repurchase
 
Plan may be
terminated,
 
increased or
 
or
decreased by
 
by the Company’s
 
Board of
Directors
 
in its discretion
 
at any time.
 
From commencementNo shares
 
of the Repurchasewere repurchased
 
under the
2021 Repurchase
Plan through
 
March 31,September
 
30, 2021.
Tender Offer
In July 2021, the
 
Company repurchasedwe completed
 
a total of“modified
 
70,704Dutch auction”
tender offer
and paid
$1.5 million,
excluding
fees and
related expenses,
to
repurchase
812,879 shares
 
at an
aggregateof our Class
 
cost of approximatelyA common
 
$166,945,stock, which
 
including commissionswere retired,
 
and fees, for
at a weighted
average price
 
of $2.37$1.85 per
 
share.
Factors that Affect our Results of Operations and Financial Condition
A variety
 
A variety of industry
and economic
factors (in
addition to
those related
to the
COVID-19 pandemic)
 
may impact
our results
of
operations and financial condition. These factors include:
●
•
 
interest rate trends;
●
•
 
the difference between Agency MBS yields and our funding and hedging costs;
●
•
 
competition for, and supply of, investments in Agency MBS;
●
•
 
actions
actions
taken
by
the
U.S.
government,
including
the
 
presidential
administration,
the
U.S.
Federal
Reserve
(the
“Fed”),
the
Federal Reserve (the “Fed”), the Federal
Open Market Committee (the “FOMC”), the Federal Housing Finance Agency
 
(theAgency (the “FHFA”) and the U.S. Treasury;
●
•
 
prepayment rates on mortgages underlying our Agency MBS, and credit trends
 
insofar as they affect prepayment rates; and
●
•
 
the equity markets and the ability of Orchid to raise additional capital; and
●
•
 
other market developments.
In addition, a
variety of factors
relating to our
business may also
impact our results
 
of operations and
financial condition. These
factors include:
●
•
 
our degree of leverage;
●
•
 
our access to funding and borrowing capacity;
●
•
 
our borrowing costs;
●
•
 
our hedging activities;
●
•
 
the market value of our investments;
●
•
 
the requirements to qualify for a registration exemption under the Investment Company Act;
●
•
 
our ability to use net operating loss carryforwards and net capital loss carryforwards
 
to reduce our taxable income;
●
•
 
the impact of possible future changes in tax laws or tax rates; and
●
•
 
our ability to manage the portfolio of Orchid and maintain our role as manager.
Results of
 
of Operations
Described below
 
below are the Company’s results
of operations for
 
the Company’snine and three months
 
results ofended September
 
operations30, 2021, as compared
 
for to
the nine
and three
 
months ended
 
March 31,September
 
2021,
as compared
to the three
months ended
March 31,
30, 2020.
Net Income
 
(Loss) Summary
Consolidated
 
net income
 
for the three
 
nine months ended
 
March 31,ended September
 
30, 2021
was $1.3$0.8
 
million, or
 
$0.11 or $0.07
basic and
diluted
 
income per
 
share of
of Class A Common
 
Common Stock, as
compared to
a consolidated
net loss of
 
$22.317.5 million,
 
or $1.92$1.51 basic and
 
and diluted
loss per share of
 
of Class A
Common Stock,
 
Afor the nine
months ended
September
30, 2020.
Consolidated
net income
for the
three
months
ended September
30, 2021
was $0.5
million,
or $0.04
basic and
diluted
income per
share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 23 -
of Class
A Common
Stock, as
compared
to consolidated
net income
of $1.3
million,
or $0.11 basic
and diluted
income per
share of
Class A
Common Stock,
 
for the three
 
three months ended
 
March 31,ended September
 
30, 2020. The
 
The components of
 
of net income (loss)
 
(loss) for the nine and three months
 
the threeended September
 
months ended
March 31,
30, 2021 and 2020, along
 
along with
the changes
 
in
those components
 
are presented
 
in the table
 
below.
below:
(in thousands)
Nine Months Ended September 30,
Three Months Ended March 31,September 30,
2021
2020
Change
2021
2020
Change
Advisory services revenues
$
2,0256,758
$
1,7254,969
$
3001,789
$
2,547
$
1,629
$
918
Interest and dividend income
1,1173,245
2,4054,414
(1,288)(1,169)
1,043
1,097
(54)
Interest expense
(289)(843)
(1,277)(1,924)
9881,081
(272)
(304)
32
Net revenues
2,8539,160
2,8537,459
-1,701
3,318
2,422
896
Other (expense) income (expense)
658(2,855)
(16,077)(10,703)
16,7357,848
(1,033)
1,119
(2,152)
Expenses
(1,757)(5,134)
(1,706)(5,007)
(51)(127)
(1,653)
(1,615)
(38)
Net income (loss) before income tax provision
1,7541,171
(14,930)(8,251)
16,6849,422
632
1,926
(1,294)
Income tax provision
(464)(336)
(7,403)(9,296)
6,9398,960
(167)
(608)
441
Net income (loss)
$
1,290835
$
(22,333)(17,547)
$
23,62318,382
$
465
$
1,318
$
(853)
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to
hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
 
We have not designated our derivative financial instruments as hedge accounting relationships,
 
but rather hold them for economic
hedging purposes. Changes
in fair value of these instruments are presented in a
separate line item in our consolidated
statements of
operations and not included in interest expense. As such, for financial reporting
 
purposes, interest expense and cost of funds are not
impacted by the fluctuation in value of the derivative instruments.
 
For the purpose of computing economic net interest income and ratios relating to cost
 
of funds measures, GAAP interest expense
has been adjusted to reflect the realized and unrealized gains or losses on
 
on certain derivative instruments the Company uses that
pertain to each period presented. We believe that adjusting our interest expense for the periods
 
periods presented by the gains or losses on
these derivative instruments would not accurately reflect our economic interest
 
expense for these periods. The reason is that these
derivative instruments may cover periods that extend into the future, not just the current
 
current period.
 
Any realized or unrealized gains or
losses on the instruments reflect the change in market value of the instrument caused
 
by changes in underlying interest rates
applicable to the term covered by the instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments
 
in place for the respective period
with the actual interest expense incurred on borrowings to reflect total economic interest
 
interest expense for the applicable period. Interest
expense, including the effect of derivative instruments for the period, is referred to as economic interest
 
expense. Net interest income,
when calculated to include the effect of derivative instruments for the period, is referred to
 
as economic net interest income. This
presentation includes gains or losses on all contracts in effect during the reporting period, covering
 
covering the current period as well as
periods in the future.
We believe that economic interest expense and economic net interest income provide meaningful
 
meaningful information to consider, in
addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its
financial position and performance without the effects of certain transactions and GAAP adjustments
 
that are not necessarily indicative
of our current investment portfolio or operations. The unrealized gains or losses
on derivative
instruments presented in our
consolidated statements of operations are not necessarily representative of the total interest
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 24 -
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
 
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
 
economic value of our investment strategy should not
be viewed in isolation and is not a substitute for interest expense and net interest
 
interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments,
calculated in accordance with GAAP for each quarter in 2021 and 2020.
 
As a result of the market turmoil during the first quarter of 2020 several hedge positions where closed.
 
However, the
hedges closed were hedges that covered periods well beyond the first quarter of 2020.
 
Accordingly, the open equity at the
time these hedges were closed will result in adjustments to economic interest expense through the balance of their
respective original hedge periods.
 
Since the Company’s portfolio was significantly reduced during the first quarter of 2020,
the effect of applying the open equity at the time of closure of these hedge instruments to the current, and much smaller,
repurchase agreement interest expense amounts couldhas materially impactimpacted the economic interest amounts reported below.
Gains (Losses)Losses on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
(in thousands)
Recognized in
Statement of
TBA
Operations
Securities
Futures
(GAAP)
Income (Loss)
Contracts
Three Months Ended
March 31,(GAAP)
Loss
Contracts
September 30, 2021
$
-
$
-
$
-
June 30, 2021
-
-
-
March 31, 2021
-
-
-
December 31, 2020
-
-
-
September 30, 2020
-
-
-
June 30, 2020
(2)
-
(2)
March 31, 2020
(5,291)
(1,441)
(3,850)
Nine Months Ended
September 30, 2021
$
-
$
-
$
-
September 30, 2020
(5,292)
(1,441)
(3,851)
Gains (Losses) on Futures ContractsDerivative Instruments - Attributed to Current Period (Non-GAAP)
(in thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Repurchase
Long-Term
Repurchase
Long-Term
Statement of
Three Months Ended
Agreements
Debt
Total
Agreements
Debt
Total
Operations
Three Months Ended
March 31,September 30, 2021
$
(708)(709)
$
(58)(57)
$
(766)
$
708709
$
5857
$
766
$
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
December 31, 2020
(615)
(40)
(655)
615
40
655
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
40
1,105
-
June 30, 2020
(456)
(40)
(496)
456
38
494
(2)
March 31, 2020
(456)
(40)
(496)
(2,879)
(475)
(3,354)
(3,850)
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
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
ThreeNine Months Ended
March 31,September 30, 2021
$
611(2,125)
$
40(173)
$
(708)(2,298)
$
7482,125
$
571173
$
(137)2,298
December 31, 2020$
597
43
(615)
658
554
(61)-
September 30, 2020
604(1,977)
43(120)
(1,065)(2,097)
1,108(1,358)
561(396)
(504)(1,754)
$
(3,851)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 25 -
Economic Net Portfolio Interest Income
(in thousands)
Interest Expense on Repurchase Agreements
Net Portfolio
Effect of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
September 30, 2021
$
537
$
24
$
(709)
$
733
$
513
$
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
December 31, 2020
597
43
(615)
658
554
(61)
September 30, 2020
604
43
(1,065)
1,108
561
(504)
June 30, 2020
523
60
(456)
516
463
7
March 31, 2020
2,040
928
(456)
1,384
1,112
656
Nine Months Ended
September 30, 2021
$
1,726
$
95
$
(2,125)
$
2,220
$
1,631
$
(494)
September 30, 2020
3,167
1,030
(1,978)
3,008
2,137
159
(1)
Reflects the effect of derivative instrument hedges for only the period
 
period presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
 
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
 
attributed to the period presented to GAAP net portfolio interest
income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
Three Months EndedSeptember 30, 2021
$
513
$
(196)
$
248
$
(57)
$
305
$
265
$
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
$
571
$
(137)
$
250
$
(58)
$
308
$
321
$
(445)
December 31, 2020
554
(61)
257
(40)
297
297
(358)
September 30, 2020
561
(504)
261
(40)
301
300
(805)
June 30, 2020
463
7
282
(40)
322
181
(315)
March 31, 2020
1,112
656
350
(40)
390
762
266
Nine Months Ended
September 30, 2021
$
1,631
$
(494)
$
748
$
(173)
$
921
$
883
$
(1,415)
September 30, 2020
2,137
159
893
(120)
1,013
1,244
(854)
(1)
Calculated by adding the effect of derivative instrument hedges attributed
 
attributed to the period presented to GAAP net portfolio interest
income.
(2)
Reflects the effect of derivative instrument hedges for only the period
 
the period presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges
 
attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges
 
attributed to the period presented to GAAP net interest income.
Segment Information
We have two operating segments. The asset management segment includes the investment
 
advisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment
portfolio segment includes the
investment activities conducted
by Royal Palm.
 
Segment information for the threenine months ended March 31,September 30, 2021 and 2020 is as
 
follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,025
$
-
$
-
$
-
$
2,025
Advisory services, other operating segments
(1)
36
-
-
(36)
-
Interest and dividend income
-
1,117
-
-
1,117
Interest expense
-
(40)
 
(250)
(2)
-
(290)
Net revenues
2,061
1,077
(250)
(36)
2,852
Other income
-
658
 
1
(3)
-
659
Operating expenses
(4)
(1,103)
(653)
-
-
(1,756)
Intercompany expenses
(1)
-
(36)
-
36
-
Income (loss) before income taxes
$
958
$
1,046
$
(249)
$
-
$
1,755
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
1,725
$
-
$
-
$
-
$
1,725
Advisory services, other operating segments
(1)
59
-
-
(59)
-
Interest and dividend income
-
2,405
-
-
2,405
Interest expense
-
(928)
 
(350)
(2)
-
(1,278)
Net revenues
1,784
1,477
(350)
(59)
2,852
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 26 -
2021
Other expensesAdvisory services, external customers
$
6,758
$
-
(15,563)$
-
$
-
$
6,758
Advisory services, other operating segments
(1)
108
-
-
(108)
-
Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
 
(514)(748)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other income
-
(3,008)
154
(3)
-
(16,077)(2,854)
Operating expenses
(4)
(709)(3,396)
(997)(1,738)
-
-
(1,706)(5,134)
Intercompany expenses
(1)
-
(59)(108)
-
59108
-
Income (loss) before income taxes
$
1,0753,470
$
(15,142)(1,704)
$
(864)(594)
$
-
$
(14,931)1,172
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
4,969
$
-
$
-
$
-
$
4,969
Advisory services, other operating segments
(1)
116
-
-
(116)
-
Interest and dividend income
-
4,414
-
-
4,414
Interest expense
-
(1,030)
(893)
(2)
-
(1,923)
Net revenues
5,085
3,384
(893)
(116)
7,460
Other expenses
-
(10,238)
(466)
(3)
-
(10,704)
Operating expenses
(4)
(2,632)
(2,375)
-
-
(5,007)
Intercompany expenses
(1)
-
(116)
-
116
-
Income (loss) before income taxes
$
2,453
$
(9,345)
$
(1,359)
$
-
$
(8,251)
Segment information for the three months ended September 30, 2021 and 2020 is
as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,547
$
-
$
-
$
-
$
2,547
Advisory services, other operating segments
(1)
35
-
-
(35)
-
Interest and dividend income
-
1,043
-
-
1,043
Interest expense
-
(24)
(248)
(2)
-
(272)
Net revenues
2,582
1,019
(248)
(35)
3,318
Other
-
(1,033)
-
-
(1,033)
Operating expenses
(4)
(1,157)
(496)
-
-
(1,653)
Intercompany expenses
(1)
-
(35)
-
35
-
Income (loss) before income taxes
$
1,425
$
(545)
$
(248)
$
-
$
632
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
1,629
$
-
$
-
$
-
$
1,629
Advisory services, other operating segments
(1)
32
-
-
(32)
-
Interest and dividend income
-
1,097
-
-
1,097
Interest expense
-
(43)
(261)
(2)
-
(304)
Net revenues
1,661
1,054
(261)
(32)
2,422
Other
-
1,070
49
(3)
-
1,119
Operating expenses
(4)
(956)
(659)
-
-
(1,615)
Intercompany expenses
(1)
-
(32)
-
32
-
Income (loss) before income taxes
$
705
$
1,433
$
(212)
$
-
$
1,926
(1)
Includes advisory services revenue received by Bimini Advisors from
Royal Palm.
(2)
 
- 27 -
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)
on Eurodollar futures contracts entered into as
a hedge on
junior subordinated notes and fair value adjustments
on
retained interests in securitizations.notes.
(4)
Corporate expenses are allocated based on each segment’s proportional
 
share of total revenues.
Assets in each reportable segment were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
March 31,September 30, 2021
$
1,7001,823
110,711
$
122,89413,200
$
12,639
$
137,233125,734
December 31, 2020
1,469
113,764
13,468
128,701
Asset Management
 
Segment
Advisory Services
 
Revenue
Advisory services
 
revenue
consists
 
of management
 
fees and
overhead
 
reimbursements
 
charged to
 
to Orchid for
 
for the management
 
of its
portfolio
 
pursuant to
 
to the terms
 
of a management
 
agreement.
 
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
and less
than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses incurred
 
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 2022 and provides for automatic one-year extension
 
extension options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee equal
 
equal to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic
 
renewal term.
The following table summarizes the advisory services revenue received from
 
Orchid in each quarter during 2021 and 2020.
(in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
September 30, 2021
$
5,136,331
$
672,384
$
2,157
$
390
$
2,547
June 30, 2021
4,504,887
542,679
1,791
395
2,186
March 31, 2021
$
4,032,716
$
453,353456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
347
1,615
March 31, 2020
3,269,859
376,673
1,377
348
1,725
Nine Months Ended
September 30, 2021
$
4,557,978
$
557,250
$
5,569
$
1,189
$
6,758
September 30, 2020
3,273,068
368,785
3,897
1,072
4,969
Investment Portfolio Segment
Net Portfolio Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 27 -
 
 
In response
 
to the COVID-19
 
related market
 
developments
 
during the
 
first quarter
 
of 2020 discussed
 
above, the
 
Company sold
 
a
significant
 
portion of
 
the MBS portfolio.
 
Our outstanding
 
balances under
 
repurchase
 
agreement
 
borrowings
 
declined proportionately
 
as
well. As a
 
result, many
- 28 -
We define
 
figures discussednet portfolio
 
below appear
distorted
when simple
average balances
are calculated,
such as average
MBS
held and average
outstanding
balances under
repurchase
agreement
borrowings.
Further, since
the sales occurred
very late
in the
quarter, interest
 
income andas
 
interest expense
amounts reflect
balances of
both assets
and borrowing
in place for
the majority
of the
quarter.
The combination
of these two
factors led
to certain
metrics such
as our yield
on average
MBS and cost
of funds measures
to
appear higher
than they
would have
been had these
large sales
not occurred,
or had they
occurred earlier
in the quarter.
These factors
should be kept
in mind when
reading the
discussion of
our investment
portfolio
segment results
for the quarters
that follow.
We define net
portfolio
interest income
as interest
 
income on MBS
 
MBS less
interest
 
expense on
 
repurchase
 
agreement
 
funding.
 
During the
the three
nine months ended
March 31,
September 30, 2021, we generated $1.6 million of
net portfolio interest income, consisting of $1.7 million of interest
income from MBS
assets offset by $0.1
million of interest
expense on repurchase
liabilities.
For the comparable
period ended September
30, 2020, we
generated
 
$0.62.1 million
 
of net portfolio
 
interest income,
 
consisting
 
of $0.6 million
of interest
income from
MBS assets
offset by $40,000
of interest
expense on
repurchase
liabilities.
For the comparable
period ended
March 31,
2020, we generated
$1.1 million
of net portfolio
interest income,
consisting
of $2.0$3.2 million
 
of interest
 
income from
 
MBS assets offset
 
offset by
$0.91.0 million
 
of interest
 
expense on
 
on repurchase
 
liabilities.
The $1.4$1.5
 
million decrease
 
in interest
 
income for
 
the threenine
 
months ended
 
MarchSeptember
31,30, 2021 was
 
due to a 245$15.4
 
basis point
("bp")million decrease
 
in yieldsaverage
 
earned on
the portfolio,MBS balances,
 
combined with
 
a $67.1167 basis
point ("bp")
decrease in
yields earned
on the
portfolio.
The $0.9
million decrease
in interest
expense for
the nine
months ended
September
30, 2021
was due
to a combination
of
an $11.9 million
 
decrease
 
in average
MBS balances.
 
The $0.9 million
decrease in
interest expense
for the three
months ended
March 31,
2021 was due
to a $62.1
million
decrease in
average repurchase
 
liabilities
 
combined withand a 151
 
a 260 bp decrease
 
in cost of
 
funds.
Our economic
 
interest
expense
 
on repurchase
 
liabilities
 
for the three
 
nine months ended
 
March 31,ended September
 
30, 2021
and 2020
 
was $0.7 million$2.2
 
million and
$1.43.0 million,
 
respectively, resulting
 
in ($0.1)0.5)
 
million and
 
$0.70.2 million
 
of economic
 
net portfolio
 
interest
 
income, respectively.
 
During the
three months
ended September
30, 2021,
we generated
approximately
$513,000
of net portfolio
interest
income,
consisting
of approximately
$537,000
of interest
income
from MBS
assets offset
by approximately
$24,000
of interest
expense
on repurchase
liabilities.
For the
three months ended
September 30, 2020,
we generated approximately $561,000 of
net portfolio interest income, consisting of
approximately
$604,000
of interest
income from
MBS assets
offset by
approximately
$43,000
of interest
expense on
repurchase
liabilities.
Our economic interest expense
on repurchase liabilities
for the three months ended September 30, 2021 and 2020 was $0.7 million
and
$1.1
million, respectively,
resulting in
approximately ($0.2)
million
and
($0.5)
million of
economic net
portfolio interest
expense,
respectively.
The
tables
 
below
provide
 
information
 
on our
portfolio
 
average
balances,
 
interest
income,
 
yield
on
 
assets,
average
 
repurchase
agreement
 
agreement
balances, interest
 
expense, cost
 
of funds,
net interest
 
income and net
 
net interest rate
 
rate spread for the
 
for the three
nine months ended
 
MarchSeptember 30,
2021
31, and 2020
and each
quarter in
2021 and
 
for each quarter2020 on both
 
in 2020 ona GAAP and
 
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)
Three Months EndedSeptember 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%
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%7.25%
June 30, 2020
53,630
523
3.90%
51,987
60
516
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
928
1,384
2.83%
4.22%
Nine Months Ended
September 30, 2021
$
68,878
$
1,726
3.34%
$
69,533
$
95
$
2,220
0.18%
4.26%
September 30, 2020
84,251
3,167
5.01%
81,431
1,031
3,008
1.69%
4.92%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
Three Months EndedSeptember 30, 2021
$
513
$
(196)
3.08%
(1.14)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
$
571
$
(137)
3.31%
(0.79)%
December 31, 2020
554
(61)
3.20%
(0.43)(0.42)%
September 30, 2020
561
(504)
3.56%
(3.40)%
June 30, 2020
463
7
3.44%
(0.07)%
March 31, 2020
1,112
656
3.16%
1.77%
(1)
Portfolio yields and costs of borrowings presented in the table above
and the tables on pages
31 and 32 are calculated based on the
average balances of the underlying investment portfolio/repurchase
agreement balances and are annualized for the quarterly periods
presented. Average balances for quarterly periods are calculated
using two data points, the beginning and ending balances.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 28 -
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 32 include
the effect
of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period related to hedging
activities divided by average MBS held.
(4)
Economic Net Interest Spread is calculated by subtracting average economic
cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest
income was
$0.6 million
for the three
months ended
March 31,
2021 and $2.0
million for
the three
months ended
March
31, 2020.
Average MBS
holdings were
$69.0 million
and $136.1
million for
the three months
ended March
31, 2021 and
2020,
respectively. The
$1.4 million
decrease
in interest
income was
due to a $67.1
million decrease
in average
MBS holdings,
combined with
a
245 basis point
("bp") decrease
in yields.
Average balances
as presented
here, and
in the table
below, are based
on beginning
and ending
outstanding
balances and
are skewed
lower for
the quarter
ended March
31, 2020 because
nearly all
of the disposals
occurred
at the end
of March 2020.
If average
balances were
calculated
based on
daily balances,
average MBS
holdings for
the three months
ended March
31, 2020 would
have been
$209.7 million
and the yield
would have
been 3.89%.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
MBS
and pass-through
MBS (“PT
MBS”) for
the three months
ended March
31, 2021 and
for each quarter
in 2020.
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
Three Months Ended
March 31, 2021
$
68,703
$
314
$
69,017
$
605
$
6
$
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
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%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
outstanding
balances under
repurchase
agreements
were $69.1
million and
$131.2 million,
generating
interest expense
of $40,000
and $0.9 million
for the three
months ended
March 31,
2021 and 2020,
respectively.
Our average
cost of funds
was 0.23%
and
2.83% for
three months
ended March
31, 2021 and
2020,
respectively.
There was
a 260 bp decrease
in the average
cost of funds
and a
$62.1 million
decrease in
average outstanding
balances under
repurchase
agreements
during the
three months
ended March
31, 2021 as
compared to
the three
months ended
March 31,
2020. Average
balances as
presented
here, and
in the table
below, are based
on
beginning and
ending outstanding
balances and
are skewed
lower for
the quarter
ended March
31, 2020 because
nearly all
of the
deleveraging
occurred at
the end of
March 2020.
If average
balances were
calculated
based on
daily balances,
average outstanding
repurchase
agreements
for the three
months ended
March 31,
2020 would
have been
$198.4 million
and the cost
of funds would
have
been 1.87%.
Our economic
interest expense
was $0.7 million
and $1.4 million
for the three
months ended
March 31, 2021
and 2020, respectively.
There was
a 11 bp increase
in the average
economic cost
of funds
to 4.33%
for the three
months ended
March 31,
2021 from
4.22% for
the
three months
ended March
31, 2020.
The $0.7
million decrease
in economic
interest expense
was due
to a 260
bp decrease
in the average
cost of funds
combined with
the unfavorable
performance
of our derivative
holdings attributed
to the current
period.
Because all
of our repurchase
agreements
are short-term,
changes in
market rates
have a more
immediate impact
on our interest
expense.
The Company’s
average cost
of funds calculated
on a GAAP
basis was 10
bps above the
average one-month
LIBOR and
equal
to the average
six-month LIBOR
for the quarter
ended March
31, 2021.
The Company’s
average economic
cost of funds
was 420 bps
above the
average one-month
LIBOR and
410 bps above
the average
six-month LIBOR
for the quarter
ended March
31, 2021.
The
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 29 -
March 31, 2020
1,112
656
3.16%
1.77%
Nine Months Ended
September 30, 2021
$
1,631
$
(494)
3.16%
(0.92)%
September 30, 2020
2,136
159
3.32%
0.09%
(1)
Portfolio yields
and costs
of borrowings
presented in
the tables
above and
the tables
on pages
29 and
30 are
calculated based
on the
average term
to maturitybalances
 
of the underlying
investment portfolio/repurchase
agreement balances
and are annualized
for the periods
presented.
Average balances for quarterly periods are calculated using two data
points, the beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the tables above and the tables on page 30 include
the effect
of derivative instrument hedges for only the period presented.
(3)
Represents
interest
cost
of
our
borrowings
and
the
effect
of
derivative
instrument
hedges
attributed
to
the
period
related
to
hedging
activities divided by average MBS.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest income
was $1.7
million for
the nine
months ended September 30,
2021 and
$3.2 million
for the
nine months ended
September
30, 2020.
Average
MBS holdings
were
$68.9
million
and $84.3
million
for the
nine months
ended
September
30, 2021
and 2020,
respectively. The $1.5
million decrease
in interest income
was due to a $15.4
million decrease
in average MBS
holdings,
combined with
a
167 bp decrease
in yields.
Our interest income was $0.5 million for
the three months ended September 30, 2021 and
$0.6 million for the
three months ended
September 30, 2020.
Average MBS holdings were $66.7 million and $63.0 million for the three months ended September
30, 2021 and
2020, respectively. The $0.1 million decrease in interest income was due to
a 62
bp decrease in yields, partially offset by a
$3.7 million
increase in
average MBS
holdings.
The tables below present the average
portfolio size, income
and yields of our respective
sub-portfolios,
consisting of structured
MBS
and PT MBS,
for the nine
months ended
September
30, 2021
and 2020,
and for each
quarter during
2021 and
2020.
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
Three
Months Ended
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
September 30, 2021
$
64,641
$
2,051
$
66,692
$
533
$
4
$
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
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%
Nine Months Ended
September 30, 2021
$
67,851
$
1,027
$
68,878
$
1,717
$
9
$
1,726
3.37%
1.25%
3.34%
September 30, 2020
83,570
681
84,251
3,119
48
3,167
4.98%
9.42%
5.01%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
outstanding
balances
under repurchase
agreements
were $69.5
million and
$81.4 million,
generating
interest expense
of
$0.1 million
and $1.0
million for
the nine months
ended September
30, 2021
and 2020,
respectively.
Our average
cost of funds
was 0.18%
and 1.69%
for nine
months ended
September
30, 2021
and 2020,
respectively.
There was
a 151 bp decrease
in the average
cost of funds
and a
$11.9 million
decrease
in average
outstanding
 
repurchase
 
agreements
 
increased from
33 days at
December 31,
2020 to 64
days at March
31, 2021.
The tables
below presentduring
 
the averagenine
 
outstandingmonths
 
balances underended September
 
all repurchase30, 2021,
 
agreements,
interest expense
and averagecompared
economic cost
of funds,
and average
one-month
and six-month
LIBOR rates
forto the threenine
 
months ended
 
March 31,September
 
2021 and for30, 2020.
 
each
quarter in
 
2020 on both
 
a GAAP and
economic basis.
 
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Agreements
Basis
Basis
Basis
Basis
Three Months Ended
March 31, 2021
$
69,104
$
40
$
748
0.23%
4.33%
December 31, 2020
67,878
43
658
0.25%
3.88%
September 30, 2020
61,151
43
1,108
0.28%
7.24%
June 30, 2020
51,987
60
516
0.46%
3.97%
March 31, 2020
131,156
928
1,384
2.83%
4.22%
 
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
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
December 31, 2020
0.15%
0.27%
0.10%
(0.02)%
3.73%
3.61%
September 30, 2020
0.17%
0.35%
0.11%
(0.07)%
7.08%
6.89%
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%
 
Dividend Income
 
At both March
31, 2021 and
December 31,
2020,
we owned
2,595,357 shares
of Orchid common
stock.
Orchid paid
total dividends
of
$0.195 and
$0.24 and
per share
during the
three months
ended March
31, 2021 and
2020,
respectively.
During the
three months
ended
March 31,
2021 and 2020,
we received
dividends
on this common
stock investment
of approximately
$0.5
million and
$0.4
million,
respectively.
 
Long-Term Debt
 
Junior Subordinated Debt
 
Interest expense
on our junior
subordinated
debt securities
was approximately
$0.2 million
for the three-month
period ended
March
31, 2021,
compared to
approximately
$0.3 million
for the same
period in
2020.
The average
rate of interest
paid for the
three months
ended March
31, 2021 was
3.71% compared
to 5.19% for
the comparable
period in
2020. The junior
subordinated
debt securities
pay
interest at
a floating
rate.
The rate is
adjusted quarterly
and set at
a spread of
3.50% over
the prevailing
three-month
LIBOR rate
on the
determination
date.
As of March
31, 2021,
the interest
rate was 3.68%.
 
Note Payable
 
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable
 
in equal monthly principal and interest
installments of approximately $4,500 through October 30, 2039. Interest accrues
 
at 4.89% through October 30, 2024. Thereafter,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 30 -
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, 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
ten months
after the
completion
of the loan
forgiveness
period.
The Small
Business Administration
has notified
the Company
that, effective
as of April
22, 2021,
all principal
and accruedOur economic
 
interest
 
underexpense
was $2.2
million
and $3.0
million
for the
 
PPP loannine
 
has been forgiven.months
ended
September
30, 2021
and 2020,
respectively.
There was a 66 bp decrease
in the average economic
cost of funds to
4.26% for the nine
months ended September
30, 2021 from 4.92%
for the nine
months ended September 30, 2020.
The $0.8 million decrease in
economic interest expense was due to the
$11.9 million
decrease
in average
outstanding
repurchase
agreements
during the
nine months
ended September
30, 2021.
Our average
outstanding
balances
under repurchase
agreements
were $67.3
million and
$61.2 million,
generating
interest expense
of
approximately
$24,000
and 43,000
for the
three months
ended September
30, 2021
and 2020,
respectively.
Our average
cost of
funds was
0.14% and
0.28% for
three months
ended September
30, 2021 and
2020, respectively.
There was
a 14 bp
decrease
in the average
cost of
funds and a
$6.1 million increase in
average outstanding repurchase agreements
during the three months
ended September 30, 2021,
compared
to the three
months ended
September
30, 2020.
 
Gains or Losses and Other Income
 
Our
 
The tableeconomic
 
below presentsinterest
 
our gainsexpense
 
or losses was
$0.7
million
and
 
other income$1.1
million
for
the
three
months
ended
September 30,
2021
and
2020,
respectively.
There was
a 289
bp decrease
in the
average
economic
cost of
funds to
4.36% for
the three
months ended
September
30, 2021
from 7.25%
 
for the three
 
months ended
 
March September
30, 2020.
Because all of
our repurchase agreements are short-term, changes in market rates
have a
more immediate impact on our
interest
expense.
Our average cost of funds calculated on a GAAP basis was 5 bps above the average one-month LIBOR and 2 bps below the
average
six-month
LIBOR for
the quarter
ended September
30, 2021.
Our average
economic
cost of
funds was
427 bps
above the
average
one-month LIBOR and 420
bps above
the average six-month LIBOR
for the
quarter ended September 30,
2021. The average
term to
maturity of
the outstanding
repurchase
agreements
decreased
from 33 days
at December
31, 2020
to 25 days
at September
30, 2021.
The tables
below
present
the average
outstanding
balances
under
our repurchase
agreements,
interest
expense
and average
economic
cost of funds,
and average
one-month and
six-month LIBOR
rates for the
nine months
ended September
30, 2021 and
2020, and for
each
quarter in
 
2021 and 2020.
 
2020, on
both a GAAP
and economic
basis.
($ in thousands)
2021Average
2020Balance of
ChangeInterest Expense
Realized losses on salesAverage Cost of MBSFunds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
September 30, 2021
$
-67,253
$
(5,805)24
$
5,805733
Unrealized losses on MBS0.14%
(1,392)4.36%
(574)June 30, 2021
(818)72,241
Total losses on
MBS31
(1,392)739
(6,379)0.17%
4,987
Losses on derivative instruments
-
(5,291)
5,291
Unrealized gains (losses) on Orchid Island Capital, Inc. common stock
2,050
(4,408)
6,458
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
three months
ended March
31, 2020 we
received proceeds
of approximately
$171.2
million from
the sales of
MBS. Most
of these sales
occurred during
the second
half of March
2020 as we
sold assets
in order
to maintain
our leverage
ratio at prudent
levels, maintain
sufficient
cash and liquidity
and reduce
risk associated
with the market
turmoil brought
about
by COVID-19.
We did not
sell any MBS
during the
three months
March 31,
2021.
The fair value
of our MBS
portfolio and
derivative
instruments,
and the gains
(losses) reported
on those financial
instruments,
are
sensitive to
changes in
interest rates.
The table
below presents
historical
interest rate
data as of
each quarter
end during
2021 and 2020.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)4.09%
March 31, 2021
0.94%69,104
1.75%40
2.39%748
3.08%0.23%
0.19%4.33%
December 31, 2020
0.36%67,878
0.92%43
2.22%658
2.68%0.25%
0.23%3.88%
September 30, 2020
0.27%61,151
0.68%43
2.39%1,108
2.89%0.28%
0.24%7.25%
June 30, 2020
0.29%51,987
0.65%60
2.60%516
3.16%0.46%
0.31%3.97%
March 31, 2020
0.38%131,156
928
1,384
2.83%
4.22%
Nine Months Ended
September 30, 2021
$
69,533
$
95
$
2,220
0.18%
4.26%
September 30, 2020
81,431
1,030
3,008
1.69%
4.92%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Three Months Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
December 31, 2020
0.15%
0.27%
0.10%
(0.02)%
3.73%
3.61%
September 30, 2020
0.17%
0.35%
0.11%
(0.07)%
7.08%
6.90%
June 30, 2020
0.55%
0.70%
2.89%(0.09)%
3.45%(0.24)%
1.10%3.42%
(1)
Historical 5 Year and
10 U.S. Year
Treasury Rates are obtained from quoted end of
day prices on the Chicago Board Options Exchange.
(2)
Historical 15 Year and
30 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s
Primary Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Operating Expenses
3.27%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 31 -
March 31, 2020
For 1.34%
1.43%
1.49%
1.40%
2.88%
2.79%
Nine Months Ended
September 30, 2021
0.10%
0.19%
0.08%
(0.01)%
4.16%
4.07%
September 30, 2020
0.68%
0.83%
1.01%
0.86%
4.24%
4.09%
Dividend Income
We owned 1,520,036
shares of Orchid
common stock as of
March 31, 2020.
We acquired 975,321
additional shares
during the three
months ended June 30, 2020, and
an additional 100,000 shares during the three months ended September 30, 2020, bringing our total
ownership to 2,595,357 shares. Orchid paid total dividends
of $0.585 per share and $0.195 per share during the nine
and three months
ended September
30, 2021, respectively, and $0.595
per share and $0.19 per share
during the nine and three
months ended September
30, 2020,
respectively.
During the
nine and
three months
ended September 30,
2021, we
received dividends on
this common
stock
investment
of approximately
$1.5 million
and $0.5 million,
respectively, compared
to $1.2 million
and $0.5
million during
the nine and
three
months ended
September
30, 2020,
respectively.
Long-Term Debt
Junior Subordinated Notes
Interest
expense on
our junior
subordinated
debt securities
was $0.7
million and
$0.9 million
for the nine
months ended
September
30,
2021 and 2020, respectively.
The average rate of interest paid for the nine months
ended September 30, 2021 was 3.67% compared
to
4.38% for
the comparable
period in
2020.
Interest expense
on
our
junior subordinated debt
securities was
$0.2
million and
$0.3 million
for
the
three month
periods ended
September
30, 2021
and 2020,
respectively.
The average
rate of
interest
paid for
the three
 
months ended
 
March 31,September
 
30, 2021 our
 
total operatingwas 3.62%
expenses were
approximately
$1.8 million
compared
 
to
approximately
$1.7 million
for the three
months ended
March 31,
2020. The
table below
presents a
breakdown
of operating
expenses for
the three
months ended
March 31,
2021 and 2020.
(in thousands)
2021
2020
Change
Compensation and benefits
$
1,124
$
1,100
$
24
Legal fees
44
20
24
Accounting, auditing and other professional fees
93
139
(46)
Directors’ fees and liability insurance
188
165
23
Other G&A expenses
308
282
26
$
1,757
$
1,706
$
51
Income Tax Provision
We recorded an income tax provision for the three months ended March 31, 2021 of approximately
$0.5 million on consolidated
pre-tax book income of $1.8 million. We recorded an income tax provision for the three months ended
March 31, 2020 of approximately
$7.4 million on a consolidated pre-tax book loss of $14.9 million.
As a result
of adverse
economic impacts
of COVID-19
on our business,
management
performed
an assessment
of the need
for
additional
valuation allowances
against existing
deferred tax
assets. Following
the more-likely-than-not
standard that
benefits will
not be
realized in
the future,
we determined
an additional
valuation allowance
of approximately
$11.2 million was
necessary during
the three
months ended
March 31,
2020 for
the net operating
loss carryforwards
and capital
loss carryforwards.
With the evolving
and changing
landscape caused
by the pandemic,
we will continue
to closely
monitor the
impacts of
COVID-19
on the Company’s
ability to
realize its
deferred tax
assets and
may increase
valuation allowances
in the future
as new information
becomes available.
Financial
Condition:
Mortgage-Backed Securities
As of March
31, 2021,
our MBS portfolio
consisted of
$72.9 million
of agency or
government
MBS at fair
value and had
a weighted
average coupon
of 3.66%.
During the
three months
ended March
31, 2021,
we received
principal repayments
of $3.3 million
compared to
$6.7 million 3.80%
 
for the comparable
 
period ended
March 31,in
 
2020.
 
The averagejunior subordinated
 
prepaymentdebt securities
 
speedspay interest
at a floating
rate.
The rate is
adjusted quarterly
and set at
a spread of
3.50% over
the prevailing
three-month
LIBOR rate
on the determination
date.
As of September
30, 2021,
the interest
rate was
3.62%.
Note Payable
On October
30, 2019,
the Company borrowed
$680,000 from a
bank. The
note is
payable in equal
monthly principal and interest
installments of approximately
$4,500 through October
30, 2039. Interest accrues
at 4.89% through October
30, 2024. Thereafter, interest
accrues based
on the weekly
average yield
to the United
States Treasury
securities
adjusted to
a constant
maturity of
5 years, plus
3.25%.
The note
is secured
by a mortgage
on the Company’s
office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately
$152,000 through
the Paycheck Protection
Program (“PPP”) of the CARES
Act in
the form
of a
low interest
loan.
The Small
Business
Administration
notified
the Company
that,
effective
as of
April
22, 2021,all
principal
and accrued
interest
under the
PPP loan
has been
forgiven.
Gains or Losses and Other Income
The table
below presents
our gains
or losses
and other
income for
 
the quartersnine and
three months
 
ended MarchSeptember
 
31,30, 2021
and 2020 were
 
18.3% and 2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
 
13.7%,
respectively.
 
 
The following
table presents
the 3-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 (%)
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 32 -
2021
2020
Change
2021
2020
Change
Realized gains (losses) on sales of MBS
$
69
$
(5,805)
$
5,874
$
69
$
-
$
69
Unrealized (losses) gains on MBS
(2,222)
304
(2,526)
(324)
276
(600)
Total (losses)
gains on MBS
(2,153)
(5,501)
3,348
(255)
276
(531)
Losses on derivative instruments
-
(5,292)
5,292
-
-
-
Gains on retained interests in securitizations
-
59
(59)
-
59
(59)
Unrealized (losses) gains on
Orchid Island Capital, Inc. common stock
(856)
39
(895)
(779)
794
(1,573)
We invest
in MBS
with the
intent
to earn
net income
from the
realized
yield on
those
assets
over
their related
funding
and hedging
costs,
and not for the
purpose of making short term gains from trading in these securities.
However, we have sold, and may
continue to sell,
existing assets
to
acquire new
assets, which
our
management believes
might have
higher risk-adjusted
returns in
light of
current or
anticipated interest rates, federal government programs or general economic conditions or to
manage our balance sheet
as part
of our
asset/liability
management
strategy. During the nine months
ended September
30, 2020, we received
proceeds of $171.2
million from the
sales of MBS.
Most of these
sales occurred
during the
second half
of March 2020
as we sold
assets in order
to maintain
our leverage
ratio
at prudent levels, maintain sufficient cash
and liquidity and reduce risk
associated with the market turmoil brought about
by COVID-19.
During the
nine months
ended September
30, 2021,
we received
proceeds
of $13.1
million from
the sales
of MBS.
The fair
value of
our MBS
portfolio and derivative instruments, and the
gains (losses) reported on
those financial instruments, are
sensitive
to changes
in interest
rates.
The table
below presents
historical
interest
rate data
for each
quarter end
during 2021
and 2020.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 Year and
10 Year U.S. Treasury
Rates are obtained from quoted end of day prices on the Chicago Board Options
Exchange.
(2)
Historical 15 Year and
30 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration
Ltd.
Operating Expenses
For the nine
and three months ended September 30, 2021,
our total operating expenses were approximately $5.1 million and $1.7
million,
respectively, compared to approximately
$5.0 million and $1.6 million for the nine and three months ended September 30, 2020,
respectively.
The table
below presents
a breakdown
of operating
expenses for
the nine
and three
months ended
September
30, 2021 and
2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Compensation and related benefits
$
3,220
$
3,157
$
63
$
1,029
$
1,010
$
19
Legal fees
113
122
(9)
37
27
10
Accounting, auditing and other professional fees
293
345
(52)
97
94
3
Directors’ fees and liability insurance
568
512
56
190
166
24
Administrative and other expenses
940
871
69
300
319
(19)
$
5,134
$
5,007
$
127
$
1,653
$
1,616
$
37
 
 
- 33 -
Income Tax Provision
We recorded an income tax provision for the nine and three months ended September 30,
2021 of approximately $0.3 million and
$0.2 million, respectively, on consolidated pre-tax book income of $1.2 million and $0.6 million, respectively.
We recorded an income
tax provision for the nine and three months ended September 30, 2020
of approximately $9.3 million and $0.6 million, respectively, on
consolidated pre-tax book (loss) income of $(8.3) million and $1.9 million.
As a result
of adverse
economic
impacts of
COVID-19
on our business,
management
performed
an assessment
of the need
for
additional
valuation
allowances
against existing
deferred
tax assets.
Following
the more-likely-than-not
standard
that benefits
will not
be
realized in
the future,
we determined
an additional
valuation
allowance
of approximately
$11.2 million was
necessary
during the
three
months ended
March 31,
2020 for
the net operating
loss carryforwards
and capital
loss carryforwards.
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2021,
our MBS portfolio
consisted
of $64.4
million of
agency or
government
MBS at fair
value and
had a
weighted
average coupon
of 3.40%.
During the
nine months
ended September
30, 2021,
we received
principal
repayments
of $11.8
million compared
to $11.2 million
for the comparable
period ended
September
30, 2020.
The average
prepayment
speeds for
the quarters
ended September
30, 2021
and 2020
were 18.3%
and 15.8%,
respectively.
The following
table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT MBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction of
the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three-month
prepayment
rate of the
securities
in the respective
asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
The following
 
tables summarize
 
certain characteristics
 
of our PT
 
MBS and structured
 
MBS as of March
 
31, 2021 andSeptember
 
30, 2021
and December 31,
31, 2020:
 
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31,September 30, 2021
Fixed Rate MBS
$
72,50461,372
99.5%95.3%
3.66%3.69%
335333
1-Jan-511-Sep-51
Interest-Only MBS
3292,999
0.5%4.7%
3.51%2.87%
298305
15-Jul-4815-May-51
Inverse Interest-Only MBS
2319
0.0%
5.87%5.90%
218212
15-May-39
Total MBS Portfolio
$
72,856
100.0%
3.66%
335
1-Jan-51
December 31, 2020
Fixed Rate MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only MBS
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only MBS
25
0.0%
5.84%
221
15-May-39
Total MBS Portfolio
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
March 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
48,564
66.7%
$
38,946
59.8%
Freddie Mac
24,292
33.3%
26,232
40.2%
Total Portfolio
$
72,856
100.0%
$
65,178
100.0%
March 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
108.84
$
109.51
Weighted Average Structured Purchase Price
$
4.28
$
4.28
Weighted Average Pass-through Current Price
$
109.63
$
112.67
Weighted Average Structured Current Price
$
4.80
$
3.20
Effective Duration
(1)
3.976
3.309
(1)
Effective duration is the approximate percentage change
in price for a 100 basis point change in rates.
An effective duration of 3.976 indicates
that an interest rate increase of 1.0% would be expected to cause a 3.976% decrease
in the value of the MBS in our investment portfolio
at
March 31, 2021.
An effective duration of 3.309 indicates that an interest rate
increase of 1.0% would be expected to cause a 3.309% decrease
in the value of the MBS in our investment portfolio at December 31,
2020. These figures include the structured securities in the portfolio
but do
include the effect of our 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
three months
ended March
31, 2021 and
2020.
($ in thousands)
Three Months Ended March 31,
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
12,368
$
104.84
1.19%
$
20,823
$
110.83
2.64%
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 33 -
 
priced by
- 34 -
Total MBS Portfolio
$
64,390
100.0%
3.40%
331
1-Sep-51
December 31, 2020
Fixed Rate MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only MBS
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only MBS
25
0.0%
5.84%
221
15-May-39
Total MBS Portfolio
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
September 30, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
41,938
65.1%
$
38,946
59.8%
Freddie Mac
22,452
34.9%
26,232
40.2%
Total Portfolio
$
64,390
100.0%
$
65,178
100.0%
September 30, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
109.33
$
109.51
Weighted Average Structured Purchase Price
$
4.81
$
4.28
Weighted Average Pass-through Current Price
$
110.38
$
112.67
Weighted Average Structured Current Price
$
9.45
$
3.20
Effective Duration
(1)
2.542
3.309
(1)
Effective duration is the approximate percentage change in price
for a 100 basis point change in rates.
An effective duration of 2.542 indicates
that an interest rate increase of 1.0% would be expected to cause a 2.542% decrease in the
 
value of the MBS in our investment portfolio at
September 30, 2021.
An effective duration of 3.309 indicates that an interest rate
increase of 1.0% would be expected to cause a 3.309%
decrease in the value of the MBS in our investment portfolio at December
31, 2020. These figures include the structured securities in the
portfolio but do include the effect of our hedges.
Effective duration quotes for individual investments are obtained
from The Yield Book, Inc.
The following
table presents
a summary
of our portfolio
assets acquired
during the
nine months
ended September
30, 2021
and 2020.
($ in thousands)
Nine Months Ended September 30,
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
23,337
$
106.48
1.41%
$
43,130
$
111.44
1.99%
Structured MBS
2,852
10.01
0.43%
-
-
-
Our portfolio
of PT MBS
is typically
comprised
of adjustable-rate
MBS, fixed-rate
MBS and hybrid
adjustable-rate
MBS. We generally
seek to acquire
low duration
assets that
offer high
levels of
protection
from mortgage
prepayments
provided
that they
are reasonably
priced by
the market.
 
The stated
 
contractual
 
final maturity
 
of the mortgage
 
loans underlying
 
our portfolio
 
of PT MBS
 
generally ranges
 
up
to 30 years.
 
However, the effect
 
effect of prepayments
 
of the underlying
 
mortgage loans
 
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
 
loan payments,
 
which accelerates
 
the amortization
 
of the
loans.
 
The duration
 
of our IO
 
and IIO portfolio
 
will vary greatly
 
greatly depending
 
on the structural
 
features of
 
of the securities.
 
While prepayment
activity will
 
always affect
 
the cash flows
 
flows associated
 
with the
securities,
 
the interest
 
only nature
 
of IO’s may cause
 
cause their
durations
 
to become
extremely negative
 
negative when
prepayments
 
are high,
 
and less negative
 
when prepayments
 
are low. Prepayments
 
affect the
duration
 
of IIO’s
similarly, but the
 
floating rate
 
nature of
 
the coupon
 
of IIOs (which
 
is inversely
 
related to
 
the level
 
of one month
 
LIBOR) causes
 
their price
movements -
 
- and model
duration
 
- to be affected
 
by changes
 
in both
prepayments
 
and one month
 
LIBOR - both
 
current and
 
anticipated
levels.
 
As a result,
 
the duration
 
of IIO securities
 
will also vary
 
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 March 31,
2021, assuming
rates instantaneously
fall 100 bps,
rise 100 bps
and rise
200 bps, adjusted
to reflect
the impact
of convexity, which
is the measure
of the sensitivity
of our hedge
positions and
Agency MBS’
effective duration
to movements
in interest
rates.
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
72,504
$
2,487
$
(3,399)
$
(7,366)
3.43%
(4.69)%
(10.16)%
Interest-Only MBS
329
(100)
74
127
(30.33)%
22.55%
38.71%
Inverse Interest-Only MBS
23
1
(3)
(7)
3.56%
(14.46)%
(30.16)%
Total MBS Portfolio
$
72,856
$
2,388
$
(3,328)
$
(7,246)
3.28%
(4.57)%
(9.95)%
($ in thousands)
Notional
$ Change in Fair Value
% Change in Fair Value
Amount
(1)
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Eurodollar Futures Contracts
Junior Subordinated Debt Hedges
$
1,000
$
(10)
$
10
$
20
(1.00)%
1.00%
2.00%
$
1,000
$
(10)
$
10
$
20
Gross Totals
$
2,378
$
(3,318)
$
(7,226)
(1)
Represents the
average contract/notional
amount of Eurodollar
futures contracts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3435 -
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 September
30, 2021,
assuming rates
instantaneously
fall 100 bps,
rise 100
bps and
rise 200
bps, adjusted
to reflect
the
impact of
convexity, which
is the
measure of
the sensitivity
of our hedge
positions
and Agency
MBS’ effective
duration
to movements
in
interest
rates.
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
61,372
$
2,070
$
(2,857)
$
(6,133)
3.37%
(4.66)%
(9.99)%
Interest-Only MBS
2,999
(955)
636
996
(31.84)%
21.21%
33.22%
Inverse Interest-Only MBS
19
1
(3)
(5)
6.09%
(13.97)%
(28.53)%
Total MBS
Portfolio
$
64,390
$
1,116
$
(2,224)
$
(5,142)
1.73%
(3.45)%
(7.99)%
($ in thousands)
Notional
$ Change in Fair Value
% Change in Fair Value
Amount
(1)
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Eurodollar Futures Contracts
Junior Subordinated Debt Hedges
$
1,000
$
(3)
$
3
$
5
(1.00)%
1.00%
2.00%
$
1,000
$
(3)
$
3
$
5
Gross Totals
$
1,113
$
(2,221)
$
(5,137)
(1)
Represents
the average contract/notional
amount of Eurodollar
futures contracts.
In addition
 
to changes
 
in interest
 
rates, other
 
factors impact
 
the fair value
 
value of our
interest
 
rate-sensitive
 
investments
 
and hedging
instruments,
 
such as the
 
shape of
 
the yield curve,
 
curve, market
expectations
 
as to future
 
interest rate
 
rate changes and
 
and other market
 
market conditions.
Accordingly, in the
 
the event
of changes
 
in actual
interest
 
rates, the
 
change in the
 
the fair value
 
value of our assets
 
assets would likely
 
likely differ from
 
from that
shown
above and
 
such difference
 
might be
 
material and
 
adverse to
 
our stockholders.
Repurchase Agreements
As of MarchSeptember
 
31,30, 2021,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number of
 
of commercial
banks and other
 
other financial
institutions
 
and had borrowings
 
in place with
 
six of these
 
counterparties.
 
We believe
 
believe these
facilities
 
provide
borrowing
 
capacity
 
in excess of
 
of our needs.
 
None of these
 
lenders are
 
affiliated with
 
with us.
 
These borrowings
 
are secured
 
by our MBS.
 
As of MarchSeptember
 
31,30, 2021,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$73.163.2 million
 
with a net
weighted average
 
- 36 -
net weighted
average borrowing
 
cost of 0.21%0.13%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
6 to 53 days,
 
6 to
127 days, with
a weighted
 
average maturity
 
of 6425 days.
 
Securing the
 
the repurchase
 
agreement
 
obligation
 
as of MarchSeptember
 
31,30, 2021 are
 
MBSare
MBS with
an estimated
 
fair value,
 
including
 
accrued interest,
 
of $73.0$64.6 million
 
and a weighted
 
average maturity
 
of 336332 months.
 
Through May
November
 
14,8, 2021,
2021, we have been
 
been able
to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to those
 
those that existed
 
existed at March 31,
 
September
30,
2021 with
maturities
 
through AugustJanuary
 
5, 2021.
14, 2022.
The table below presents information about our period-end, maximum and average
 
repurchase agreement obligations for each
quarter in 2021 and 2020.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
September 30, 2021
$
63,160
$
72,047
$
67,253
$
(4,093)
(6.09)%
June 30, 2021
71,346
72,372
72,241
(895)
(1.24)%
March 31, 2021
$
73,136
$
76,004
$
69,104
$
4,032
5.83%
December 31, 2020
65,071
70,684
67,878
(2,807)
(4.14)%
September 30, 2020
70,685
70,794
61,151
9,534
15.59%
(1)
June 30, 2020
51,617
52,068
51,987
(370)
(0.71)%
March 31, 2020
52,357
214,921
131,156
(78,799)
(60.08)%
(2)
(1)
The higher ending balance relative to the average balance during the quarter
 
quarter ended September 30, 2020 reflects the increase in the portfolio.
During that quarter, the Company's investment in
 
in PT MBS increased $20.4 million.
(2)
The lower ending balance relative to the average balance during the quarter
 
ended March 31, 2020 reflects the Company’s response to
the
COVID-19 pandemic. During that quarter,
 
the Company's investment in PT MBS decreased $162.4 million.
Liquidity and Capital Resources
Liquidity is
 
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
 
immediate
 
sources of
 
liquidity include
 
include cash
balances,
 
unencumbered
 
assets, the
availability
 
to borrow
 
under repurchase
 
agreements,
 
and fees and
 
and dividends received
 
received from
Orchid.
 
Our borrowing
 
capacity will
 
vary over
time as the
 
market value
 
of our interest
 
earning assets
 
varies.
 
Our investments
 
also generate
 
liquidity on
 
on an on-going
 
basis through
payments of
 
principal and
 
and interest
 
we receive
 
on our MBS
 
portfolio.
 
The COVID-19
 
pandemic has
 
adversely affected
 
affected our
liquidity,
 
assets under
 
management
 
and operating
 
results.
 
During March
 
2020,
we significantly
 
reduced our
 
MBS assets
 
to meet margin
 
calls and
 
repay debts.
 
As described
 
elsewhere
 
in this report,
 
since March
 
2020
Bimini’s operating
 
results have
 
stabilized,
 
liquidity
 
has improved
 
and our investments
 
in MBS and
 
Orchid shares
 
has increased.have increased
 
as
compared to
investments
in MBS and
Orchid shares
at March
31, 2020.
Our hedging
 
strategy
typically
 
involves taking
 
taking short
positions
 
in Eurodollar
 
futures, T-Note
 
T-Note futures, TBAs
 
TBAs or other instruments.
 
- 35 -
instruments.
Currently, our
 
hedge positions
 
are limited
 
to 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
 
reduce our
liquidity
 
position to
 
to the extent
 
other securities
 
in our portfolio
move in price
 
in such a way
 
way that
we do not
 
not receive enough
 
enough cash through
 
through margin calls
 
calls to offset
 
the Eurodollar
 
related margin
 
calls. If this
were to occur
 
occur in sufficient
 
magnitude,
 
the loss of
 
liquidity might
 
might force
us to reduce
 
reduce the size of
 
size of the levered
 
levered portfolio,
 
pledge additional
structured
 
securities
 
to raise funds
 
funds or
risk operating
 
the portfolio
 
with less liquidity.
 
liquidity.
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
 
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
- 37 -
terminate
 
the repurchase
 
agreement
 
transaction.
 
Under our
 
repurchase
 
agreement funding
 
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
 
the market value
 
value of the
asset collateralizing
 
the financing
 
transaction
 
declines, the
 
the market value
 
value of our posted
 
posted margin will
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases in
 
in value, we
 
we would
be over
collateralized
 
and we
would be entitled
 
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,
 
needed, as
do we.
 
Typically, but not always,
 
always, the parties
 
parties agree
to a
minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need for
 
for nuisance margin
 
margin calls
on a daily
 
daily basis.
As discussed
 
above, we
 
invest a portion
 
portion of
our capital
 
in structured
 
MBS.
 
We generally
 
do not apply
 
leverage to
 
to this portion
 
of our
portfolio.
 
The leverage
 
inherent in
 
in the structured
 
securities
 
replaces the
 
the leverage
obtained
 
by acquiring
 
PT securities
 
and funding
 
them in
the repurchase
 
market.
 
This structured
 
MBS strategy
 
has been a
 
a core element
 
of the Company’s
 
overall investment
 
strategy
 
since 2008.
 
However, we have
 
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
 
continue to finance
 
finance our
activities
 
through repurchase
 
agreements.
 
As of MarchSeptember
 
31,30, 2021, we
 
we had cash
cash and cash
equivalents
 
of $6.0 $7.9
million.
 
We generated
 
cash flows
 
of $3.9 million$13.4
 
million from
principal
 
and interest
 
payments on
 
our MBS portfolio
portfolio
and had average
 
repurchase
 
agreements
 
outstanding
 
of $69.1 $69.5
million during
the nine
months ended
September
30, 2021.
In
addition,
 
during the
 
threenine months
 
ended MarchSeptember
 
31, 2021.30, 2021,
 
In addition,
during
the three
months ended
March 31,
2021, we received
 
approximately
 
$2.06.5 million
 
in management
 
fees and expense
 
expense
reimbursements
 
as
manager of
 
of Orchid and
 
and approximately
 
$0.51.5 million
 
in dividends
 
from our investment
 
in Orchid common
 
common stock.
 
In order to generate additional cash to be invested in our MBS portfolio, on October
 
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 accrues 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
 
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 proceeds from this sale were approximately $462,000 and were
 
invested in our MBS portfolio.
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. 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.
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. The
Small Business
Administration
has notified
the Company
that, effective
as of April
22, 2021,
all principal
and accrued
interest under
the PPP loan
has been
forgiven.
The table below summarizes the effect that certain future contractual obligations existing as of March
 
31,of September 30, 2021 will have on our
our liquidity and cash flows. The figures below reflect forgiveness of all principal and
interest under
the PPP loan.
- 36 -
(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
73,13663,160
$
-
$
-
$
-
$
73,13663,160
Interest expense on repurchase agreements
(1)
7118
-
-
-
7118
Junior subordinated notes
(2)
-
-
-
26,000
26,000
Interest expense on junior subordinated notes
(1)
1,016995
1,9451,909
1,9421,906
9,4348,783
14,33713,593
Principal and interest on mortgage loan
(1)
54
107
107108
730703
998972
Totals
$
74,27764,227
$
2,0522,016
$
2,0492,014
$
36,16435,486
$
114,542
103,743
(1)
Interest expense
 
on repurchase
 
agreements,
 
junior subordinated
 
notes and mortgage
 
loan are based
 
on current interest
 
interest rates
as of MarchSeptember
 
31, 202130,
2021 and the remaining
 
remaining term
of liabilities
 
existing at
 
that date.
(2)
We hold a common
 
equity interest
 
in Bimini Capital
 
Trust II.
 
The amount presented
 
represents our
 
net cash outlay.
Outlook
Outlook
- 38 -
Orchid Island
 
Capital Inc.
Orchid Island Capital continued to recover from the market impact during the first quarter
of 2020 caused by the COVID-19
pandemic.
Orchid was able to grow its capital base with two secondary offeringsin the third quarter of common2021.
 
stock, realizingOrchid raised net proceeds of $96.9approximately
million. However, as$207.5 million through its “at the economic recovery from the pandemic acceleratedmarket” (“ATM”) program during the firstthird quarter and an additional $38.4 million subsequent to
September 30, 2021. The capital raised subsequent to September 30, 2021,
exhausted the remaining capacity under the ATM program
in place at the time and Orchid announced a new ATM program on October 29, 2021, of $250 million.
As for Orchid’s financial
performance, Orchid recorded GAAP net income of $0.20 per share or $26.0 million
in the third quarter of 2021 interest rates
increased as
the market anticipated strong growth for 2021 and a potential acceleration in inflation.
As described more fully below, these
developments had an adverse impact on the Agency MBS market and Orchid incurred
a net loss for the quarter of $29.4 million.2021.
 
The
net effect of the capital raises
new shares issued, net income and the net loss was a $50.9 million increase in the shareholders
equity of Orchid Island.
The increase
in the equity base of Orchiddividends paid resulted in an 11% increaseOrchid’s capital base increasing
$176.8 million, or 32% for during the
third quarter.
Year to date Orchid has increased its capital base by approximately $315.3 million, or 76%.
As a result, Bimini Advisor’s
advisory services revenue increased 17% over the second quarter and, as the increased
capital base at Orchid was not in advisory service revenueplace for the first
entire quarter, of 2021 versusthe run rate entering the fourth
quarter of 2020 and a 17% increase versus the first quarter of 2020. In addition, Orchidis higher still.
 
Orchid’s financial performance and dividend activity will also
continue to impact the size of its capital base going forward.
Orchid is obligated to reimburse us for direct expenses
paid on its behalf and to pay
to us Orchid’s pro rata share of overhead as
defined in the management
agreement.
 
As a stockholder of
Orchid, we will also continue to share in distributions, if
any, paid by
Orchid to its stockholders.
 
Our operating results are also impacted
by changes in the market value of
our holdings of Orchid common
shares, although these
market value changes do not impact our
cash flows
from Orchid.
The Company increased its holdings of Orchid
during the second quarter
of 2020,
as the shares of Orchid
were trading at a significant
discount to Orchid’s reported book value as of
March 31, 2020.
 
The Company currently owns
approximately 2.6 million shares of Orchid.
The independent Board of Directors of Orchid has the ability to terminate the
 
management agreement and thus end our ability to
collect management fees and share overhead costs.
 
Should Orchid terminate the management agreement without cause,
 
it will be
obligated to pay us a termination fee equal to three times the average annual management
 
fee, as defined in the management
agreement, before or on the last day of the current automatic renewal term.
Economic Summary
During the
first quarter
of 2021 the
economy made
tremendous
strides towards
recovery from
the COVID-19
pandemic. Evidence
of
the recovery
was pervasive.
New casesThe effects
 
of COVID-19
 
which peaked
around the
turn of the
year, moderated
significantly, as
did
hospitalizations
and deaths.
As a result
of the U.S.
Senate run-off
elections in
early January, both
of which were
won by Democrats,
one
party was
now in control
of the White
House and
both houses
of Congress.
This led the
way to a new
stimulus package
being passed
that
was at the
high end of
market expectations
- $1.9 trillion.
The American
Rescue Plan
Act of 2021
was signed
into law on
March 11, 2021.
This marked
the third
legislative
act related
to the nation’s
recovery from
the COVID-19
pandemic, after
the $2.2 trillion
CARES Act
(described
below), which
passed on March
27, 2020 and
the $2.3 trillion
Consolidated
Appropriations
Act of 2021,
which contained
$900
billion of
COVID-19
relief and
was signed on
December 27,
2020.
Given the momentum
the administration
had after
passing the
- 37 -
American Rescue
Plan Act of
2021, President
Biden shortly
thereafter
announced plans
for a $2 trillion-plus
infrastructure
bill.
The vaccine
roll-out,
which initially
seemed haphazard,
improvedcontinued to
 
the pointdominate
 
where the
U.S. became
a world leader.
The U.S.
was well on
its way to
herd immunity
as over 200
million inoculations
were administered
by April 21,
2021, well
ahead of even
the most optimistic
projections
at
the beginning
of the year.
Economic data
released over
the course
of the first
quarter has
been consistently
very strong.
Fueled by
two
rounds of
stimulus checkseconomic activity
 
during the
 
firstthird quarter
 
consumersof 2021,
particularly
the Delta
variant that
first emerged
in earnest
during July.
Daily new
infections
from the
Delta variant
rose rapidly
during the
summer but
appeared
to peak in
early September
and have
 
been spending.slowly
 
Retail sales,falling since.
 
home sales,COVID related
deaths have
followed
a similar
pattern.
Progress
on vaccinations
has
slowed, and
most of the
new cases
were among
the unvaccinated.
This has led
to various
measures
by governments
and corporations
to
mandate employees
receive vaccinations.
The net effect
of a spreading
virus and
a reluctance
on the part
of many to
get vaccinated
has
been subdued
job growth
during the
third quarter
of 2021.
This is particularly
true among
workers with
high exposure
to customers,
such
as those in
the leisure
and hospitality
industries.
The various
forms of
pandemic related
supplemental
unemployment
insurance
ended in
early September,
so job growth
may accelerate
in the fourth
quarter.
In the interim,
the combination
of a reluctance
to return
to work on
the part
of many individuals,
coupled with
sufficient
income via
unemployment
insurance,
has resulted
in both robust
 
demand for
 
new cars
andgoods
other durable
goods are
all benefitting
from the stimulusand services
 
and considerable
pent-up demand.
Job growth
appears to
be accelerating
quickly, and the
unemployment
rate has dropped
to 6.1%.
All of the
developments
described above
have stoked
inflation fears.
The most
obvious evidenceshortages
 
of potentiallabor
 
price pressuresin many industries.
 
relateCoupled
with a demand/supply
imbalance
in favor of
demand for
many
commodities
and parts,
the combination
of the two
forces has
led to severe
 
supply shortages
of a variety
of consumer
goods and
commodities
caused by
the
combination
of still constrained
production
and surging
demand that
have begun
to surface
 
across the
 
economy.
 
The factorssupply
 
highlightedimbalances
for goods
 
above and services
have in turn
 
led to a surgingprice
 
economy, whichpressures
 
grew at anfor both,
 
annualizeddriving inflation
 
rate of 6.4%to multi-decade
 
during thehighs.
 
first quarter.The Fed chairman,
 
Theyamong other
have also impactedmembers of
 
the financialFederal
 
markets.Open Market
 
TheCommittee
(“FOMC”)
has maintained
these inflationary
forces are
temporary
and will
ease once
the
effects of
the COVID
pandemic fade
and workers
can return
to work.
Yet, as implied by
market pricing
of inflation
linked U.S.
Treasury
securities
and opinions
expressed
by various
 
broad equitymarket participants,
 
indices areinflation
 
making newmay prove
 
all-time highsto be more
 
on a frequentthan transitory,
 
basis, and
corporate of late
 
debt issuanceeven FOMC
members themselves
 
levels – bothhave admitted
 
investmentinflation
 
grade andhas remained
 
high yieldlonger
 
– are at orthan they
 
near record
levels reflecting
the demand
for capital
andhad anticipated.
investor appetite
for yield.
U.S. Treasury
rates, at
least longer-term
rates, have
risen significantly.
The ten-year
U.S. Treasury
note yield
increased from
0.916% to
1.742% over
Over the course
 
of the firstthird
 
quarter an increaseand
 
of 82.6 basisinto the
 
points, andfourth, expectations
for growth
in the U.S.
economy continued
to decline.
On October
28, 2021,
the advanced
read on gross
domestic product
growth for
 
the U.S.
 
Treasury curveeconomy was
 
has
steepened substantially.reported to
 
The marketbe 2.0%.
 
has moved up
expectationsExpectations
 
for a recoverygrowth
during the
 
from the pandemicquarter were
 
and returnsignificantly
 
to normalcy
significantly.
The Federal
Reserve (the
“Fed”) gave
a green light
to higher
rates, referring
to them as
a sign of economic
strength.
However, when at
 
the
market has
attempted
to price in
an acceleration
to the timing beginning
 
of the ratequarter.
 
increases byAs noted
above, job
growth has
decelerated,
and supply
constraints
of goods
and services
are keeping
activity levels
suppressed.
Over the
course of
 
the Fed,balance
of the year
it should
become
- 39 -
apparent
whether
the supply
constraints,
especially with
respect
to labor, are
transitory
now that essentially
all forms
of pandemic
related
unemployment
insurance
have ended
and the new
cases of the
 
Fed has pushedDelta variant
 
back againstof the COVID
 
such
sentiment.virus are subsiding.
 
These effortsThis in turn
should also
answer the
question about
the
transitory
nature of
inflation.
The housing
market remains
robust as
evidenced
by sales
of new and
existing homes,
as well
as new home
construction.
However,
as home prices
 
have largelyrisen
 
been successful,at 10% –
20% over
the last year
 
and currentsupply
 
market pricingshortages
 
only reflectsof goods
 
one interestand materials
 
rate hike byare constraining
 
the end ofnew home
construction,
 
2022.this trend
 
may slow.
If this were
to occur, it would
be beneficial
for the Company’s
RMBS portfolio
as prepayments
related to
housing turnover
may decelerate.
Legislative
 
Response and
 
and the Federal
 
ReserveFed
 
Congress passed
 
passed the CARES
 
CARES Act quickly
 
quickly in
response
 
to the pandemic’s
 
emergence
 
lastin the spring
of 2020
 
and followed
 
with additional
legislation
 
legislation
over the ensuing
 
ensuing months.
 
However, as certain
 
provisions
 
of the CARES
 
Act expired,
 
such as supplemental
 
unemployment
insurance
 
last
in July of
this year,
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
 
set in, particularly
 
over the
Christmas
 
holiday.
 
As mentioned
 
above, the
 
Federal government
 
eventually
passed an
 
passed an additional
stimulus package
 
stimulus
package in
late December
 
of 2020 and
 
2020 and again in March
 
in March of 2021.
 
2021. In addition,
 
the Fed has
 
provided,
 
and
continues
 
to provide,
 
as
much support
 
to the markets
 
and the economy
 
as it can within
 
within the
constraints
 
of its mandate.
 
During the
 
third
quarter of
 
of 2020, the
 
Fed
unveiled a
 
a new monetary
 
policy framework
 
focused on
 
average inflation
 
rate targeting
 
that allows
 
the Fed Funds
rate to remain
 
quite low, even
even if inflation
 
is expected
 
to temporarily
 
surpass the
 
2% target
 
level. Further,
 
the Fed willhas
 
indicated
that it will
look past the
 
the presence of
 
of very tight
 
labor
markets, should
 
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
above 2% in the
 
the future as
 
as the economy
 
more fully
 
recovers.
 
As mentionedThe response
 
above, thisof U.S.
 
appears toTreasury rates
appeared
 
be occurringto follow
 
early inthis pattern
precisely
during the
first quarter
of 2021,
 
now that
effective vaccinesbut have
 
have beensince reversed
 
found andsince early
 
inoculationsin the second
 
are distributedquarter
 
at an accelerating2021.
Interest
 
pace.Rates
Interest
 
Interest Rates
Interest rates
steadily increased
throughout across
 
the firstU.S.
 
Treasury curve
and U.S.
dollar swap
curve were
little changed
during the
third quarter
of 2021.
The
only notable
development
within the
rates complex
was the slight
flattening
of both curves
between the
five-
and 30-year
points as
 
described abovethe
market anticipates
 
and levelsthe eventual
tapering
 
of impliedasset purchases
 
volatilitybeginning
 
rose as well.
Mortgage
rates slowly
declined at
in the end of
2020 as originators
added capacity
and could handle
ever increasing
levels of production
volume.
This
trend in mortgage
rates quickly
reversed during
the firstfourth
 
quarter of
 
2021 as ratesand
 
began to increase,increases
 
especiallyto the Fed
funds rate
in
either the
second half
of 2022 or
early 2023.
As described
above, the
COVID virus
has dominated
economic
activity, since
March 2020,
with the
Delta variant
in particular
becoming dominant
during the
third quarter
of 2021.
However, the FOMC
and the Fed
chairman have
looked through
the effects
of the
pandemic and
see the impact
fading.
At the November
FOMC meeting,
the Fed announced
they would
commence the
tapering
of their
asset purchases
beginning
in November.
The pace
of the tapering
will be $10
billion of
treasury
securities
per month
and $5 billion
of
Agency MBS
per month.
The Fed stated
the pace
of tapering
could be adjusted
if economic
conditions
warranted.
The Fed indicated
that
absent an
adjustment
to the pace
of the tapering
of their
asset purchases
they would
likely complete
the tapering
by mid next
year.
At the
conclusion
of the Fed’s
September
FOMC meeting
the
Fed released
their summary
of economic
projections,
or “Dot
Plot” as
it is known.
As was the
case with
the June
FOMC Dot
Plot, the
Dot Plot
indicated FOMC
members anticipated
increasing
the Fed Funds
rate sooner
and by a larger
amount than
the market
anticipated.
Nine of the
eighteen FOMC
members,
as evidenced
by the Dot
Plot released
in
September, expect
the Fed to
increase the
funds rate
at least once
in 2022.
This surprised
the market,
and the market
pricing of
forward
short-term
rates quickly
adjusted
to reflect
these expectations.
As the fourth
quarter has
unfolded and
inflationary
pressures
have continued
to build,
market pricing
of forward
short-term
rates have
continued
to reflect
additional
increases
to the Fed
Funds rate.
Further, as inflation
persists at
higher levels
and continues
to challenge
the
Fed’s assertion
that it will
prove transitory,
longer maturity
rates have
moved higher
so far in
 
late Februarythe fourth
 
and March.
With the increasequarter.
 
in interest
- 40 -
The Agency
 
rates, prepaymentRMBS Market
Performance
 
activity slowed.
The percent
offor the Agency
 
RMBS universemarket
 
with sufficientfor the third
 
rate incentivequarter was
 
to
economicallya modest
 
refinance0.01%, generally
 
has declinedin-line with
 
from approximatelymost other
 
80%asset classes.
 
at the end
The excess
 
of 2020return to
 
approximatelycomparable
 
46% at theduration
 
end of the
first quarter.
However, the spread
between rates
available to
borrowersU.S. Treasuries
 
and the impliedswaps
 
yield on a
current coupon
mortgage,
known asfor 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
could remain
at current
levels even
if U.S. Treasury
rates increased
further. Since
the
end of the
first quarter,
interest rates
have declined
by approximately
10 basis points
in the case
of the 10-year
U.S. Treasury
note.
Accordingly, prepayment
levels on Agency
 
RMBS securitiessub-index
 
are likelywas 0.1%
 
to remain
high unless
U.S. Treasury
rates increase
above current
levels.
- 38 -
The Agency
MBS Market
The
market conditions
that prevailed
throughout
the first
quarter were
not conducive
to mortgage
performance.
In fact, apart
from high
yield bonds,
all fixed income
sectors had
negative returnsfor both
 
for the quarter.
 
Interest rates
rose rapidly, and
volatility was
elevated.Within the
 
Agency
RMBS had
 
negative absolutesector, higher
 
and excesscoupon fixed
 
rate securities
outperformed
lower coupons,
specifically
the coupon
currently
in
widespread
production.
Total returns for
 
the firstthird
 
quarter offor
 
-1.2%2.0% and 2.5%
 
-0.3%, respectivelysecurities
 
(both vs U.Swere -0.4%
 
Treasuries and 0.00%,
respectively.
For 3.0%
and
LIBOR/swaps).3.5% coupons
 
There is athe returns
 
benefitwere 0.6%
and 0.5%,
respectively.
Thirty-year
and fifteen-year
securities
both returned
0.1% for
the quarter. As
mentioned
above, the
Fed announced
they will
begin to
 
higher interesttaper their
 
rates, andasset purchases
 
as interestin November
 
rates roseand, absent
 
prepaymentan adjustment
 
levels declined.in the pace
 
The Mortgageof
their tapering,
 
Bankers
Associationwhich could
 
refinanceoccur if
 
index declinedeconomic conditions
 
from approximatelywarrant,
 
4700 in earlyconclude the
 
January 2021$40 billion
 
to approximatelyper month
 
2900 in earlypurchases
 
April 2021,of Agency
 
before
reboundingRMBS assets
 
slightly since.by
mid-2022. Given
 
Thethe length
of time
the Fed has
been supporting
the Agency
 
RMBS market,
 
continues tocoupled with
 
be essentiallybanks that
 
bifurcatedare flush
 
with twodeposits
that need
 
separateto be invested,
price levels
in the Agency
RMBS market
were quite
rich prior
to this development,
especially
the coupons
the
Fed routinely
purchases,
which have
been the
2.0% and
 
distinct sub-markets.2.5% coupons
 
predominantly. These
factors are
what drove
the relative
Lowerunderperformance
of these
two coupons
for the quarter
and has continued
to do so
into the
fourth quarter.
The second
driver of
Agency RMBS
performance,
both for
the third
quarter of
2021 and
beyond, is,
as always,
the level
of
prepayments.
With interest
rates relatively
steady during
the third
quarter and,
after such
a prolonged
period of
low interest
rates
prepayment
speeds on
higher coupon,
 
fixed ratepremium priced
 
mortgages,securities
 
coupons ofwere expected
 
1.5% throughto eventually
 
2.5%, areslow.
 
purchased This appears
to be finally
happening,
as evidenced
by the August
and September
prepayment
reports,
released in
September
and October, respectively.
As interest
rates have
moved higher
so far in
 
the Fed.fourth
 
Fed purchase
activity maintains
substantial
price pressure
underquarter these
 
coupons and
they benefit
from attractive
TBA dollar
roll drops.
Higher coupons
in the TBA
market
do not have
 
the benefitbeen impacted
 
of Fed purchases.
Importantly, the
Fed tendsfurther quarter
 
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 still
very high
prepayment
speeds on these
securities
as
rates have
not risen
enough to
eliminate the
economic incentive
to refinance.
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.
Through the
April 2021
prepayment
report released
in early May, this
has yet to
occur.
While
market
participants
continue to
favor specified
pools that
have favorable
prepayment
characteristics
that mute
the refinance
incentive,
the
premium over
generic TBA
securities
has declined
significantly
with the reduced
refinance
incentive caused
by the increase
in rates
available to
borrowers.
date.
Recent Legislative
 
and Regulatory
 
Developments
The Fed conducted
 
large scale
 
overnight repo
 
repo operations
 
from late
 
2019 until
 
July 2020 to
 
to address
disruptions
 
in the U.S.
 
Treasury,
Agency debt
 
and Agency
 
MBS financing
 
markets. These
 
operations
 
ceased in July
 
July 2020 after
 
after the central
 
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
 
actions to
stabilize
 
markets as
 
a result of
 
of the impacts
 
of the COVID-19
 
pandemic. In
 
In March of
2020, the
 
Fed announced
 
a $700 billion
 
asset purchase
 
program to
 
to provide
liquidity
 
to the U.S.
 
Treasury and
 
Agency RMBS
 
markets. The
Fed also lowered
 
the Fed Funds
 
rate to a
 
range of 0.0%
 
0.0% – 0.25%, after
 
after having
already
 
lowered the
 
Fed Funds
 
rate by 50
 
bps earlier
 
in the
month. Later
 
that same
 
month the
 
Fed announced
 
a program
 
to acquire
 
U.S. Treasuries
 
and Agency
 
RMBS in the
 
the amounts needed
 
needed to
support smooth
 
market functioning.
 
With these
 
purchases,
 
market conditions
 
improved substantially.
 
Currently, the Fed
 
Fed is committed
 
to
purchasing
 
$80 billion
 
of U.S. Treasuries
 
Treasuries and $40
$40 billion
 
of Agency
 
RMBS each
 
month. Chairman
 
Powell and
 
the Fed have
 
reiterated
 
their
commitment
 
to this level
 
of asset
purchases
 
at every
meeting
 
since their
 
meeting on
 
June 30,
 
2020. ChairmanHowever,
 
Powell hasat the November
 
also maintained2021
thatmeeting, the Fed
 
expects toFed concluded
 
maintain interestthat substantial
 
rates at thisfurther progress
 
level untiltowards their
 
the Fed isdual mandate
 
confidenthad been
met and they
will begin
to taper
their
asset purchases
in November.
They further
stated that
 
the economypace
 
has weatheredof the tapering
could be adjusted
if economic
conditions
warranted,
but
otherwise
would conclude
 
the pandemictapering
 
and its
impact on economic
activity and
is on track
to achieve
its maximum
employment
and price
stability goals.in mid-2022.
 
The Fed has
 
taken various
 
other steps
steps to support
 
certain other
 
fixed income
 
markets,
to support
 
support mortgage
 
servicers and
 
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
 
Presidenton March 27,
 
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
trillion COVID-19
 
relief bill,
 
among
other things,
 
things, provided
 
for direct
 
payments to
 
each American
 
making up
to $75,000
a year, increased
unemployment
benefits
for up to
 
$75,000 a
year, increasedfour
unemployment
benefits for
up to four
months (on
 
top of state
 
benefits),
 
funding to
 
hospitals and
 
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
 
funding
bill into
law that
provided
an additional
$484 billion
 
of funding
 
to individuals,
 
small businesses,
 
hospitals,
 
health care
 
providers
 
and
additional
 
coronavirus
 
testing efforts.
 
Various
provisions
 
of the CARES
 
Act began
 
to expire
 
in July 2020,
 
including a
 
moratorium
on
evictions (July
25, 2020),
expanded
unemployment
benefits (July
31, 2020),
and a moratorium
 
on foreclosuresevictions,
 
(August 31,expanded unemployment
 
2020). On
August 8,benefits,
 
and a
moratorium
on foreclosures.
On August
8, 2020,
President
 
Trump issued Executive
 
Order 13945,
 
directing the
 
the Department
 
of Health
 
and
Human Services,
 
Services, the Centers
 
Centers for
Disease Control
 
Control and
Prevention
 
(“CDC”),
 
the Department
 
of Housing
 
and Urban
 
Development,
 
and
Department
 
of the Treasury
 
to take
measures
 
- 39 -
measures to
temporarily
 
halt residential
 
evictions and
 
and foreclosures,
 
including through
 
temporary
financial
 
financial assistance.
 
- 41 -
On December
 
27, 2020,
 
President
Trump signed into
law an additional
 
$900 billion
 
coronavirus
 
aid package
 
was signed
into law
as part of
 
the Consolidated
Consolidated
Appropriations
 
Act of 2021,
 
providing for
 
extensions
 
of many of
 
the CARES
 
Act policies
 
and programs
 
as well as
 
additional
relief. The
 
relief.
The
package provided
 
for, among other
 
things, direct
 
payments to
 
most Americans
 
with a gross
 
income of less
 
less than $75,000
 
$75,000 a year,
extension of
 
year, extension
of unemployment
 
benefits through
 
March 14,
 
2021, funding
 
for procurement
 
of vaccines
 
and health
 
providers,
 
loans to qualified
businesses,
 
funding for
 
rental assistance
 
and funding
 
for schools.
 
On January
 
29, 2021,
 
the CDC
 
issued guidance
 
extending
eviction
moratoriums
 
for covered
 
persons through
 
through March 31,
 
31, 2021, which
 
which was further
 
extended to
 
June 30,July 31, 2021.
On August
26, 2021,
 
on March 29,the U.S.
 
2021. Supreme
Court issued
a decision
ending the
CDC eviction
moratorium.
In addition,
on February
 
9, 2021, the
 
the FHFA announced
 
that the foreclosure
moratorium
 
begun under
 
the CARES
 
Act for loans
 
backed by Fannie
 
Fannie Mae
and Freddie
 
Mac and the
 
the eviction
moratorium
 
for real estate
 
estate
owned by Fannie
 
Fannie Mae
and Freddie
 
Mac were
extended
 
until March
 
31, 2021,
which was
 
further extended
 
to Junethrough September
30, 2021.
On July 30,
 
2021, on Februarythe
 
25, 2021.
On February
16, 2021,
the U.S.
Housing and
Urban Development
Department
FHA announced
 
thean extension
 
of the FHAeviction
 
eviction andmoratorium
 
through September
30, 2021
for foreclosed
borrowers
and
other occupants
and noted
the expiration
of the foreclosure
 
moratorium
 
to June 30,on July 31,
 
2021.
On March 11, 2021,
 
the $1.9 trillion
 
trillion American Rescue
 
Rescue Plan
Act of 2021
 
2021 was signed
 
into law.
 
This stimulus
 
program furthered
 
the
Federal government’s
 
efforts to stabilize
 
stabilize the economy
 
economy and
provide
 
assistance
 
to sectors
 
of the population
 
still suffering
 
from the
 
various
physical and
 
economic effects
 
effects of
the pandemic.
In January
2019, the
Trump administration
made statements
of its plans
to work with
Congress to
overhaul Fannie
Mae and Freddie
Mac and expectations
to announce
a framework
for the development
of a policy
for comprehensive
housing finance
reform soon.
On
September
 
30, 2019,
 
the FHFA announced
 
that Fannie
 
Mae and Freddie
 
Mac were
allowed to
increase their
capital buffers
 
to increase$25
their capital
buffers tobillion and
 
$25 billion
and $2020 billion,
 
respectively, from
 
from the prior
 
prior limit
of $3 billion
 
billion each.
This step could
ultimately
lead to Fannie
Mae and Freddie
Mac being
privatized
and represents
the first
concrete step
on the road
to GSE reform.
 
On June 30,
 
2020, the
 
FHFA released
 
a proposed
 
rule on a
new
new regulatory
 
framework
 
for the GSEs
 
which seeks
 
to implement
 
both a risk-based
 
capital framework
 
and minimum
 
leverage
 
capital
requirements.
 
The final
 
rule on the
 
new capital
 
framework
 
for the GSEs
 
was published
 
in the federal
 
register in
 
December
2020.
 
On
January 14,
 
2021, the
 
U.S. Treasury
 
and the FHFA executed
 
executed letter
agreements
 
allowing the
 
the GSEs
to continue
 
to retain
 
capital up
 
to their
regulatory
 
minimums,
including
 
buffers, as
 
prescribed
 
in the December
 
rule.
 
These letter
 
agreements
 
provide, in
 
part, (i)
 
there will
 
be no
exit from conservatorship
 
until all
 
material litigation
 
is settled
 
and the GSE
 
has common
 
equity Tier
 
1 capital of
at least 3%
 
of its assets,at least
 
3% of its
assets, (ii)
the GSEs will
 
will comply with
 
with the
FHFA’s regulatory capital
 
capital framework,
 
(iii) higher-risk
 
single-family
 
mortgage
acquisitions
 
will be
restricted
 
to
current levels,
 
and (iv)
 
(iv) the U.S.
 
Treasury and
 
the FHFA will
 
establish a
 
a timeline and
 
and process for
 
for future GSE
 
GSE reform. However,
 
However, no definitive
proposals or
 
or legislation
 
have been
 
released or
 
enacted with
 
respect to
 
ending the
 
conservatorship,
 
unwinding
 
the GSEs,
 
or materially
reducing the
 
roles of
the GSEs
in the U.S.
mortgage
market. On
June 23, 2021,
President
Biden removed
the director
of the FHFA
and
appointed
an acting
director. On
September
14, 2021,
the FHFA suspended
certain provisions
added to
the letter
agreements
on January
14, 2021,
including
limits on
the enterprises'
cash windows,
multifamily
lending, loans
with higher
risk characteristics,
and second
homes
and investment
properties.
The enterprises
will continue
to build
capital under
the continuing
provisions
of the letter
agreements.
Additionally, the
 
GSEs FHFA is reviewing
the enterprise
regulatory
capital framework
and expects
to announce
further action
in the near
 
U.S. mortgage
market.
future.
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
 
to base levels
 
and the
liability associated
 
with submitting
 
an unfounded
 
level. The
 
ICE Benchmark
 
Administration,
 
in its capacity
 
as administrator
 
of USD LIBOR,
has confirmed
 
that it will
 
cease publication
 
of (i) the
 
one-week and
 
two-month
 
USD LIBOR
 
settings immediately
 
following
 
the LIBOR
publication
 
on December
 
31, 2021,
 
and (ii) the
 
overnight
 
and one, three,
 
three, six
and 12-month
 
USD LIBOR
 
settings immediately
 
following
 
the
LIBOR publication
 
on June 30,
 
2023. A joint
 
statement
 
by key regulatory
 
authorities
 
calls on banks
 
to cease
entering
 
into new
 
contracts
that use USD
 
LIBOR as a
 
reference rate
 
rate by no later
 
later than
December
 
31, 2021.
 
The Alternative
 
Reference
 
Rates Committee,
 
a steering
committee
comprised
 
of large U.S.
 
U.S. financial
institutions,
 
has proposed
 
replacing
USD-LIBOR
 
with a new
 
SOFR, a rate
 
based on U.S.
 
repo
trading. On
 
December 31,
2020, FNMA
and FHLMC
ceased purchasing
LIBOR-based
adjustable-rate
mortgage (“ARM”)
loans and began
accepting SOFR-based
ARMs and issuing
SOFR-based
MBS. However,
manyMany banks
 
believe that
 
it may take
 
four to five
 
years to
complete the
 
transition
 
to SOFR,
 
for certain,
 
despite the
 
2021 deadline.
We will monitor
 
the emergence
 
of this new
 
rate carefully
 
as it will
potentially
 
become the
 
new benchmark
 
for hedges
 
and a range
 
of
interest rate
 
rate investments.
 
At this time,
 
however, no consensus
 
exists as
to what rate
 
or rates may
 
may become accepted
 
accepted alternatives
 
to LIBOR.
Effective January
 
1, 2021, Fannie
 
Fannie Mae,
in alignment
 
with Freddie
 
Mac, will extend
 
extend the
timeframe
 
for its delinquent
 
loan buyout
 
policy
for Single-Family
 
Uniform Mortgage-Backed
 
Securities
 
(UMBS) and
 
Mortgage-Backed
 
Securities
 
(MBS) from
 
four consecutively
 
missed
- 40 -
monthly payments
 
to twenty-four
 
consecutively
 
missed monthly
 
payments (i.e.,
 
24 months past
 
past due). This
 
This new
timeframe
 
will apply
 
to
- 42 -
outstanding
 
single-family
 
pools and
 
newly issued
 
single-family
 
pools and was
 
was first
reflected
 
when January
 
2021 factors
 
were released
 
on
the fourth
 
business day
 
in February
 
2021.
 
For Agency
 
RMBS investors,
 
when a delinquent
 
loan is bought
 
out of a pool
 
pool of mortgage
 
loans, the
 
removal of
 
the loan from
 
from the
pool
is the same
 
as a total
 
prepayment
 
of the loan.
 
The respective
 
GSEs currently
 
anticipate,
 
however, that
 
delinquent
 
loans will
 
be
repurchased
 
in most cases
 
before the
 
24-month deadline
 
under one
 
of the following
 
exceptions
 
listed below.
•
 
• a loan that
is paid in
 
in full, or
 
where the
 
related lien
 
is released
 
and/or the
 
note debt
 
is satisfied
 
or forgiven;
•
a loan repurchased by
 
by a seller/servicer
 
under applicable
 
selling and
 
and servicing
requirements;
•
a loan entering
a permanent
 
modification,
 
which generally
 
requires
 
it to be removed
 
removed from
the MBS.
 
During any
 
modification
 
trial
period, the
 
loan will
 
remain in the
 
the MBS until
 
the trial
 
period ends;
•
a loan subject
to a short
 
short sale
or deed-in-lieu
 
of foreclosure;
 
or
•
a loan referred to
 
to foreclosure.
Because of
 
these exceptions,
 
the GSEs
 
currently believe
 
believe based on
 
on prevailing
 
assumptions
 
and market
 
conditions
 
this change
 
will
have only a
 
a marginal impact
 
impact on
prepayment
 
speeds, in
 
aggregate.
 
Cohort level
 
impacts may
 
vary. For example,
 
more than
 
half of loans
referred to
 
to foreclosure
 
are historically
 
referred within
 
within six months
 
months of
delinquency. The
 
degree to
 
which speeds
 
are affected
 
depends on
delinquency
 
levels, borrower
 
response, and
 
referral to
 
to foreclosure
 
timelines.
The scope and
 
and nature of
 
of the actions
 
the U.S.
 
government
 
or the Fed
 
will ultimately
 
undertake
 
are unknown
 
and will continue
 
continue to
evolve, especially
 
in light of
 
the COVID-19
 
pandemic, President
 
President Biden’s new
 
new administration
 
and the new
 
Congress in
 
in the United
 
States.
On April 28,
2021 the FHFA
announced new
refinance
options for
low-income
families with
enterprise
backed mortgages
(FNMA and
FHLMC). Eligible
borrowers
will benefit
from a reduced
interest rate
and lower
monthly payment.
Eligibility
for the program
was further
clarified
by
the respective
GSEs on May
4, 2021. The
impact on
refinancing
on the Company
and the universe
of Agency
MBS is expected
to be limited
and concentrated
in loans with
lower loan
balances.
Effect on Us
Regulatory
 
developments,
Regulatory developments,
movements
in interest
rates and
prepayment
rates affect
us in many ways,
 
ways, including
the following:
Effects on
our Assets
A change
 
A change in
or elimination
 
of the guarantee
 
structure
 
of Agency
 
RMBS may increase
 
increase our
costs (if,
 
for example,
 
guarantee
 
fees
increase) or
 
or require us
 
us to change
 
our investment
 
strategy
altogether.
 
For example,
 
the elimination
 
of the guarantee
 
structure
 
of Agency
RMBS may cause
 
cause us to change
 
change our
investment
 
strategy to
 
to focus
on non-Agency
 
RMBS, 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
 
rates can affect the
 
the value
of our Agency
 
Agency RMBS in
 
in a number
 
of ways. If
 
prepayment
 
rates are
 
relatively
 
low
(due, in part,
 
part, to
the refinancing
 
problems described
 
above), lower
 
long-term
 
interest rates
 
rates can increase
 
increase the
value of
higher-coupon
 
Agency
RMBS. This
 
is because
 
investors
 
typically place
 
a premium
 
on assets
 
with yields
 
that are higher
 
higher than market
 
market yields.
Although
 
lower long-
term interest
 
rates may
increase
 
asset values
 
in our portfolio,
 
we may not
 
be able to
 
invest new
 
funds in similarly-yielding
 
assets.
If prepayment
 
levels increase,
 
the value
 
of our Agency
 
RMBS affected
 
by such prepayments
 
may decline.
 
This is because
 
a principal
prepayment
 
accelerates
 
the effective
 
term of an
 
Agency RMBS,
 
which would
 
shorten the
 
period during
 
which an investor
 
investor would
receive
above-market
 
returns (assuming
 
the yield on
 
on the prepaid
 
asset is higher
 
higher than market
 
market yields). Also,
 
Also, prepayment
 
proceeds may
 
may not
be able
to be reinvested
 
in similar-yielding
 
assets. Agency
 
RMBS backed
 
by mortgages
 
with high
 
interest rates
 
rates are
more susceptible
 
to
- 41 -
prepayment
 
risk because
 
holders of
 
of those mortgages
 
are most likely
 
likely to
refinance
 
to a lower
 
rate. IOs
 
and IIOs, however,
 
however, may
be the
types
of Agency
 
RMBS most
 
sensitive to
 
to increased
prepayment
 
rates. Because
 
the holder
 
of an IO or
 
or IIO receives
 
no principal
 
payments,
 
the
values of IOs
 
IOs and IIOs are
 
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
 
of our IOs and
 
and IIOs, they
 
they have
the opposite
 
effect on POs.
 
POs. Because POs
 
POs act like
zero-coupon
 
bonds, meaning
 
they are
purchased at
 
at a discount
 
to their
 
par value and
 
and have
an effective
 
interest rate
 
based on the
discount and
 
the term ofdiscount
 
and the term
of the underlying
 
loan, an
- 43 -
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
 
of our Agency
 
RMBS.
 
As long-term
 
rates rise,
 
rates available
 
to borrowers
 
also rise.
 
This tends
 
to cause prepayment
 
activity to
 
slow and extend
 
extend the expected
 
expected average life
 
life of mortgage
 
cash flows.
 
As the expected
 
average
life of the
 
mortgage cash
 
cash flows
increases,
 
coupled with
 
higher discount
 
rates, the
 
value of Agency
 
RMBS declines.
 
Some of the
instruments
 
the Company
 
uses to hedge
 
our Agency
 
RMBS assets,
 
such as interest
 
rate futures,
 
swaps and
 
swaptions,
 
are stable
average life
 
life instruments.
 
This means
 
that to the
 
extent we
 
use such instruments
 
to hedge our
 
our Agency RMBS
 
RMBS assets, our
 
our hedges
may not
adequately
 
protect us
 
from price
 
declines, and
 
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
 
as the number
 
and size
of the cash
flows increase
 
the cash flowslonger
 
increase the
longer the
underlying
 
mortgages
 
remain outstanding.
 
This makes
interest only
 
securities
 
desirable
 
hedge instruments
 
for pass-through
 
Agency RMBS.
 
As described
 
above, the
 
Agency RMBS
 
market began
 
to experience
 
severe dislocations
 
in mid-March
 
2020 as a result
 
result of
the
economic, health
 
health and
market
 
turmoil brought
 
brought about
by COVID-19.
 
In March of
 
2020, the
 
Fed announced
 
that it would
 
purchase
Agency
RMBS and
 
U.S. Treasuries
 
in the amounts
 
needed to
 
support smooth
 
market functioning,
 
which largely
 
stabilized the
 
the Agency
RMBS
market, a
commitment
 
it reaffirmed
 
at all subsequent
 
Fed meetings,meetings.
 
including itsAt the November
 
most recent2021 meeting,
 
meeting inthe Fed concluded
 
April of 2021.that the
 
Ifeconomy
had progressed
to the Fedpoint
 
modifies,
reduces orthat they
 
suspends itscould begin
the process
of tapering
their asset
purchases.
Beginning
in November,
the Fed will
reduce their
purchases of
treasury
securities
by $10 billion
per month
and their
 
purchases
 
of Agency RMBS,
 
our investmentMBS by $5
 
portfolio couldbillion per
 
be negativelymonth.
 
impacted. Further,At this
rate they
will completely
eliminate
 
the current
level of purchases
by mid-2022
although
the Fed
did state
that if economic
conditions
warranted,
they could
alter the
pace of the
tapering
accordingly.
The reduction
of the Fed’s
purchases
of Agency
RMBS could
negatively
impact our
investment
portfolio.
Further, the
moratoriums
 
on
foreclosures
and evictions
 
described
 
above will
 
likely delay
 
potential
 
defaults on
 
loans that
would otherwise
 
be bought
 
out of Agency
 
MBS pools
pools as described
 
above.
 
Depending
 
on the ultimate
 
resolution
 
of the foreclosure
or evictions,foreclosures,
 
when
and if it
 
it occurs, these
 
these loans may
 
may be
removed from
 
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
Company’s securities
 
until such
 
time. As the
 
the majority of
 
of the Company’s
 
Agency RMBS
 
assets were
acquired at
 
a premium
 
to par, this will
tend to increase
 
the realized
 
yield on the
 
asset in question.
Because we
 
base our
investment
 
decisions on
 
risk management
 
principles
 
rather than
 
anticipated
 
movements
in interest
rates, in
 
interest rates,
in a
volatile interest
 
rate environment
 
we may allocate
 
more capital
 
to structured
 
Agency RMBS
 
with shorter
 
durations.
 
We believe
these
securities
 
have a lower
 
sensitivity
 
to changes
 
in long-term
 
interest
 
rates than
 
other asset
 
classes. We
 
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 RMBS,
particularly
 
PT RMBS backed
 
by fixed-rate
 
mortgages.
Effects on
our borrowing costs
 
costs
We leverage
 
our PT RMBS
 
portfolio and
 
a portion
 
of our structured
 
Agency RMBS
 
with principal
 
balances through
 
the use of
 
short-
term repurchase
 
agreement
 
transactions.
 
The interest
 
rates on
 
our debt are
 
are determined
 
by the short-termshort
 
term interest rate
 
rate markets.
An
increase in
 
the Fed Funds
 
rate or LIBOR
 
would increase
 
our borrowing
 
costs, which
 
could affect
 
our interest
 
rate spread
 
if there is
 
is no
corresponding
 
increase in
 
the interest
 
we earn on
 
our assets.
 
This would
 
be most prevalent
 
with respect
 
to our Agency
 
RMBS backed
 
by
fixed rate
 
mortgage loans
 
loans because the
 
the interest rate
 
rate on a
fixed-rate
 
mortgage loan
 
loan does
not change
 
even though
 
market rates
 
may change.
In order to
 
to protect our
 
our net interest
 
margin against
 
increases in
 
in short-term
 
interest rates,
 
rates, we
may enter into
 
into interest
 
rate swaps,
 
which
economically
 
convert our
 
floating-rate
 
repurchase
 
agreement
 
debt to fixed-rate
 
debt, or utilize
 
utilize other hedging
 
hedging instruments
 
such as
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
contracts or
 
or interest rate
 
rate swaptions.
Summary
- 4244 -
Summary
Once again
 
COVID-19
 
continues todominated
 
dominate theeconomic activity
 
performancethis quarter.
However, we may
be at a crossroads
as the effects
 
of the marketsDelta
variant appear
to be waning
 
and economy.the number
 
In the caseof people
with either
a vaccination
and/or prior
infections
 
of the firstvirus
 
quarter ofgrow.
 
2021 this meantPandemic
 
therelated
recovery fromrelief measures
 
the pandemic,such as supplemental
 
in stark contrastunemployment
 
to the firstinsurance
 
quarter ofpayments and
 
2020 whenforeclosure
 
the pandemicmoratoriums
 
first emergedhave lapsed.
 
in the U.S.Hopefully
 
The recovery
has
been driven
by many factors
– the emergence
and widespread
distribution
of a very effective
vaccine, substantial
government
stimulus
and accommodative
monetary
policy. The economy
is recovering
rapidly as
the emergence
of an effective
vaccine has
allowed pent-up
demand to
lead to a
surge in demand
for goods
and services,
fueled further
by multiple
rounds of
stimulus checks
and numerous
other
means of financial
support provided
by the government.
Financial
markets are
benefiting
from extremely
lose financial
conditions,
abundant liquidity,
high risk tolerance
and an insatiable
demand for
returns.
The surge
in economic
activity during
the first
quarter of
2021 and expectations
for activity
to return
to pre-pandemic
levels much
sooner than
anticipated
caused interest
rates to rise
rapidly as
well.
The yield on
the 10-year
U.S. Treasury
note increased
by over 82
basis points
and closed
the quarter
at approximately
1.75%, not
far below
the yield level
that prevailed
last January
before the
pandemic
emerged last
March.
In addition,
the U.S.
Treasury curve
has steepened
as the market
fears an
outbreak in
inflation caused
by the
combination
 
of abundantall of
 
liquiditythese factors
 
via governmentwill lead
 
stimulus,to surging
 
loose financial
conditionsjob growth
 
and veryact to
 
strong demandquickly lessen
 
for all typesthe severe
supply shortage
 
of goods and
services.
 
Constrainedand labor.
 
supply of
This in turn
 
needed rawshould slow
 
materials,the stubbornly
 
various inputshigh inflation
the economy
has suffered.
If these
events come
 
to consumerpass, the
 
goods, such
as micro chips,
and even labor
have
exacerbated
the upward
pressure on
prices. It
remains to
be seen if
these price
pressures proveeconomy appears
 
to be temporary
positioned
 
orto perform
 
lead to more
sustained
inflation.very well.
 
The Fed believesviews
this outcome
as likely
and will
commence
a tapering
of their
asset purchases
in November
as they slowly
remove the
considerable
accommodation
they have
provided the
market since
 
the effectsonset
 
are transitory.of the pandemic.
 
Current marketConversely, if
these events
 
pricing isdo not unfold
 
roughly inand the
 
line withsupply shortages
of goods
and labor
remain, the
economy will
likely continue
to suffer from
elevated
levels of
inflation.
Under this
scenario
 
the Fed’s viewpath
 
as the Eurodollarof economic
growth
is less certain,
 
and
Fed Funds the path
 
futures marketsof monetary
 
only reflectpolicy could
 
at most oneprove to
 
interest ratebe quite
challenging
 
hike byfor the Fed.
 
end of 2022.
The performance
 
Theof the Agency
 
RMBS market
 
did not performwas very
 
well during
the first quarter
as market conditions
– rapidly
rising rates
and increased
volatility –
led to extension
fearsmodest in
 
mortgage cashabsolute returns,
 
flows, driving
convexity related
sellingat 0.0% and
 
spread widening.0.1% versus
 
Agency RMBScomparable
 
hadduration
negative absolute
and excess
returns for
the first
quarter of
2021 of -1.2%
and -0.3%,
respectively
(both vs U.S.
Treasuries and
LIBOR/swaps).
A positive
impact from
higher rates
and lowered
prepayment
expectations
is slower
premium amortization,
which
enhances net
income all
else equal.
The Mortgage
Bankers Association
refinance index
declined from
approximately
4700 in early
January 2021
to approximately
2900 in early
April, before
rebounding
slightly since.
As was the
case for much
of 2020, the
Agency RMBS
market continues
to be essentially
bifurcated
with two
separate and
distinct sub-markets.
Lower coupon
fixed rate
mortgages,
coupons of
1.5% through
2.5%, are
purchased by
the Fed and
benefit from
the substantial
price pressure
and attractive
TBA dollar
roll drops.
Higher
coupons in
the TBA market
do not have
the benefit
of Fed purchases,
so the market
is left to
absorb still
very high prepayment
speeds on
these securities
as rates have
not risen
enough to
eliminate the
economic incentive
to refinance.
The market
expects prepayments
on
higher coupons
will eventually
decline as
“burn out”
sets in, although
this has yet
to occur.
One final
element to
poor MBS
performance
for
the quarter
was the impact
of higher
rates on the
premiums paid
for specified
pools.
The premium
over generic
TBA securities
has
declined significantly
with the reduced
refinance incentive
caused by
the increase
in rates available
to borrowers.
Now that
the containment
of the COVID-19
pandemic appears
to be within
sight, at least
in the U.S.,
the economy
and life as
we were
accustomed
to should return
to pre-pandemic
norms.
The key questions
the market
must grapple
with going
forward relate
to whether
there have
been any permanent
changes that
will result,
including,
for example,
inflationary
pressures
resulting from
the unprecedented
government
stimulus and
monetary
quantitative
easing by the
Fed, the impact
of the many
technological
advancements
that were
born out
of the pandemic,
such as employees’
ability to
effectively
work remotely, the
desire to
live in congested
cities and
the implications
for
commercial
real estate
values for
the cities
that many
may not want
to return
to, and the
willingness
to gather
in large numbers
or travel
by
air. These factors
will matter
to both the
Company and
Orchid to the
extent they
impact the
levels of
interest rates
 
and swaps.
Performance
for the efficacysector
was generally
in line with
other sectors
 
of
refinancing the fixed
 
specifically,income markets.
Within the
Agency RMBS
universe,
performance
was skewed
towards higher
coupons and
 
economic activityaway from
lower coupons
that comprise
the bulk of
recent
production
 
and inflationFed purchases.
 
generally.This has continued
into the
fourth quarter,
in large
part because
at the November
FOMC meeting
the Fed
stated they
will begin
to taper
their asset
purchases
and likely
conclude the
process in
mid-2022.
Prepayment
speeds, particularly
on high
coupon securities,
have moderated
and are likely
to do so
even more
with rates
higher so
far in the
fourth quarter
and the typical
seasonal
slow down
as we approach
the winter
months.
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
 
critical accounting
 
policies involve
 
decisions and
 
and assessments
 
which could
significantly
 
affect reported
 
assets,
 
liabilities,
 
revenues and
 
and expenses,
and these
 
decisions
 
and assessments
 
can change
 
significantly
- 43 -
each reporting
 
period.
 
There have
 
been no changes
 
to the processes
 
used to determine
 
our critical
 
accounting
 
estimates
 
as discussed
 
in
our annual
 
report on
 
Form 10-K for
 
for the year ended
 
ended December 31,
 
31, 2020.
Capital Expenditures
At March 31,September 30, 2021, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
 
At March 31,September 30, 2021, 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 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES
 
ABOUT MARKET
 
RISK.
 
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
- 45 -
As of the end of the period covered by this report (the “evaluation date”), we carried
 
carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer (the “CEO”)
 
and Chief Financial Officer (the “CFO”), of
the effectiveness of the design and operation of our disclosure controls and procedures,
 
as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the
 
the CEO and CFO concluded our disclosure controls
and procedures, as designed and implemented, were effective as of the evaluation date (1)
 
in ensuring that information regarding the
Company and its subsidiaries is accumulated and communicated to our management,
 
including our CEO and CFO, by our employees,
as appropriate to allow timely decisions regarding required disclosure and (2) in
 
in providing reasonable assurance that information we
must disclose in our periodic reports under the Exchange Act is recorded, processed,
 
processed, summarized and reported within the time periods
prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no material changes in the Company’s internal control over financial reporting
 
that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably likely
to materially
affect, the Company’s internal control over
financial reporting.
 
 
 
 
- 4446 -
PART II.
 
OTHER INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in
 
the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007.
 
The demand is 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 demand vigorously.
 
No
provision or accrual has been recorded as of March 31,September 30, 2021 related to the Citigroup
 
demand.
We are not party to any other material pending legal proceedings as described
 
in Item 103 of Regulation S-K.
ITEM 1A.
 
RISK FACTORS.
There have been
 
been no material
 
changes to the
 
risk factors
 
disclosed in
 
in our Annual Report
 
Report on Form 10-K
 
10-K for the year
 
year ended
December 31,
 
2020, filed
 
with the SEC
 
on March 15,
 
2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2021,
the Company
completed
a “modified
Dutch auction”
tender offer
and paid an
aggregate of
$1.6 million,
including fees
and related
expenses,
to repurchase
812,879 shares
of Bimini
Capital’s Class
A common stock
at a price
of
$1.93 per share.
The tender
offer was announced
on May 27,
2021.
On March 26,
 
2018, the Company'sBoard
 
Board of Directors
 
authorizedof the Company
(the “Board”)
approved a Stock
Repurchase
Plan (the
“2018
Repurchase
Plan”).
Pursuant to
the 2018 Repurchase
Plan, the
 
repurchase ofCompany 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 maximum2018 Repurchase
 
remaining numberPlan 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 repurchasedpurchase
shares of its
 
under this
authorizationClass A Common
 
is 429,596 shares.Stock from
 
The authorization,time to time
 
as currentlyfor an aggregate
 
extended, expirespurchase price
 
on Novembernot to exceed
 
15, 2021.$2.5 million.
 
The Companytable below
 
did
not repurchasepresents the
 
anyCompany’s share
repurchase activity
for the three
months ended
September 30,
2021.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of its commonPublicly
of Shares or Approximate
stock during
Dollar Amount of Shares
That May Yet be
of Shares
Price Paid
Announced
Repurchased Under
Repurchased
Per Share
Programs
the three monthsAuthorization
ended March
July 1, 2021 - July 31, 2021.2021
812,879
$
1.93
-
429,596
August 1, 2021 - August 31, 2021
-
-
-
429,596
September 1, 2021 - September 30, 2021
1,195
1.92
1,195
$
2,500,000
Totals / Weighted Average
814,074
$
1.93
1,195
2,500,000
The Company
 
did not have
 
any unregistered
 
sales of its
 
equity securities
 
during the three
 
three months ended
 
March 31,ended September
 
2021.30,
2021.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
None.
None.
- 45 -
3.4
3.5
31.1
31.2
31.2
32.1
32.2
101.INS
Instance Document***
101.SCH
Taxonomy Extension Schema
 
Document***
101.CAL
Taxonomy Extension Calculation
 
Linkbase Document***
101.DEF
Additional
Taxonomy Extension
Definition
 
Linkbase Document***
101.LAB
Taxonomy Extension Label
 
Linkbase Document***
101.PRE
Taxonomy Extension Presentation
 
Linkbase Document***
*
 
Filed herewith.
**
Furnished
herewith
***
Submitted electronically herewith.
 
 
- 4648 -
Signatures
Pursuant to the requirements of
 
of Section 13 or 15(d)
of the Securities Exchange
Act of 1934, as amended,
 
the Securities Exchange Act ofregistrant has duly
 
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:
 
May 14,November 9, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date:
 
May 14,November 9, 2021
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas,
 
IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)