bmnm10q20220930p1i0
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
September 30, 20212022
☐
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 mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
ý
 
No
☐
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
ý
 
No
☐
Indicate by check mark whether the registrant is
 
a large accelerated filer,
 
an accelerated filer, a non-accelerated filer,
 
a smaller reporting company,
 
or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☐
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
November 9, 202114, 2022
10,726,86410,246,809
Class B Common Stock, $0.001 par value
November 9, 202114, 2022
31,938
Class C Common Stock, $0.001 par value
November 9, 202114, 2022
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
2122
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
About Market
 
Risk
4447
ITEM 4. Controls
 
and Procedures
5548
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
4649
ITEM 1A.
 
Risk Factors
4649
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
4649
ITEM 3. Defaults
 
Upon Senior
 
Securities
4649
ITEM 4. Mine
 
Safety Disclosures
4649
ITEM 5. Other
 
Information
4649
ITEM 6. Exhibits
4650
SIGNATURES
4851
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 1 -
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
BALANCE SHEETS
(Unaudited)
September 30, 20212022
December 31, 20202021
ASSETS:
Mortgage-backed securities, at fair valuevalue:
Pledged to counterparties
$
64,371,40844,078,712
$
65,153,27460,788,129
Unpledged
18,869190,815
24,95715,015
Total mortgage
 
-backed securities
64,390,27744,269,527
65,178,23160,803,144
Cash and cash equivalents
7,854,8435,861,597
7,558,3428,421,410
Restricted cash
1,690,1601,537,500
3,353,0151,391,000
Orchid Island Capital, Inc. common stock, at fair value
12,691,2964,256,384
13,547,76411,679,107
Accrued interest receivable
247,716200,104
202,192229,942
Property and equipment, net
2,041,5032,016,436
2,093,4402,024,190
Deferred tax assets
34,332,07836,607,388
34,668,46735,036,312
Due from affiliates
934,7971,075,189
632,4711,062,155
Other assets
1,551,0731,045,417
1,466,6471,437,381
Total Assets
$
125,733,74396,869,542
$
128,700,569122,084,641
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
63,159,99943,493,999
$
65,071,11358,877,999
Long-term debt
27,444,50827,422,050
27,612,78127,438,976
Accrued interest payable
53,868134,738
107,41755,610
Other liabilities
1,322,7841,470,900
1,421,4092,712,206
Total Liabilities
91,981,15972,521,687
94,212,72089,084,791
 
COMMITMENTS AND CONTINGENCIES (Note 10)9)
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 September 30, 20212022 and December
 
31, 20202021
0-
0-
Class A Common stock, $
0.001
 
par value;
98,000,000
 
shares designated:
10,794,48110,246,809
and 11,608,555
10,702,194
shares issued and
outstanding as of September 30, 20212022
 
and December 31, 2020,2021, respectively.
10,79410,247
11,60910,702
Class B Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of September 30, 20212022 and December 31, 20202021
32
32
Class C Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of September 30, 20212022 and December 31, 20202021
32
32
Additional paid-in capital
331,073,064330,068,058
332,642,758330,880,252
Accumulated deficit
(297,331,338)(305,730,514)
(298,166,582)(297,891,168)
Stockholders’ Equity
33,752,58424,347,855
34,487,84932,999,850
Total Liabilities
 
and Stockholders' Equity
$
125,733,74396,869,542
$
128,700,569122,084,641
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 2 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Nine and Three Months Ended September 30, 20212022 and 20202021
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
20202022
2021
2020
Revenues:
Advisory services
$
9,719,703
$
6,757,799
$
4,969,1433,311,962
$
2,546,578
$
1,629,463
Interest income
1,328,264
1,726,268
3,167,439444,808
537,200
604,158
Dividend income from Orchid Island Capital, Inc. common stock
1,035,547
1,518,284
1,246,636282,893
506,095
493,118
Total revenues
12,083,514
10,002,351
9,383,2184,039,663
3,589,873
2,726,739
Interest expense
Repurchase agreements
(313,843)
(94,926)
(1,030,372)(209,928)
(23,729)
(42,955)
Long-term debt
(938,557)
(747,577)
(893,299)(378,752)
(248,465)
(261,341)
Net revenues
10,831,114
9,159,848
7,459,5473,450,983
3,317,679
2,422,443
Other income (expense):
Unrealized losses on mortgage-backed securities
(6,605,850)
(2,221,521)
(2,572,296)
(323,659)
Realized (losses) gains on mortgage-backed securities
(2,221,521)
303,651
(323,659)
275,796
Realized gains (losses) on mortgage-backed securities(858,001)
69,498
(5,804,656)-
69,498
0
Unrealized (losses) gainslosses on Orchid Island Capital, Inc. common stock
(7,422,723)
(856,468)
38,935(3,140,383)
(778,607)
793,727
(Losses) gainsGains (losses) on derivative instruments
794,500
(280)
(5,292,346)844,188
(147)
75
Gains on retained interests in securitizations
-
58,73565,928
-
58,73565,928
-
Other income (expense)
268
154,122
(8,248)81
149
(8,890)
Total other (expense)expense
income(14,025,878)
(2,854,649)
(10,703,929)(4,802,482)
(1,032,766)
1,119,443
Expenses:
Compensation and related benefits
3,835,763
3,219,685
3,157,0741,230,113
1,029,465
1,010,407
Directors' fees and liability insurance
587,566
568,087
511,786194,519
190,453
166,093
Audit, legal and other professional fees
370,323
405,828
467,015103,090
133,925
120,374
Administrative and other expenses
1,422,006
939,966
870,919549,585
298,719
318,874
Total expenses
6,215,658
5,133,566
5,006,7942,077,307
1,652,562
1,615,748
Net (loss) income (loss) before income tax (benefit) provision
(9,410,422)
1,171,633
(8,251,176)(3,428,806)
632,351
1,926,138
Income tax (benefit) provision
(1,571,076)
336,389
9,295,859(255,618)
167,751
608,351Net (loss) income
Net income (loss)$
(7,839,346)
$
835,244
$
(17,547,035)(3,173,188)
$
464,600
$
1,317,787
Basic and Diluted Net (loss) income (loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
(0.75)
$
0.07
$
(1.51)(0.31)
$
0.04
$
0.11
CLASS B COMMON STOCK
Basic and Diluted
$
(0.75)
$
0.07
$
(1.51)(0.31)
$
0.04
$
0.11
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
10,467,091
11,358,346
11,608,55510,288,785
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 Nine and Three Months Ended September 30, 20212022 and 20202021
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 20202022
11,672,43110,766,070
$
11,67310,766
$
332,642,758330,880,252
$
(292,677,440)(297,891,168)
$
39,976,99132,999,850
Net loss
-
0-
0-
(22,332,947)(3,479,584)
(22,332,947)(3,479,584)
Class A common shares repurchased and retired
(188,280)
(188)
(377,110)
-
(377,298)
Balances, March 31, 20202022
11,672,43110,577,790
$
11,67310,578
$
332,642,758330,503,142
$
(315,010,387)(301,370,752)
$
17,644,04429,142,968
Net incomeloss
-
0-
0-
3,468,125(1,186,574)
3,468,125(1,186,574)
Class A common shares repurchased and retired
(41,135)
(41)
(72,958)
-
(72,999)
Balances, June 30, 20202022
11,672,43110,536,655
$
11,67310,537
$
332,642,758330,430,184
$
(311,542,262)(302,557,326)
$
21,112,16927,883,395
Net incomeloss
-
0-
0-
1,317,787(3,173,188)
1,317,787(3,173,188)
Class A common shares repurchased and retired
(225,970)
(226)
(362,126)
-
(362,352)
Balances, September 30, 20202022
11,672,43110,310,685
$
11,67310,311
$
332,642,758330,068,058
$
(310,224,475)(305,730,514)
$
22,429,95624,347,855
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 repurchasedrepurchases 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 Nine Months Ended September 30, 20212022 and 20202021
2022
2021
2020
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net (loss) income (loss)
$
(7,839,346)
$
835,244
$
(17,547,035)
Adjustments to reconcile net (loss) income (loss) to net cash provided by operating
 
activities:
Depreciation
51,93753,930
52,22351,937
Deferred income tax (benefit) provision
(1,571,076)
336,389
9,285,344
LossesUnrealized losses on mortgage-backed securities net
2,152,0236,605,850
5,501,0052,221,521
Realized losses on mortgage-backed securities
858,001
(69,498)
Gains on retained interests in securitizations
-(65,928)
(58,735)-
PPP loan forgiveness
(153,724)-
0(153,724)
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
856,4687,422,723
(38,935)
Realized and unrealized losses on forward settling TBA securities
0
1,441,406856,468
Changes in operating assets and liabilities:
Accrued interest receivable
(45,524)29,838
516,444(45,524)
Due from affiliates
(302,326)(13,034)
32,057(302,326)
Other assets
(84,426)391,964
1,558,632(84,426)
Accrued interest payable
(51,990)79,128
(561,918)(51,990)
Other liabilities
(98,625)(1,241,306)
(26,123)(98,625)
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
3,495,4464,710,744
154,3653,495,446
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(26,189,505)(21,009,391)
(43,129,835)(26,189,505)
Sales
13,063,24823,096,853
171,155,24913,063,248
Principal repayments
6,982,304
11,762,188
11,170,005
Costs associated with termination ofPayments received on retained interests in securitizations
065,928
58,735
Net settlement of forward settling TBA contracts
0
(1,500,000)-
Purchases of Orchid Island Capital, Inc. common stockproperty and equipment
0(46,176)
(4,071,593)-
NET CASH PROVIDED BY (USED IN) PROVIDED BY INVESTING ACTIVITIES
(1,364,069)9,089,518
133,682,561(1,364,069)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
195,962,000268,710,690
501,460,570195,962,000
Principal repayments on repurchase agreements
(197,873,114)(284,094,690)
(640,729,398)
Proceeds from long-term debt
0
152,165(197,873,114)
Principal repayments on long-term debt
(16,108)(16,926)
(15,238)(16,108)
Class A common shares repurchased and retired
(1,570,509)(812,649)
0(1,570,509)
NET CASH USED IN FINANCING ACTIVITIES
(3,497,731)(16,213,575)
(139,131,901)(3,497,731)
NET DECREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(1,366,354)(2,413,313)
(5,294,975)(1,366,354)
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
10,911,3579,812,410
12,385,11710,911,357
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
9,545,0037,399,097
$
7,090,1429,545,003
SUPPLEMENTAL DISCLOSURES OF CASH
 
FLOW INFORMATION:
Cash paid (received) during the period for:
Interest expense
$
896,0521,173,272
$
2,485,589
Income taxes
$
0
$
(1,568,363)896,052
See Notes to Condensed Consolidated Financial Statements
- 5 -
BIMINI CAPITAL
 
MANAGEMENT, INC.
NOTES TO CONDENSED
 
CONSOLIDATED FINANCIAL
 
STATEMENTS
(Unaudited)
September
 
30, 20212022
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
 
with the
Securities and Exchange Commission), are collectively referred to as "Bimini
 
"Bimini Advisors."
 
Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.
 
("Orchid") and receives fees for providing these services.
Effective April 1, 2022, Bimini Advisors started providing certain repurchase agreement
trading, clearing and administrative services to
Orchid that were previously provided by a third party. Bimini Advisors also manages the MBS portfolio of Royal Palm Capital,
LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily
of MBS investments
and shares of Orchid common
stock, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries
 
are collectively referred to as "Royal Palm."
Segment Reporting
The Company’s operations are classified into two principal reportable segments: the asset
management segment and the
investment portfolio segment. These segments are evaluated by management in deciding
how to allocate resources and in assessing
performance.
The accounting policies of the operating segments are the same as the
Company’s accounting policies with the
exception that inter-segment revenues and expenses are included in the presentation
of segment results.
For further information see
Note 13.
 
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini
 
Capital, Bimini Advisors and Royal Palm.
 
All
inter-company accounts and transactions have been eliminated from the consolidated
 
financial statements.
Basis of
Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X.
Accordingly, they may not include all of the information and footnotes required by GAAP for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for
a fair presentation have been included.
Operating results for the nine and three-month periods ended September 30,
2022 are not
necessarily indicative of the results that may be expected for the year ending December
31, 2022.
The consolidated balance sheet at December 31, 2021 has been derived from the
audited financial statements at that date but
does not include all of the information and footnotes required by GAAP for
complete consolidated financial statements.
For further
information, refer to the financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year
ended December 31, 2021.
- 6 -
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
Significant estimates affecting the accompanying consolidated financial statements include
determining the fair
values of MBS and derivatives, the value of Orchid Common Stock, determining
the amounts of asset valuation allowances, and the
computation of the income tax provision or benefit and the deferred tax asset allowances
recorded for each accounting period.
Variable Interest Entities (“VIEs”)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the
 
primary beneficiary of the VIE. Bimini Capital
has a common share investment
in a trust used in connection with the issuance
of Bimini Capital's junior subordinated
notes. See Note
87 for a description of the accounting used for this VIE.
The Company obtains interests in VIEs through its investments in mortgage-backed
 
securities.
 
The interests in these VIEs are
passive in nature and are not expected to result in the Company obtaining a controlling
 
financial interest in these VIEs in the future.
 
As
a result, the Company does not consolidate these VIEs and accounts for the interest
 
in these VIEs as mortgage-backed securities.
 
See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities.
 
The maximum exposure to
loss for these VIEs is the carrying value of the mortgage-backed securities.
Basis of
Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial
information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X.
Accordingly, they may not include all of the information and footnotes required by GAAP for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for
a fair presentation have been included.
Operating results for the nine and three-month periods ended September
30, 2021 are not
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 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 to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from
those estimates.
Significant estimates affecting the accompanying consolidated financial statements include
determining the fair
values of MBS, investment in Orchid common shares and derivatives, determining
the amounts of asset valuation allowances, 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 equivalents
 
include
 
cash on deposit
 
with financial
 
institutions
 
and highly
 
liquid investments
 
with original
 
maturities
 
of
three months
 
or less at
 
the time
 
of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and
derivative
 
instruments.
 
The following
 
table presents
 
the Company’s
 
cash, cash
 
equivalents
 
and restricted
 
cash as of
 
September
 
30, 20212022
and December
 
31, 2020.2021.
September 30, 20212022
December 31, 20202021
Cash and cash equivalents
$
7,854,8435,861,597
$
7,558,3428,421,410
Restricted cash
1,690,1601,537,500
3,353,0151,391,000
Total cash, cash equivalents
 
and restricted cash
$
9,545,0037,399,097
$
10,911,3579,812,410
The Company
 
maintains
 
cash balances
 
at several
 
banks and
 
excess margin
 
with an exchange
 
clearing member.
 
At times,
 
balances
may exceed
 
federally
 
insured
 
limits. The
 
Company has
 
not experienced
 
any losses
 
related to
 
these balances.
 
The Federal
 
Deposit
Insurance Corporation
 
insures eligible
 
accounts up
 
to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash balances
 
are
uninsured,
 
but are held
 
in separate
 
accounts that
 
are segregated
 
from the
 
general funds
 
of the counterparty.
 
The Company
 
limits
uninsured
 
balances to
 
only large,
 
well-known
 
banks
 
and exchange
 
clearing members
 
and believes
 
that it is
 
not exposed
 
to significant
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Advisory Services
Orchid is
 
externally
 
managed and
 
advised by
 
Bimini Advisors
 
pursuant
 
to the terms
 
of a management
 
agreement.
 
Under the
 
terms of
the management
 
agreement,
 
Orchid is
 
obligated
 
to pay Bimini
 
Advisors a
 
monthly management
 
fee and a
 
pro rata
 
portion of
 
certain
overhead
 
costs and
 
to reimburse
 
the Company
 
for any direct
 
expenses incurred
 
on its behalf.
 
Revenues
 
from management
 
fees are
recognized
 
over the
 
period of
 
time in which
 
the service
 
is performed.
Mortgage-Backed
Securities
- 7 -
Mortgage-Backed
Securities
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed
 
certificatessecurities issued by Freddie Mac, Fannie Mae
or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only
 
(“IO”) securities and inverse interest-only (“IIO”)
securities representing interest in or obligations backed by pools of mortgage-backed
 
loans. We referThe Company refers to MBS and CMOs
as PT MBS. The Company refers
We refer to IO and IIO securities as structured MBS. The Company has elected to account
 
account for its investment in
MBS under the fair
value option.
 
Electing the fair value option requires the Company to record changes
 
in fair value in the consolidated
statement of
operations, which, in management’s view, more appropriately reflects the results of ourthe Company’s operations for a
particular reporting period
and
is consistent with the underlying economics and
how the portfolio is managed.
The Company records MBS transactions on the trade date.
 
Security purchases that have not settled as of the balance sheet date
are included in the MBS balance with an offsetting liability recorded, whereas securities sold
 
that have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to
 
to transfer the liability in an orderly transaction
between market participants at the measurement date.
 
The fair value measurement assumes that the transaction to sell
 
the asset or
transfer the liability either occurs in the principal market for the asset
or liability, or in the absence of a principal market, occurs
in the
most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or
third-party broker quotes, when available.
 
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase
 
are
not amortized.
 
Premium lost and discount accretion resulting from monthly principal repayments
 
are reflected in unrealized gains and
losses on MBS in the consolidated statements of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on
 
the carrying
 
value and
the effective
 
yield. The
 
difference
 
between income
 
accrued and
 
the interest
 
received on
 
the security
 
is characterized
 
as a return
 
of
investment
 
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
At each reporting date, the effective yield is adjusted prospectively for future
reporting periods based on the new estimate of prepayments and the contractual
 
terms of the security.
 
For IIO securities, effective
yield and income recognition calculations also take into account the index
 
value applicable to the security.
 
Changes in fair value of
MBS during each reporting period are recorded in earnings and reported as
 
unrealized gains or losses on mortgage-backed securities
in the accompanying consolidated statements of operations.
The amount reported as unrealized gains or losses on mortgage-backed
securities thus captures the net effect of changes in the fair market value of securities caused by market
 
market developments and any
premium or discount lost as a result of principal repayments during the period.
Orchid Island Capital, Inc. Common Stock
The Company
 
accounts for
 
its investment
 
in Orchid
 
common shares
 
at fair value.
 
The change
 
in the fair
 
value and
 
dividends
 
received
on this investment
 
are reflected
 
in the consolidated
 
statements
 
of operations.
 
We estimate
 
the fair
 
value of ourOrchid’s
 
investment
in Orchidcommon shares
 
on a
market approach
 
using “Level
 
1” inputs
 
based on
 
the quoted
 
market price
 
of Orchid’s
 
common stock
 
on a national
 
stock exchange.
Retained
 
Interests
 
in Securitizations
The Company
 
holds retained
 
interests
 
in the subordinated
 
tranches
 
of securities
 
created in
 
securitization
 
transactions.
 
These retained
interests
 
currently
 
have a recorded
 
fair value
 
of zero,
 
as the prospect
 
of future
 
cash flows
 
being received
 
is uncertain.
 
Any cash
 
received
from the
 
retained
 
interests
 
is reflected
 
as a gain
in the consolidated
 
statements
 
of operations.
- 8 -
Derivative
 
Financial
 
Instruments
The Company
 
useshas historically
used derivative
 
instruments
 
to manage
 
interest
 
rate risk,
 
facilitate
 
asset/liability
 
strategies
 
and manage
other
other exposures,
 
and it may
 
continue
 
to do so
 
in the future.
 
The principal
 
instruments
 
that the
 
Company has
 
has used to
date are
 
Treasury Note
 
(“T-
Note”) and
 
Eurodollar
 
futures contracts,
 
and “to-be-announced”
 
(“TBA”) securities
 
transactions,transactions.
 
but it may
enter into
other derivative
- 8 -
instruments
in the future.
The Company
 
accounts for
 
TBA securities
as derivative
 
instruments.
Other types
of derivative
instruments
may be used
in the future.
 
Gains and
 
losses associated
 
with TBAderivative
transactions
 
securities
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
consolidated
 
statements
 
of operations.
During the
 
nine and
three months
ended September
30, 2022,
the Company
only held
T-Note futures
contracts.
The Company
recorded
income of
approximately
$
0.8
million on
these instruments
during both
the nine
and three
months ended
September
30, 2022.
Losses recorded
during the
nine and
three months
ended September
30, 2021
were negligible.
Derivative
 
instruments
 
are carried
 
at fair value,
 
and changes
 
in fair
 
value are
 
recorded
 
in the consolidated
 
operations
 
for each
 
period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge
 
accounting
 
relationships,
 
but rather
 
are used
 
as economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
Gains and
losses on
derivatives,
except those
that result
in cash receipts
or payments,
are
included in
operating
activities
on the statements
of cash flows.
Cash payments
and cash receipts
from settlement
of derivatives,
including
current period
net cash settlements
on interest
rate swaps,
are classified
as an investing
activity
on the statements
of cash flows.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
by counterparties
 
to honor
 
their commitments.
 
In
the event
 
of default
 
by a counterparty,
 
the Company
 
may have difficulty
 
recovering
 
its collateral
 
and may not
 
receive payments
 
provided
for under
 
the terms
 
of the agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive collateral
 
to mitigate
 
such risk.
 
In
addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
 
banks as
 
counterparties,
monitors positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair value of financial instruments for which it is practicable to estimate that
 
value is disclosed, either in the body of the
consolidated financial statements or in the accompanying notes. MBS,
 
Orchid common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods and
 
and assumptions used to estimate fair value for these
instruments are presented in Note 1312 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued
 
interest receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates
 
their carrying value as of September 30, 20212022 and
December 31, 2020,2021, due to the short-term nature of these financial instruments.
 
It is impractical to estimate the fair value of the Company’s junior subordinated notes.
 
Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates would
 
would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in
 
Note 87 to the consolidated financial statements.
Property
 
and Equipment,
 
net
Property and equipment, net, consists of computer equipment with a depreciable
 
life of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildingsour building and
 
andits improvements with depreciable lives of 30
30 years.
 
Property and equipment is recorded at acquisition cost and depreciated to
 
their respective salvage values using the straight-linestraight-
line method over the estimated useful
lives of the assets. Depreciation is included
in administrative and other expenses
in the
consolidated statement of operations.
- 9 -
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its PT
 
MBS through
 
the use of
 
repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
 
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Earnings
 
Per Share
Basic EPS is calculated as income available to common stockholders divided
 
by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class
 
method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result
 
is anti-dilutive.
- 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 two-class method and, consequently, are presented
separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation
 
as these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stock are
 
not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A Common
 
Stock were not met.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax
assets and
liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities using enacted
 
tax rates. The measurement of net
deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it
 
is more likely than not that they will
not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31,
 
2018 remain open for examination.
Although management believes its calculations for tax returns are correct and the positions
 
taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm
 
and
its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain
 
tax positions will be sustained upon
examination based on the facts, circumstances and information available at the
 
end of each period.
 
The measurement of uncertain tax
positions is adjusted when new information is available, or when an event occurs
 
that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely than
 
not that the position will be sustained upon
examination by the relevant taxing authority based on the technical merits
 
of the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realized upon
 
settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as an unrecognized
 
tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,
 
if applicable, within the income tax
provision.
- 10 -
Recent Accounting
 
Pronouncements
In March 2020, the FASB issued ASUAccounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848):
Facilitation
of the Effects of Reference Rate
Reform on Financial Reporting
.”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP
requirements
for modifications
on debt instruments, leases, derivatives, and other
contracts, related to the expected
market transition
from the London Interbank
Offered Rate (“LIBOR,”),
and certain other floating rate benchmark indices, or collectively, IBORs, to
alternative reference rates. ASU
2020-04 generally considers contract modifications
related to reference rate reform to
be an event that
does not require contract
remeasurement at the modification date nor a reassessment
of a previous accounting
determination. The
guidance in ASU 2020-04 is
optional and may be elected over time, through December
31, 2022, as reference
rate reform activities
occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial
 
financial statements.
 
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply
 
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
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 the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
 
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
 
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the
 
terms of a management agreement.
 
As Manager,
Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its management
 
team, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervision
 
and oversight of Orchid's board of directors and has only
such functions and authority as delegated to it. Bimini Advisors receives a monthly
 
management fee in the amount of:
●
One-twelfth of 1.5%1.50% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
 
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
Orchid is obligatedOn April 1, 2022, pursuant to reimburse Bimini Advisors for any direct expenses incurred
on its behalf andthe third amendment to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in the
management agreement. The management
agreement has been renewed through February 20, 2022
and provides for automatic one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated to
 
entered into on November 16, 2021, the
Company began providing certain repurchase agreement trading, clearing and
administrative services to Orchid that had been
previously provided by AVM, L.P.
under an agreement terminated on March 31, 2022.
In consideration for such services, Orchid will
pay Bimini Advisors a terminationthe following fees to the Company:
●
A daily fee equal to three
times the average annual management fee, as defined in the managementoutstanding principal balance of repurchase agreement funding
 
agreement, before or on the last dayin place as of the automaticend of such day
renewal term.
The following table summarizes the advisory services revenue from
Orchidmultiplied by 1.5 basis points 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
of aggregate outstanding principal balance
 
millionless than or equal to $5 billion, and
$
0.6
multiplied by 1.0 basis point for any amount of aggregate outstanding principal
 
million, respectively.
balance in excess of $5 billion, and
●
NOTE 3.A fee for the clearing and operational services provided by personnel
 
MORTGAGE-BACKED SECURITIES
The following
table presents
of 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
Manager equal to $10,000 per month.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 11 -
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred
on its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in the
management agreement. The management
agreement has been renewed through February 20, 2023
and provides for automatic one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated
to pay Bimini Advisors a termination fee equal to three
times the average annual management fee, as defined in the management agreement,
before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue from
Orchid for the nine and three months ended September 30,
2022 and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Management fee
$
7,881
$
5,569
$
2,616
$
2,157
Allocated overhead
1,482
1,189
522
390
Repurchase, Clearing and Administrative Fee
357
-
174
-
Total
$
9,720
$
6,758
$
3,312
$
2,547
At September 30, 2022 and December 31, 2021, the net amount due from
Orchid was approximately $
1.1
million and $
1.1
million,
respectively.
NOTE 3.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
MBS portfolio
as of September
30, 2022
and December
31, 2021:
(in thousands)
September 30, 2022
December 31, 2021
Fixed-rate MBS
$
41,276
$
58,029
Structured MBS
2,994
2,774
Total
$
44,270
$
60,803
The following table is a summary of the Company’s net gain (loss) from the sale of MBS during the nine months ended
September 30, 2022 and 2021.
(in thousands)
2022
2021
Proceeds from sales of MBS
$
23,097
$
13,063
Carrying value of MBS sold
(23,955)
(12,994)
Net (loss) gain on sales of MBS
$
(858)
$
69
Gross gain on sales of MBS
$
-
$
69
Gross loss on sales of MBS
(858)
-
Net (loss) gain on sales of MBS
$
(858)
$
69
- 12 -
NOTE 4.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its MBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest
 
rates are
generally
 
fixed based
 
on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders
 
will typically
 
require the
 
Company to
 
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of
 
the pledged
securities
 
increases,
 
lenders
 
may release
 
collateral
 
back to the
 
Company. As of
 
September
 
30, 2021,2022,
 
the Company
 
had met all
 
margin call
requirements.
As of September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
September 30, 2022
Fair value of securities pledged, including accrued
interest receivable
$
-
$
40,788
$
3,487
$
-
$
44,275
Repurchase agreement liabilities associated with
these securities
$
-
$
40,223
$
3,271
$
-
$
43,494
Net weighted average borrowing rate
-
2.97%
3.14%
-
2.98%
December 31, 2021
Fair value of securities pledged, including accrued
interest receivable
$
0-
$
46,85760,859
$
17,761159
$
0-
$
64,61861,018
Repurchase agreement liabilities associated with
these securities
$
0-
$
45,73058,793
$
17,43085
$
0-
$
63,16058,878
Net weighted average borrowing rate
-
0.14%
0.12%0.70%
-
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%0.14%
In addition,
 
cash pledged
 
to counterparties
 
for repurchase
 
agreements
 
was approximately
 
$
1.71.2
 
million and
 
$
3.41.4
 
million as
 
of
September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
respectively.
If, during
 
the term
 
of a repurchase
 
agreement,
 
a lender
 
files
 
for bankruptcy,
 
the Company
 
might experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable,
and cash posted by the Company as collateral, if any.
 
At September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
the Company
 
had an aggregate
amount at
 
risk (the
 
difference
 
between the
 
amount loaned
 
to the Company,
 
including
 
interest
 
payable, and
 
the fair
 
value of securities
 
and
cash pledged
 
(if any),
 
including
 
accrued interest
 
on such securities)
 
with all
 
counterparties
 
of approximately
 
$
3.12.0
 
million and
 
$
3.63.5
 
million,
respectively.
 
As of September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
the Company
 
did not have
 
an amount
 
at risk with
 
any individual
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 daily basis.
A minimum
balance, or
“margin”,
is required
to be maintained
in the
account on a
daily basis.
The tables
below present
information
related to
the Company’s
Eurodollar
and T-note futures
positions at
September 30,
2021 and December
31, 2020.
($ in thousands)
As of September 30, 2021
- 12 -
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
(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
$
(5,292)
$
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 13 -
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
Bimini’s assets
 
pledged
 
as collateral
 
under its
 
repurchase
 
agreements
 
and derivative
 
agreements
 
as of
September
 
30, 20212022
 
and December
 
31, 2020.2021.
($ in thousands)
September 30, 20212022
December 31, 20202021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
61,37241,276
$
0-
$
61,37241,276
$
64,90258,029
$
0-
$
64,90258,029
Structured MBS - at fair value
2,9992,803
0-
2,9992,803
2512,759
0-
2512,759
Accrued interest on pledged securities
248196
0-
248196
201230
0-
201230
Restricted cash
1,6901,244
0294
1,6901,538
3,3521,391
1-
3,3531,391
Total
$
66,30945,519
$
0294
$
66,30945,813
$
68,70662,409
$
1-
$
68,70762,409
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
cash pledged
 
to Bimini
 
from counterparties
 
under repurchase
 
agreements
 
and derivative
agreements
as
of September
 
30, 20212022
and December
 
31, 2020.2021.
 
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, 20212022
December 31, 20202021
Repurchase agreementsCash
$
487148
$
80106
Total
$
487148
$
80106
NOTE 7.6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivatives
 
and repurchase
 
agreements
 
are subject
 
to underlying
 
agreements
 
with master
 
netting or
 
similar
arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
 
bankruptcy
 
of either
 
party to the
 
transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
 
basis.
 
The following
 
tables present
 
information
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the
 
Company had
 
presented
 
them on a
 
net basis as
 
of September
30, 20212022
 
and December
 
31, 2020.2021.
(in thousands)
Offsetting of Liabilities
Gross Amount Not Offset in the
Net Amount
Consolidated Balance Sheet
Gross Amount
of Liabilities
Financial
Gross Amount
Offset in the
Presented in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2022
Repurchase Agreements
$
43,494
$
-
$
43,494
$
(42,250)
$
(1,244)
$
-
$
43,494
$
-
$
43,494
$
(42,250)
$
(1,244)
$
-
December 31, 2021
Repurchase Agreements
$
63,16058,878
$
0-
$
63,16058,878
$
(61,470)(57,487)
$
(1,690)(1,391)
$
0-
$
63,16058,878
$
0-
$
63,16058,878
$
(61,470)(57,487)
$
(1,690)(1,391)
$
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-
- 14 -
The amounts
 
disclosed
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
are limited
 
to the amount
 
sufficient
 
to reduce
 
the
asset or
 
liability
 
presented
 
in the consolidated
 
balance sheet
 
to zero.
 
The fair
 
value of the
 
actual collateral
 
received by
 
or posted
 
to the
same counterparty
 
typically
 
exceeds the
 
amounts presented.
 
See Note
 
65 for a discussion
 
of collateral
 
posted for, or
 
received against,
- 14 -
repurchase
 
obligations
 
and derivative
 
instruments.
NOTE 8.7.
 
LONG-TERM DEBT
Long-term
 
debt at September
 
30, 20212022 and
 
December
 
31, 20202021
 
is summarized
 
as follows:
(in thousands)
September 30, 20212022
December 31, 20202021
Junior subordinated debt
$
26,804
$
26,804
NoteSecured note payable
641618
657
Paycheck Protection Plan ("PPP") loan
0
152635
Total
$
27,44527,422
$
27,61327,439
Junior Subordinated Debt
During 2005,
 
Bimini Capital
 
sponsored
 
the formation
 
of a statutory
 
trust, known
 
as Bimini
 
Capital Trust
 
II (“BCTII”)
 
of which 100%
 
of
the common
 
equity is owned
 
by Bimini
 
Capital.
 
It was formed
 
for the purpose
 
of issuing
 
trust preferred
 
capital securities
 
to third-party
investors
 
and investing
 
the proceeds
 
from the
 
sale of such
 
capital securities
 
solely in
 
junior subordinated
 
debt securities
 
of Bimini
 
Capital.
The debt
 
securities
 
held by BCTII
 
are the sole
 
assets of
 
BCTII.
As of September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
the outstanding
 
principal
 
balance on
 
the junior
 
subordinated
 
debt securities
 
owed
to BCTII
 
was $
26.8
 
million.
 
The BCTII
 
trust preferred
 
securities
 
and Bimini
 
Capital's
 
BCTII Junior
 
Subordinated
 
Notes have
 
a rate of
interest
 
that floats
 
at a spread
 
of
3.50
% over the
 
prevailing
 
three-month
 
LIBOR rate.
 
As of September
 
30, 2021,2022,
 
the interest
 
rate was
3.626.79
%. The BCTII
 
trust preferred
 
securities
 
and Bimini
 
Capital's
��
BCTII Junior
 
Subordinated
 
Notes require
 
quarterly
 
interest
 
distributions
and are redeemable
 
at Bimini
 
Capital's
 
option, in
 
whole or
 
in part and
 
without penalty.
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes
are subordinate
 
and junior
 
in right
 
of payment
 
to all present
 
and future
 
senior indebtedness.
 
BCTII is
 
a VIE because
 
the holders
 
of the equity
 
investment
 
at risk do
 
not have
 
substantive
 
decision-making
 
ability over
 
BCTII’s
activities.
 
Since Bimini
 
Capital's
 
investment
 
in BCTII’s
 
common equity
 
securities
 
was financed
 
directly by
 
BCTII as
 
a result of
 
of its loan of
 
of the
proceeds
 
to Bimini
 
Capital,
 
that investment
 
is not considered
 
to be an
 
equity investment
 
at risk.
 
Since Bimini
 
Capital's
 
common share
investment
 
in BCTII
 
is not a variable
 
interest,
 
Bimini Capital
 
is not the
 
primary beneficiary
 
of BCTII.
 
Therefore,
 
Bimini Capital
 
has not
consolidated
 
the financial
 
statements
 
of BCTII
 
into its consolidated
 
financial
 
statements,
 
and this
 
investment
 
is accounted
 
for on the
 
equity
method.
The accompanying
 
consolidated
 
financial
 
statements
 
present
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as a
liability
 
and Bimini
 
Capital's
 
investment
 
in the common
 
equity securities
 
of BCTII
 
as an asset
 
(included
 
in other
 
assets).
 
For financial
statement
 
purposes,
 
Bimini Capital
 
records payments
 
of interest
 
on the Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as interest
 
expense.
Secured
Note Payable
On October
 
30, 2019,
 
the Company
 
borrowed
 
$
680,000
 
from a bank.
 
The note
 
is payable
 
in equal
 
monthly principal
 
and interest
installments
 
of approximately
 
$
4,5005,000
 
through October
 
30, 2039.
 
Interest
 
accrues at
 
4.89% through
 
October 30,
 
2024. Thereafter,
 
interest
accrues based
 
on the weekly
 
average
 
yield to the
 
United States
 
Treasury securities
 
adjusted to
 
a constant
 
maturity of
 
5 years,
 
plus
3.25
%.
The note
 
is secured
 
by a mortgage
 
on the Company’s
 
office building.
Paycheck
Protection
Plan Loan
On April
13, 2020,
the Company
received approximately
$
152,000
through the
Paycheck Protection
Program (“PPP”)
of the CARES
Act in the
form of a
low interest
loan.
PPP loans
carry a fixed
rate of
1.00
% and a term
of two years,
if not forgiven,
in whole or
in part.
The
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 15 -
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.
The table
 
below presents
 
the future
 
scheduled
 
principal
 
payments
 
on the Company’s
 
long-term
 
debt.
 
(in thousands)
Last three months of 20212022
$
65
2022
23For the years ended:
2023
24
2024
25
2025
26
2026
28
After 20252026
27,34127,314
Total
$
27,44527,422
NOTE 9.8.
 
COMMON STOCK
There were
 
no issuances
 
of Bimini
 
Capital's Class
 
A Common
 
Stock, Class
 
B Common
 
Stock or Class
 
C Common
 
Stock during
 
the
nine months
 
ended September
 
30, 20212022
 
and 2020.2021.
 
Stock Repurchase
 
Plans
On March 26,
 
2018, the
 
Board of
 
Directors
 
of the Company
 
(the “Board”)
 
approved
 
a Stock Repurchase
 
Plan (the
 
“2018 Repurchase
Plan”).
 
Pursuant
 
to the 2018
 
Repurchase
 
Plan, the
 
Company could
 
purchase
 
up to
500,000
 
shares of
 
its Class
 
A Common
 
Stock from
time to time,
 
subject to
 
certain limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange Act
 
Act of 1934.
 
The 2018
Repurchase
 
Plan
was terminated
 
on September
 
16, 2021
.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 $
1.92
per share.
From the
inception
of the 2018
Repurchase
Plan through
its termination,
the Company
repurchased
a total of
71,598
shares at
an
aggregate
cost of approximately
$
169,243
, including
commissions
and fees,
for a weighted
average price
of $
2.36
per share.
On September
 
16, 2021,
 
the Board
 
authorized
 
a share repurchase
 
plan pursuant
 
to Rule 10b5-1
 
of the Securities
 
Exchange
 
Act of
1934 (the
 
“2021 Repurchase
 
Plan”). Pursuant
 
to the 2021
 
Repurchase
 
Plan, the
 
Company may
 
purchase
 
shares of
 
its Class
 
A Common
Stock from
 
time to time
 
for an aggregate
 
purchase
 
price not
 
to exceed
 
$
2.5
 
million. Share
 
repurchases
 
may be executed
 
through various
means, including,
 
without limitation,
 
open market
 
transactions.
 
The 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
duringDuring the
 
nine months
ended September
 
30, 2021
under 2021
Repurchase
Plan.
Tender Offer
In July 2021,2022,
 
the Company
 
completedrepurchased
 
a “modified
Dutch auction”
tender offer
and paid
$1.5 million,
excluding
fees and
relatedtotal of
expenses,
to repurchase
812,879455,385
 
shares ofunder
 
Bimini Capital’sthe 2021
 
Class A commonRepurchase
Plan at an
 
stock at a
price of
$
1.85
per share.
The aggregate
 
cost of
the tender approximately
 
offer,$
0.8
million, including
 
commissions
 
and fees,
 
wasfor a weighted
average price
of $
1.78
per share.
From the
inception
of the 2021
Repurchase
Plan through
September
30, 2022,
the Company
repurchased
a total of
547,672
shares at
an
aggregate
cost of approximately
 
$
1.61.0
 
million.million, including
commissions
and fees,
for a weighted
average price
of $
1.84
 
per share.
NOTE 10.9.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various
claims and
legal actions arising in the ordinary course of
business.
 
- 16 -
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the
 
amount of $
33.1
 
million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company
 
of additional indemnity claims totaling $
0.2
million. The demand is
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the
related MLPA’s.
 
The Company
believes the demands are without merit and intends to defend
against the demand demands
vigorously.
 
No
provision or accrual has been
recorded as of September 30, 2021 related to the Citigroup demands.
 
demand.
- 16 -
Management is not aware of any other significant reported or unreported contingencies
 
at September 30, 2021.2022.
NOTE 11.10.
 
INCOME TAXES
 
The total income tax (benefit) provision recorded for the nine months ended September
 
30, 20212022 and 20202021 was $
0.3(1.6)
 
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 September
30, 2021 and 2020
was $
0.2
million and $
0.60.3
 
million, respectively, on consolidated pre-tax book (loss) income of $
0.6(9.4)
 
million and $
1.91.2
million in the nine months ended
September 30, 2022 and 2021, respectively.
The total income tax (benefit) provision recorded for the three
months ended September
30, 2022 and 2021 was $(
0.3
) million and $
0.2
million, respectively, on consolidated pre-tax book (loss) income of $(
3.4
) million and
$
0.6
 
million in the three months
ended September 30, 2022 and 2021, and 2020, respectively.
The Company’s tax provision is based on a projected effective rate based on annualized amounts
applied to
actual income to date
and includes the expected realization of a portion of the tax benefits of federal
 
and state net operating losses carryforwards (“NOLs”).
In assessing the realizability of deferred tax assets, management considers whether it
 
it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of capital
 
loss and NOL carryforwards is dependent upon the
generation of future capital gains and taxable income in periods prior to their expiration.
 
The Company currently provides a valuation
allowance against a portion of the NOLs since the Company believes that it is more likely
 
than not that some of the benefits will not be
realized in the future. The Company will continue to assess the need for a valuation
 
allowance at each reporting date.
As a result of adverse economic impacts of COVID-19 on its business, the Company
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 12.11.
 
EARNINGS PER SHARE
Shares of
 
Class B common
 
stock,
 
participating
 
and convertible
 
into Class
 
A common
 
stock, are
 
entitled to
 
receive dividends
 
in an
amount equal
 
to the dividends
 
declared
 
on each share
 
of Class A
 
common stock
 
if, and when,
 
authorized
 
and declared
 
by the Board
 
of
Directors.
 
The Class
 
B common stock
 
stock is included
 
in the computation
 
of basic EPS
 
using the
 
two-class
 
method, and
 
consequently
 
is
presented
 
separately
 
from Class
 
A common
 
stock.
 
Shares of
 
Class B common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A
EPS as the
 
conditions
 
for conversion
 
to Class A
 
common stock
 
were not
 
met at September
 
30, 20212022 and
 
2020.2021.
Shares of
 
Class C common
 
stock are
 
not included
 
in the basic
 
EPS computation
 
as these shares
 
do not have
 
participation
 
rights.
Shares of
 
Class C common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A EPS
 
as the conditions
 
for conversion
 
to Class A
common stock
 
were not
 
met at September
 
30, 20212022
 
and 2020.2021.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the nine
 
and three
 
months ended
 
September
 
30, 20212022
 
and
2020.2021.
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
20202022
2021
20202022
2021
Basic and diluted EPS per Class A common share:
(Loss) income attributable to Class A common shares:
Basic and diluted
$
(7,815)
$
833
$
(3,163)
$
464
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
10,247
10,794
10,247
10,794
Effect of weighting
220
564
42
72
Weighted average shares-basic and diluted
10,467
11,358
10,289
10,866
(Loss) income per Class A common share:
Basic and diluted
$
(0.75)
$
0.07
$
(0.31)
$
0.04
 
 
 
 
 
 
 
 
 
- 17 -
Basic and diluted EPS per Class A common share:
Income (loss) attributable to Class A common shares:
Basic and diluted
$
833
$
(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
$
0.07
$
(1.51)
$
0.04
$
0.11
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
20202022
2021
20202022
2021
Basic and diluted EPS per Class B common share:
Income (loss)(Loss) income attributable to Class B common shares:
Basic and diluted
$
(24)
$
2
$
(48)(10)
$
1
$
4
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
32
32
Weighted average shares-basic and diluted
32
32
32
32
Income (loss)(Loss) income per Class B common share:
Basic and diluted
$
(0.75)
$
0.07
$
(1.51)(0.31)
$
0.04
$
0.11
NOTE 13.12.
 
FAIR VALUE
Fair value
 
is the price
 
that would
 
be received
 
to sell an
 
asset or
 
paid to transfer
 
a liability
 
(an exit
 
price). A
 
fair value
 
measure should
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability, including
 
the assumptions
 
about the
 
risk inherent
in a particular
 
valuation
 
technique,
 
the effect
 
of a restriction
 
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required
disclosures
 
include stratification
 
of balance
 
sheet amounts
 
measured
 
at fair value
 
based on
 
inputs the
 
Company uses
 
to derive
 
fair value
measurements.
 
These stratifications
 
are:
●
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical
 
assets or
 
liabilities
 
traded in
 
active markets
(which include
 
exchanges
 
and over-the-counter
 
markets with
 
sufficient
 
volume),
●
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical
 
or similar
 
instruments
 
in markets
 
that are
 
not active
 
and model-based
 
valuation
 
techniques
 
for which
 
all
significant
 
assumptions
 
are observable
 
in the market,
 
and
●
Level 3 valuations,
 
where the
 
valuation
 
is generated
 
from model-based
 
techniques
 
that use
 
significant
 
assumptions
 
not
observable
 
in the market,
 
but observable
 
based on
Company-specific
 
data. These
 
unobservable
 
assumptions
 
reflect the
Company’s own
 
estimates
 
for assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability. Valuation
techniques
 
typically
 
include option
 
pricing models,
 
discounted
 
cash flow
 
models and
 
similar techniques,
 
but may also
 
include
 
the
use of market
 
prices of
 
assets or
 
liabilities
 
that are
 
not directly
 
comparable
 
to the subject
 
asset or
 
liability.
MBS, Orchid
 
common stock,
 
retained
 
interests
 
and TBA
 
securities
 
were all
recorded
 
at fair value
 
on a recurring
 
basis during
 
the nine
and three
 
months ended
 
September
 
30, 20212022
 
and 2020.2021.
 
When determining
 
fair value
 
measurements,
 
the Company
 
considers
 
the principal
or most advantageous
 
market in
 
which it
 
would transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the
asset. When
 
possible,
 
the Company
 
looks to active
 
and observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
in active
 
markets, the
 
Company
 
looks to market
 
observable
 
data for
 
similar assets.
 
Fair value
measurements
for the retainedRetained
 
interests
 
are
generatedhave a recorded
 
by a model
that requires
management
to make a
significant
number of
assumptions,
and this model
resulted
in afair value
 
of zero as
at bothof September
 
30, 20212022
 
and December
 
31, 2020.
The Company's2021,
 
MBS and TBAas the prospect
 
securitiesof future
 
are valuedcash flows
 
using Levelis uncertain.
 
2 valuations,Any cash
 
and such valuationsreceived from
 
currentlythe retained
interests
 
are determinedis reflected
 
byas a gain
in the consolidated
statements
of operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 18 -
The Company's
MBS and TBA
securities
are valued
using Level
2 valuations,
and such valuations
currently
are determined
by the
Company based
 
on independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, whenquotes. Because
 
available.the price
 
Because the
price estimates
 
may vary,
the Company
 
Company
must make
 
certain
judgments
 
and assumptions
 
about the
 
appropriate
 
price to
 
use to calculate
 
the fair
 
values. The
 
Company and
the
and the independent
 
pricing sources
 
use various
 
valuation
 
techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These techniques
techniques
include observing
 
the most
 
recent market
 
for like or
 
or identical
 
assets (including
 
security
 
coupon, maturity,
 
maturity, yield, and
 
and prepayment
speeds),
 
speeds),
spread pricing
 
techniques
 
to determine
 
market credit
 
spreads (option
 
adjusted spread,
 
zero volatility
 
spread, spread
 
to the U.S.
Treasury curve
 
Treasury
curve or spread
 
spread to
a benchmark
 
such as a
 
TBA security),
 
and model
 
driven approaches
 
(the discounted
 
cash flow
 
method, Black
Scholes and
 
Black Scholes
and SABR models
 
models which rely
 
rely upon
observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
volatility).
 
The appropriate
appropriate
spread pricing
 
method used
 
is based on
 
on market
convention.
 
The pricing
 
source determines
 
the spread
 
of recently
 
observed
trade activity
or observable
 
markets for
 
assets similar
 
to those
 
being priced.
 
The spread
 
is then adjusted
 
based on
 
variances
 
in certain
characteristics
 
characteristics
between the
 
market observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
type of asset,
 
asset, the expected
 
expected life
of the asset,
 
the
stability and
 
and predictability
 
of the expected
 
future cash
 
flows of
 
the asset,
 
whether
 
the coupon
 
of the asset
 
is fixed or
 
or
adjustable,
 
the
guarantor
 
of the security
 
if applicable,
 
the coupon,
 
the maturity, the
 
the issuer, size of
 
of the underlying
 
loans, year
 
in which
 
the
underlying
 
loans
were
originated,
 
loan to value
 
ratio, state
 
in which
 
the underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
and other
 
variables
if appropriate.
 
The fair
 
value of the
 
security is
 
determined
 
by using the
 
the adjusted
 
spread.
The Company’s
 
futures contracts
 
are Level
 
1 valuations,
 
as they are
 
exchange-traded
 
instruments
 
and quoted
 
market prices
 
are
readily available.
 
Futures contracts
 
are settled
 
daily. The Company’s
 
interest
 
rate swaps
 
and interest
 
rate swaptions
 
are Level
2
valuations.
 
The fair
 
value of interest
 
rate swaps
 
is determined
 
using a discounted
 
cash flow
 
approach
 
using forward
 
market interest
 
rates
and discount
 
rates, which
 
are observable
 
inputs. The
 
fair value
 
of interest
 
rate swaptions
 
is determined
 
using an option
 
pricing model.
The following
 
table presents
 
financial
 
assets and
 
liabilities
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
September
 
30, 2021
2022 and
December
 
31, 2020:2021:
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
September 30, 20212022
Mortgage-backed securities
$
64,39044,270
$
0-
$
64,39044,270
$
0-
Orchid Island Capital, Inc. common stock
12,6914,256
12,6914,256
0-
0-
December 31, 20202021
Mortgage-backed securities
$
65,17860,803
$
0-
$
65,17860,803
$
0-
Orchid Island Capital, Inc. common stock
13,54811,679
13,54811,679
0-
0-
During the
 
nine months
 
ended September
 
30, 20212022
 
and 2020,2021,
 
there were
 
no transfers
 
of financial
 
assets or
 
liabilities
 
between levels
1, 2 or 3.
- 19 -
NOTE 14.13.
 
SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments: the asset
 
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
 
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist
 
of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
 
Total revenues received under this management
agreement for the nine months ended September 30, 20212022 and 2020,2021, were approximately
 
$
6.89.7
 
million and $
5.06.8
 
million, respectively,
accounting for approximately
6880
% and
5368
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted
by Royal Palm.
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the nine months ended September 30, 2022 and 2021 is as
follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
9,720
$
-
$
-
$
-
$
9,720
Advisory services, other operating segments
(1)
85
-
-
(85)
-
Interest and dividend income
-
2,364
-
-
2,364
Interest expense
-
(314)
(938)
(2)
-
(1,252)
Net revenues
9,805
2,050
(938)
(85)
10,832
Other expenses
-
(14,092)
66
-
(14,026)
Operating expenses
(3)
(4,914)
(1,302)
-
-
(6,216)
Intercompany expenses
(1)
-
(85)
-
85
-
Income (loss) before income taxes
$
4,891
$
(13,429)
$
(872)
$
-
$
(9,410)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
6,758
$
-
$
-
$
-
$
6,758
Advisory services, other operating segments
(1)
108
-
-
(108)
-
Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
(748)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other (expenses) income
-
(3,008)
154
-
(2,854)
Operating expenses
(3)
(3,396)
(1,738)
-
-
(5,134)
Intercompany expenses
(1)
-
(108)
-
108
-
Income (loss) before income taxes
$
3,470
$
(1,704)
$
(594)
$
-
$
1,172
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 1920 -
The investment portfolio segment includes the investment activities conducted
by Royal Palm.
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the ninethree months ended September 30, 20212022 and 20202021 is
 
as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
20212022
Advisory services, external customers
$
6,7583,312
$
0-
$
0-
$
0-
$
6,7583,312
Advisory services, other operating segments
(1)
10829
0-
0-
(108)(29)
0-
Interest and dividend income
0-
3,245728
0-
0-
3,245728
Interest expense
0-
(95)(210)
(748)(379)
(2)
0-
(843)(589)
Net revenues
6,8663,341
3,150518
(748)(379)
(108)(29)
9,1603,451
Other incomeexpenses
0-
(3,008)(4,868)
15466
(3)-
0
(2,854)(4,802)
Operating expenses
(4)(3)
(3,396)(1,677)
(1,738)(401)
0-
0-
(5,134)(2,078)
Intercompany expenses
(1)
0-
(108)(29)
0-
10829
0-
Income (loss) before income taxes
$
3,4701,664
$
(1,704)(4,780)
$
(594)(313)
$
0-
$
1,172
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
4,969
$
0
$
0
$
0
$
4,969
Advisory services, other operating segments
(1)
116
0
0
(116)
0
Interest and dividend income
0
4,414
0
0
4,414
Interest expense
0
(1,030)
(893)
(2)
0
(1,923)
Net revenues
5,085
3,384
(893)
(116)
7,460
Other expenses
0
(10,238)
(466)
(3)
0
(10,704)
Operating expenses
(4)
(2,632)
(2,375)
0
0
(5,007)
Intercompany expenses
(1)
0
(116)
0
116
0
Income (loss) before income taxes
$
2,453
$
(9,345)
$
(1,359)
$
0
$
(8,251)
Segment information for the three months ended September 30, 2021 and 2020 is
as follows:
(in thousands)(3,429)
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 (expenses) income
0-
(1,033)
0-
0-
(1,033)
Operating expenses
(4)(3)
(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, 20212022 and December
 
31, 20202021 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
September 30, 20212022
$
1,8231,967
$
110,71186,542
13,2008,361
$
125,73496,870
December 31, 20202021
1,4691,901
113,764111,022
13,4689,162
128,701122,085
NOTE 15.14. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both September 30, 20212022 and December 31, 2020,2021, the Company owned
2,595,357519,071
 
shares of Orchid common stock representing(after giving
effect to Orchid’s 1-for-5 reverse stock split), representing approximately
1.71.5
% and
3.41.5
%, respectively, of Orchid’s outstanding common
stock on such dates.
The Company received dividends on this common
common stock investment of approximately $
1.0
million and $
0.3
million
during the nine and three months ended September 30, 2022, respectively, and approximately $
1.5
 
million and $
0.5
 
million during the
nine and three months ended September 30, 2021,
and approximately $respectively.
1.2
million and $
0.5- 21 -
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 compensationis eligible to receive
 
compensation from Orchid, and owns shares
of common
stock of Orchid.
 
In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the
Company, also
serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors,
Directors, receives compensation from Orchid, and owns shares of common stock
of Orchid. Robert
J. Dwyer and Frank E. Jaumot, our
independent directors, each own shares of common stock of Orchid.
 
- 2122 -
ITEM 2. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS.
 
The
following
discussion
of
our
financial
condition
and
results
of
operations
should
 
be read in conjunction with the consolidated
financial statements and notes to those statements included in Item 1 of this Form
 
read
in
conjunction
with
the
financial
statements and
notes to
those statements
included in
Item 1
of this
Form 10-Q.
The discussion
may contain
certain forward-lookingforward-
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
 
a result of
many
factors, such
as those
set forth
under “Risk
Factors” in
our most
recent Annual
Report on
Form 10-K
and any
subsequent Quarterly
Reports on Form 10-Q,10-K, our actual results
may differ materially from those anticipated in such
forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding
 
company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital,
 
LLC. We operate in two business segments: the
asset management segment, which includes (a) the investment advisory services provided
 
by Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which
 
includes the investment activities conducted
by Royal Palm.
 
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered
 
with the
Securities and Exchange Commission), are collectively referred to as
“Bimini “Bimini Advisors.”
 
Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement,
 
the Company receives management fees and
expense reimbursements.
 
As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day
operations.operations and, commencing April 1. 2022, provides certain repurchase agreement
 
trading, clearing and administrative services.
Pursuant to the terms of the management agreement, Bimini Advisors provides
 
provides Orchid with its management team,
including its officers,
along with appropriate support personnel. Bimini Advisors is at all times subject
 
subject to the supervision and oversight of
Orchid's board of
directors and has only such functions and authority as delegated to
it.
 
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries
 
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS")
 
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our investment
strategy focuses on,
and our
portfolio consists of, two categories of Agency
MBS: (i) traditional pass-through Agency
MBS, such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or
Ginnie Mae (the “GSEs”)
and collateralized mortgage obligations (“CMOs”) issued
issued by the GSEs (“PT MBS”) and (ii) structured Agency
MBS, such as interest
only securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other
types of
structured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock Repurchase
 
Plans
On March 26,
2018, the
Board of
Directors
of the Company
approved
a Stock Repurchase
Plan the
“2018 Repurchase
Plan”).
Pursuant
to the 2018
Repurchase
Plan, we
could purchase
up to 500,000
shares of
the Company’s
Class A Common
Stock from
time to
time, subject
to certain
limitations
imposed by
Rule 10b-18
of the Securities
Exchange
Act of 1934.
The 2018
Repurchase
Plan was
terminated
on September
16, 2021.
During the
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 $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
- 22 -
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.
 
No shares
were repurchased
underFrom the
 
2021 Repurchase
Plan throughcommencement
 
of the 2021
Repurchase
Plan,
through September
 
30, 2021.
Tender Offer
In July 2021,2022,
 
we completedrepurchased
 
a “modifiedtotal of
 
Dutch auction”547,672 shares
 
tender offerat an aggregate
cost of approximately
$1.0 million,
including
commissions
 
and paidfees,
 
$1.5 million,for a weighted
 
excluding
fees and
related expenses,
to
repurchase
812,879 shares
of our Class
A common
stock, which
were retired,
at aaverage price
 
of $1.85 per$1.84
 
per share.
During the
nine months
ended September
30, 2022,
the Company
repurchased
a total of
455,385 shares
at an aggregate
cost of approximately
$0.8 million,
including
commissions
and fees,
for a weighted
average price
of $1.78
per share.
- 23 -
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (including ongoing economic impacts from
 
of industry
and economic
factors (in
addition to
those related
to the
COVID-19 pandemic)
may impact
our results
of
results of operations and financial condition. These factors include:
•●
interest rate trends;
•●
the difference between Agency MBS yields and our funding and hedging costs;
•●
competition for, and supply of, investments in Agency MBS;
•●
actions
taken
by
the
U.S.
government,
including
the
presidential
administration,
 
the
U.S.
Federal
Reserve
(the
“Fed” (the “Fed”),
the
Federal Open Market Committee (the “FOMC”), the Federal Housing Finance
 
Agency (the “FHFA”) and the U.S. Treasury;
•●
prepayment rates on mortgages underlying our Agency MBS, and credit trends
 
insofar as they affect prepayment rates; and
•●
the equity markets and the ability of Orchid to raise additional capital;
●
geo-political events that affect the U.S. and international economies, such as the ongoing crisis in Ukraine; and
•●
other market developments.
In addition, a
variety of factors
relating to our
business may also
impact our results
 
of operations and
financial condition. These
factors include:
•●
our degree of leverage;
•●
our access to funding and borrowing capacity;
•●
our borrowing costs;
•●
our hedging activities;
•●
the market value of our investments;
•●
the requirements to qualify for a registration exemption under the Investment Company Act;
•●
our ability to use net operating loss carryforwards and net capital loss carryforwards
 
to reduce our taxable income;
•●
the impact of possible future changes in tax laws or tax rates; and
•●
increases in our cost of funds resulting from increases in the Fed Funds rate that
 
are controlled by the Fed which have
occurred, and are likely to continue to occur, in 2022;
●
our ability to manage the portfolio of Orchid and maintain our role as manager.manager; and
●
the financial performance of Orchid and resulting changes in Orchid’s shareholders equity, the carrying value of our
investment, dividend income and our advisory services revenue.
Results
 
of Operations
Described below
 
below are the Company’s results
of operations for
 
the Company’s
results of
operations
for the
nine and
three months
 
ended September
 
30, 2021, 2022,
as compared
 
to
the nine
 
and three
 
months ended
 
September
 
30, 2020.2021.
Net Income(Loss)
 
(Loss)Income Summary
Consolidated
 
net incomeloss for
 
for the
nine months
 
ended September
 
30, 20212022
 
was $0.8$7.8
 
million, or
$0.75 basic
and diluted
loss per share
of
Class A Common
Stock, as
compared
to a consolidated
net income
of $0.8 million,
 
or $0.07
 
basic and
 
diluted income
 
income per share
 
share
of Class A
 
Common Stock, as compared to consolidated net loss of
$17.5 million,
or $1.51 basic and
diluted loss per share of
Class A
Common Stock,
 
for the nine
 
months ended
 
September
 
30, 2020.2021.
 
Consolidated
 
net incomeloss for
 
for the
three
 
months ended
 
ended September
 
30, 20212022
 
was $0.5$3.2
 
million, or
$0.31 basic
and diluted
loss per
share of
Class A Common
Stock, as
compared
to consolidated
net income
of $0.5 million,
 
or $0.04
 
basic and
diluted
 
income per
 
share of
Class A
Common Stock,
for the three
months ended
September
30, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 2324 -
of Class
A Common
Stock, as
compared
to consolidated
net incomeThe components
 
of $1.3
million,
or $0.11 basic
and dilutednet (loss)
 
income perfor
 
share ofthe nine
 
Class A
Common Stock,months ended
 
for the
three months
ended September
 
30, 2020.2022
 
The components ofand 2021,
 
net income (loss)along with
 
for the nine and three months
ended September
30, 2021 and 2020, along
with the changes
 
in those
those components
 
are presented
 
in the table
 
below:below.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
20212022
20202021
Change
20212022
20202021
Change
Advisory services revenues
$
9,720
$
6,758
$
4,9692,962
$
1,789$
3,312
$
2,547
$
1,629
$
918765
Interest and dividend income
2,364
3,245
4,414(881)
(1,169)728
1,043
1,097
(54)(315)
Interest expense
(1,252)
(843)
(1,924)(409)
1,081(589)
(272)
(304)
32(317)
Net revenues
10,832
9,160
7,4591,672
1,7013,451
3,318
2,422
896133
Other (expense) incomeexpense
(14,026)
(2,855)
(10,703)(11,171)
7,848(4,802)
(1,033)
1,119
(2,152)(3,769)
Expenses
(6,216)
(5,134)
(5,007)(1,082)
(127)(2,077)
(1,653)
(1,615)
(38)(424)
Net (loss) income (loss) before income tax (benefit) provision
(9,410)
1,171
(8,251)(10,581)
9,422(3,428)
632
1,926
(1,294)(4,060)
Income tax (benefit) provision
(336)(1,571)
(9,296)336
8,960(1,907)
(167)(255)
(608)167
441(422)
Net (loss) income (loss)
$
(7,839)
$
835
$
(17,547)(8,674)
$
18,382$
(3,173)
$
465
$
1,318
$
(853)(3,638)
GAAP and
Non-GAAP
Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to
hedge a portion of the interest rate risk on repurchase agreements in a rising
rate environment.
 
We have not designated our derivative financial instruments as hedge accounting relationships,
 
but rather hold them for economic
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 expense, as reflected in our consolidated statements of operations, is
adjusted to reflect the realized and unrealized gains or losses on
certain derivative instruments the Company uses that
pertain to each period presented.
We believe that adjusting our GAAP interest
expense for the
periods presented by the gains or losses on
these derivative
instruments wouldmay not accurately reflect our economic
interest
expense for these periods. The reason is that these
derivative instruments
may cover periods that extend into the future, not
just the
current period.
 
Any realized or unrealized gains or
losses on the derivative instruments reflect
the change in market value of
the instrument caused
by changes in underlying interest rates
applicable to
the term covered by the instrument, which changes are
reflective of the future periods covered by the derivative instrument, not just
the current period.
For each period presented, we have combined the effects of the derivative financial instruments
 
in place for the respective period
with the actual interest expense incurred on borrowings to reflect total economic
 
interest expense for the applicable period. Interest
expense, including the effect of derivative instruments for the period, is referred to as economic interest
 
expense. Net interest income,
when calculated to include the effect of derivative instruments for the period, is referred to
 
as economic net interest income. This
presentation includes gains or losses on all contracts in effect during the reporting period,
 
covering the current period as well as
periods in the future.
We believe that economic interest expense and economic net interest income provide
meaningful information to consider, in
addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its
financial position and performance without the effects of certain transactions and GAAP adjustments
that are not necessarily indicative
of our current investment portfolio or operations. The unrealized gains or losses
on derivative instruments presented in our
- 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 way we calculate them. Second, while we
believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and
performance, it may be of limited usefulness as an analytical tool. Therefore, the
economic value of our investment strategy should not
be viewed in isolation and is not a substitute for interest expense and net
interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments,
calculated in accordance with GAAP for 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 has materially impacted the economic interest amounts reported below.
Losses on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
(in thousands)
Recognized in
Statement of
TBA
Operations
Securities
Futures
Three Months Ended
(GAAP)
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 Derivative Instruments - Attributed to Current Period (Non-GAAP)
(in thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Repurchase
Long-Term
Repurchase
Long-Term
Statement of
Three Months Ended
Agreements
Debt
Total
Agreements
Debt
Total
Operations
September 30, 2021
$
(709)
$
(57)
$
(766)
$
709
$
57
$
766
$
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
December 31, 2020
(615)
(40)
(655)
615
40
655
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
40
1,105
-
June 30, 2020
(456)
(40)
(496)
456
38
494
(2)
March 31, 2020
(456)
(40)
(496)
(2,879)
(475)
(3,354)
(3,850)
Nine Months Ended
September 30, 2021
$
(2,125)
$
(173)
$
(2,298)
$
2,125
$
173
$
2,298
$
-
September 30, 2020
(1,977)
(120)
(2,097)
(1,358)
(396)
(1,754)
$
(3,851)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 25 -
Economic Net Portfolio Interest IncomeWe believe that economic interest expense and economic net interest income provide
meaningful information to consider, in
addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its
financial position and performance without the effects of certain transactions and GAAP
adjustments that are not necessarily indicative
of our current investment portfolio or operations. The unrealized gains or losses
on derivative instruments presented in our
consolidated statements of operations are not necessarily representative
of the total interest expense that we will ultimately realize.
This is because as interest rates move up or down in the future, the gains
or losses we ultimately realize, and which will affect our total
interest expense in future periods, may differ from the unrealized gains or losses recognized
as of the reporting date.
Our presentation of the economic value of our hedging strategy has important
limitations. First, other market participants may
calculate economic interest expense and economic net interest income
differently than the way we calculate them. Second, while we
believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and
performance, it may be of limited usefulness as an analytical tool. Therefore, the
economic value of our investment strategy should not
be viewed in isolation and is not a substitute for interest expense and net
interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments discussed
above to interest expense shown for each period relative
to our derivative instruments, and the consolidated statements of operations
line item, gains (losses) on derivative instruments,
calculated in accordance with GAAP for each quarter in 2022 and 2021.
Gains (Losses) on Derivative Instruments - Attributed to Current Period (Non-GAAP)
(in thousands)
Interest Expense on Repurchase AgreementsAttributed to Current Period (Non-GAAP)
Net PortfolioAttributed to Future Periods (Non-GAAP)
EffectRepurchase
Long-Term
Repurchase
Long-Term
Statement of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
IncomeAgreements
BasisDebt
HedgesTotal
(1)Agreements
BasisDebt
(2)Total
BasisOperations
BasisSeptember 30, 2022
(3)$
(184)
$
(48)
$
(232)
$
1,028
$
48
$
1,076
$
844
June 30, 2022
(186)
(48)
(234)
136
48
184
(50)
March 31, 2022
(185)
(48)
(233)
185
48
233
-
December 31, 2021
(707)
(60)
(767)
707
60
767
-
September 30, 2021
$
537
$
24
$
(709)
$(57)
733(766)
$709
51357
$766
(196)-
June 30, 2021
578
31
(708)
739(58)
547(766)
(161)708
58
766
-
March 31, 2021
611
40
(708)
748(58)
571(766)
(137)708
December 31, 202058
597766
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, 20212022
$
1,726(555)
$
95(144)
$
(2,125)(699)
$
2,2201,349
$
1,631144
$
(494)1,493
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
presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)794
September 30, 2021
$(2,125)
513(173)
(2,298)
2,125
173
2,298
$
(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
to the period presented to GAAP net portfolio interest income.
(2)
Reflects the effect of derivative instrument hedges for only the period
presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP net interest income.
Segment Information
We have two operating segments. The asset management segment includes the investment
advisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment
portfolio segment includes the investment activities conducted
by Royal Palm.
Segment information for the nine months ended September 30, 2021 and 2020 is as
follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 26 -
2021
Advisory services, external customers
$
6,758
$
-
$
-
$
-
$
6,758
Advisory services, other operating segments
(1)
108
-
-
(108)
-
Economic Net Portfolio Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
(748)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other income
-
(3,008)
154
(3)
-
(2,854)
Operating expenses
(4)
(3,396)
(1,738)
-
-
(5,134)
Intercompany expenses
(1)
-
(108)
-
108
-
Income (loss) before income taxes
$
3,470
$
(1,704)
$
(594)
$
-
$
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.
- 27 -
(2)
Includes interestExpense 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 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
September 30, 2021
$
1,823
110,711
$
13,200
$
125,734
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 Orchid
for the management
of its
portfolio
pursuant
to the terms
of a management
agreement.
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses
incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management
agreement. The management agreement has been
renewed through February 2022 and provides for automatic one-year
extension options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee
equal to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue received from
Orchid in each quarter during 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
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
347
1,615
March 31, 2020
3,269,859
376,673
1,377
348
1,725
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 SegmentRepurchase Agreements
Net Portfolio Interest Income
- 28 -
We define
net portfolio
interest
income as
interest
income on
MBS less
interest
expense on
repurchase
agreement
funding.
During the
nine months ended September 30, 2021, we generated $1.6 millionEffect 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
$2.1 million
of net portfolio
interest income,
consisting
of $3.2 million
of interest
income from
MBS assets offset
by
$1.0 million
of interest
expense
on repurchase
liabilities.
The $1.5
million decrease
in interest
income for
the nine
months ended
September
30, 2021 was
due to a $15.4
million decrease
in average
MBS balances,
combined with
a 167 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
repurchase
liabilities
and a 151
bp decrease
in cost of
funds.
Our economic
interest
expense
on repurchase
liabilities
for the
nine months
ended September
30, 2021
and 2020
was $2.2
million and
$3.0 million,
respectively, resulting
in ($0.5)
million and
$0.2 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
($0.5)
million of
economic net
portfolio interest
expense,
respectively.
The
tables
below
provide
information
on our
portfolio
average
balances,
interest
income,
yield
on
assets,
average
repurchase
agreement
balances, interest
expense, cost
of funds, net interest
income and net
interest rate
spread for the
nine months ended
September 30,
2021
and 2020
and each
quarter in
2021 and
2020 on both
a GAAP and
economic basis.
($ in thousands)
Average
Yield on
Average
Interest Expense
Average Cost of Funds
MBSIncome
Interest
AverageGAAP
Repurchase
GAAPNon-GAAP
Economic
GAAP
Economic
Three Months Ended
HeldIncome
Basis
Hedges
(1)
Income
(2)
MBS
Agreements
(1)
Basis
Basis
(2)
Basis
Basis
(3)
September 30, 20212022
$
66,692445
$
537
3.22%210
$
67,253(184)
$
24394
$
235
$
51
June 30, 2022
392
73
(186)
259
319
133
March 31, 2022
491
31
(185)
216
460
275
December 31, 2021
511
21
(707)
728
490
(217)
September 30, 2021
537
24
(709)
733
0.14%513
4.36%(196)
June 30, 2021
70,925
578
3.26%
$
72,241
31
(708)
739
0.17%547
4.09%(161)
March 31, 2021
69,017
611
3.54%
69,104
40
(708)
748
0.23%571
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%
7.25%
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%(137)
Nine Months Ended
September 30, 20212022
$
68,8781,328
$
1,726
3.34%314
$
69,533(555)
$
95869
$
2,2201,014
0.18%$
4.26%459
September 30, 20202021
84,2511,726
3,16795
5.01%(2,125)
81,4312,220
1,0311,631
3,008(494)
1.69%(1)
4.92%Reflects the effect of derivative instrument hedges for only the period
presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
($ in thousands)
Net Portfolio
Net PortfolioInterest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest SpreadIncome (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
September 30, 20212022
$
513235
$
51
$
379
$
(48)
$
427
$
(144)
$
(376)
June 30, 2022
319
133
304
(48)
352
15
(219)
March 31, 2022
460
275
256
(48)
304
204
(29)
December 31, 2021
490
(217)
249
(60)
309
241
(526)
September 30, 2021
513
(196)
3.08%248
(1.14)%(57)
305
265
(501)
June 30, 2021
547
(161)
3.09%250
(0.83)%(58)
308
297
(469)
March 31, 2021
571
(137)
3.31%250
(0.79)%(58)
December 31, 2020308
554321
(61)(445)
3.20%
(0.42)%Nine Months Ended
September 30, 20202022
561$
(504)1,014
3.56%$
(3.40)%459
June$
939
$
(144)
$
1,083
$
75
$
(624)
September 30, 20202021
4631,631
7(494)
3.44%748
(0.07)%(173)
921
883
(1,415)
(1)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net portfolio interest income.
(2)
Reflects the effect of derivative instrument hedges for only the period
presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges
attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP net interest income.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 2927 -
March 31, 2020Segment Information
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 yieldsWe have two operating segments. The asset management segment includes the investment
 
advisory services provided by Bimini
Advisors to Orchid and costs
of borrowings
presented in
Royal Palm. The investment portfolio segment includes the tables
above and
the tables
on pages
29 and
30 are
calculated based
on the
average balances
of the underlying
 
investment portfolio/repurchaseactivities conducted by Royal Palm.
 
agreement balances
and are annualized
Segment information 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, 2022 and 2021 andis as
 
$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
during
the nine
months
ended September
30, 2021,
compared
to the nine
months ended
September
30, 2020.
- 30 -
Our economic
interest
expense
was $2.2
million
and $3.0
million
for the
nine
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.
Our
economic
interest
expense
was
$0.7
million
and
$1.1
million
for
the
three
months
ended
September 30,
2021
and
2020,
respectively.
There was
a 289
bp decrease
in the
average
economic
cost of
funds to
4.36% for
the three
months ended
September
30, 2021
from 7.25%
for the three
months ended
September
30, 2020.
Because all of
our repurchase agreements are short-term, changes in market rates
have a
more immediate impact on our
interest
expense.
Our average cost of funds calculated on a GAAP basis was 5 bps above the average one-month LIBOR and 2 bps below the
average
six-month
LIBOR for
the quarter
ended September
30, 2021.
Our average
economic
cost of
funds was
427 bps
above the
average
one-month LIBOR and 420
bps above
the average six-month LIBOR
for the
quarter ended September 30,
2021. The average
term to
maturity of
the outstanding
repurchase
agreements
decreased
from 33 days
at December
31, 2020
to 25 days
at September
30, 2021.
The tables
below
present
the average
outstanding
balances
under
our repurchase
agreements,
interest
expense
and average
economic
cost of funds,
and average
one-month and
six-month LIBOR
rates for the
nine months
ended September
30, 2021 and
2020, and for
each
quarter in
2021 and
2020, on
both a GAAP
and economic
basis.
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
September 30, 2021
$
67,253
$
24
$
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
December 31, 2020
67,878
43
658
0.25%
3.88%
September 30, 2020
61,151
43
1,108
0.28%
7.25%
June 30, 2020
51,987
60
516
0.46%
3.97%
March 31, 2020
131,156
928
1,384
2.83%
4.22%
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%
(0.09)%
(0.24)%
3.42%
3.27%
- 31 -
March 31, 2020
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
September
30, 2021
was 3.62%
compared
to 3.80%
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 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 nine and
three months
ended September
30, 2021
and 2020.follows:
(in thousands)
Nine Months Ended September 30,Asset
Three Months Ended September 30,Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
9,720
$
-
$
-
$
-
$
9,720
Advisory services, other operating segments
(1)
85
-
-
(85)
-
Interest and dividend income
-
2,364
-
-
2,364
Interest expense
-
(314)
(938)
(2)
-
(1,252)
Net revenues
9,805
2,050
(938)
(85)
10,832
Other expenses
-
(14,092)
66
-
(14,026)
Operating expenses
(3)
(4,914)
(1,302)
-
-
(6,216)
Intercompany expenses
(1)
-
(85)
-
85
-
Income (loss) before income taxes
$
4,891
$
(13,429)
$
(872)
$
-
$
(9,410)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
6,758
$
-
$
-
$
-
$
6,758
Advisory services, other operating segments
(1)
108
-
-
(108)
-
Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
(748)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other (expenses) income
-
(3,008)
154
-
(2,854)
Operating expenses
(3)
(3,396)
(1,738)
-
-
(5,134)
Intercompany expenses
(1)
-
(108)
-
108
-
Income (loss) before income taxes
$
3,470
$
(1,704)
$
(594)
$
-
$
1,172
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3228 -
Segment information for the three months ended September 30, 2022 and 2021 is
as follows:
2020(in thousands)
ChangeAsset
2021Investment
2020Management
ChangePortfolio
Realized gains (losses) on sales of MBSCorporate
Eliminations
Total
2022
Advisory services, external customers
$
69
$
(5,805)
$
5,874
$
693,312
$
-
$
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)$
5,2923,312
Advisory services, other operating segments
(1)
29
-
-
-
Gains on retained interests in securitizations(29)
-
59
(59)Interest and dividend income
-
59728
(59)-
Unrealized (losses) gains on-
Orchid Island Capital, Inc. common stock728
(856)Interest expense
39-
(895)(210)
(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,(379)
and not for the
purpose of making short term gains from trading in these securities.
However, we have sold, and may
continue to sell,(2)
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(589)
asset/liability
management
strategy. During the nine months
ended September
30, 2020, we received
proceeds of $171.2
million from theNet revenues
sales of MBS.3,341
Most of these
sales occurred
during the
second half
of March 2020
as we sold
assets in order
to maintain
our leverage
ratio518
at prudent levels, maintain sufficient cash
and liquidity and reduce risk
associated with the market turmoil brought about
by COVID-19.(379)
During the
nine months
ended September
30, 2021,
we received
proceeds
of $13.1
million from
the sales
of MBS.(29)
The fair
value of
our MBS
portfolio and derivative instruments, and the
gains (losses) reported on
those financial instruments, are3,451
sensitive
to changes
in interest
rates.
The table
below presents
historical
interest
rate data
for each
quarter end
during 2021
and 2020.Other expenses
5 Year-
10 Year(4,868)
15 Year66
30 Year-
Three(4,802)
U.S. TreasuryOperating expenses
U.S. Treasury(3)
Fixed-Rate(1,677)
Fixed-Rate(401)
Month-
Rate-
(2,078)
Intercompany expenses
(1)
Rate-
(29)
-
29
-
Income (loss) before income taxes
$
1,664
$
(4,780)
$
(313)
$
-
$
(3,429)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,547
$
-
$
-
$
-
$
2,547
Advisory services, other operating segments
(1)
Mortgage Rate35
-
-
(35)
-
Interest and dividend income
-
1,043
-
-
1,043
Interest expense
-
(24)
(248)
(2)
Mortgage Rate-
(272)
Net revenues
2,582
1,019
(248)
(35)
3,318
Other (expenses) income
-
(1,033)
-
-
(1,033)
Operating expenses
(3)
(1,157)
(496)
-
-
(1,653)
Intercompany expenses
(1)
-
(35)
-
35
-
Income (loss) before income taxes
$
1,425
$
(545)
$
(248)
$
-
$
632
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
LiborIncludes interest on long-term debt.
(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 andCorporate expenses are allocated based on each segment’s proportional
 
10 Year U.S. Treasury
Rates are obtained from quoted endshare of day prices on the Chicago Board Options
Exchange.total revenues.
(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 expensesAssets in each reportable segment 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.as follows:
(in thousands)
Nine Months Ended Asset
Investment
Management
Portfolio
Corporate
Total
September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Compensation and related benefits 2022
$
3,2201,967
86,542
$
3,1578,361
$
6396,870
$December 31, 2021
1,0291,901
$111,022
1,0109,162
$
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
$
37122,085
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3329 -
Asset Management
Segment
Advisory Services
Revenue
Advisory services
revenue
consists
of management
fees and
overhead
reimbursements
charged
to Orchid
for the management
of its
portfolio
pursuant
to the terms
of a management
agreement.
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.50% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
On April 1, 2022, pursuant to the third amendment to the management agreement
entered into on November 16, 2021, the
Company began providing certain repurchase agreement trading, clearing and
administrative services to Orchid that had been
previously provided by AVM, L.P.
under an agreement terminated on March 31, 2022.
In consideration for such services, Orchid pays
the following fees to the Company:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding
in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance
less than or equal to $5 billion, and
multiplied by 1.0 basis point for any amount of aggregate outstanding principal
balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel
of the Manager equal to $10,000 per month.
In addition, Orchid is obligated to reimburse us for any direct expenses
incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management
agreement. The management agreement has been
renewed through February 2023 and provides for automatic one-year extension
options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee
equal to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue received from
Orchid in each quarter during 2022 and 2021.
(in thousands)
Advisory Services
Repurchase,
Average
Average
Clearing and
Orchid
Orchid
Management
Overhead
Administrative
Three Months Ended
MBS
Equity
Fee
Allocation
Fees
Total
September 30, 2022
$
3,571,037
$
839,935
$
2,616
$
522
$
174
$
3,312
June 30, 2022
4,260,727
866,539
2,631
519
183
3,333
March 31, 2022
5,545,844
853,576
2,634
441
-
3,075
December 31, 2021
6,056,259
806,382
2,587
443
-
3,030
September 30, 2021
5,136,331
672,384
2,157
390
-
2,547
June 30, 2021
4,504,887
542,679
1,791
395
-
2,186
March 31, 2021
4,032,716
456,687
1,621
404
-
2,025
Nine Months Ended
September 30, 2022
$
4,459,203
$
853,350
$
7,881
$
1,482
$
357
$
9,720
September 30, 2021
4,557,978
557,250
5,569
1,189
-
6,758
- 30 -
Investment Portfolio Segment
Net Portfolio Interest Income Tax Provision
We recorded an define
net portfolio
interest
income tax provision foras
interest
income on
MBS less
interest
expense on
repurchase
agreement
funding.
During the
nine and three months ended September 30, 2022, we generated $1.0 million of
 
net portfolio interest income, consisting of $1.3 million of interest
income from MBS
assets offset by $0.3
million of interest
expense on repurchase
liabilities.
For the comparable
period ended September
30, 2021, we
generated
$1.6 million
of approximately $0.3net portfolio
interest income,
consisting
of $1.7 million and
of interest
income from
MBS assets offset
by
$0.20.1 million respectively, on consolidated pre-tax book income of $1.2 million and $0.6 million, respectively.
 
We recorded an incomeof interest
expense
on repurchase
liabilities.
tax provision The $0.4
million decrease
in interest
income for
the nine
months ended
September
30, 2022 was due to a $20.3 million decrease in average MBS balances,
which was partially offset by a 31 basis point ("bp") increase in
yields earned on the portfolio.
There was a $0.2 million increase
in interest expense
for the nine 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,September 30, 2022
 
2020 forthat
was due to
 
the net operatinga 70 bp increase
 
loss carryforwards
and capital
loss carryforwards.
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2021,
our MBS portfolio
consisted
of $64.4
millionin cost of
 
agency orfunds which
 
governmentwas partially
 
MBS at fairoffset by a
 
value and$21.9 million
 
had a
weighteddecrease
 
in average coupon
 
of 3.40%.repurchase
 
Duringliabilities.
Our economic
interest
expense
on repurchase
liabilities
for the
 
nine months
 
ended September
 
30, 2022
and 2021
 
we receivedwas $0.9
 
principal
repayments
of $11.8million and
million compared
to $11.2$2.2 million,
 
for the comparablerespectively, resulting
 
period in $0.5 million
and ($0.5)
million of
economic net
portfolio
interest
income (expense),
respectively.
During
the three
months
ended
 
September
 
30, 2020.2022,
 
we generated
$0.2 million
of net
portfolio
interest
income,
consisting
of $0.4
million
of
interest income
from MBS
assets offset
by
$0.2 million
of
interest expense
on
repurchase liabilities.
For
the three
months ended
September 30, 2021, we generated $0.5 million of net portfolio interest income, consisting of approximately
$537,000 of interest income
from MBS
assets offset
by approximately
$24,000 of
interest
expense on
repurchase
liabilities.
Our economic interest expense
on repurchase liabilities
for the three months ended September 30, 2022 and 2021 was $0.4 million
and $0.7 million,
respectively, resulting
in approximately
$0.1 million
and ($0.2) million
of economic
net portfolio
interest income
(expense),
respectively.
The
tables
below
provide
information
on our
portfolio
average
 
prepaymentbalances,
 
speedsinterest
income,
yield
on
assets,
average
repurchase
agreement
balances, interest
expense, cost
of funds, net interest
income and net
interest rate
spread for the
nine months ended
September 30,
2022
and 2021
and each
quarter in
2022 and
2021 on both
a GAAP and
economic basis.
($ in thousands)
Average
Yield on
Average
Interest Expense
Average Cost of Funds
MBS
Interest
Average
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Held
(1)
Income
(2)
MBS
Agreements
(1)
Basis
Basis
(2)
Basis
Basis
(3)
September 30, 2022
$
41,402
$
445
4.30%
$
40,210
$
210
$
394
2.09%
3.92%
June 30, 2022
46,607
392
3.36%
45,870
73
259
0.63%
2.25%
March 31, 2022
57,741
491
3.40%
56,846
31
216
0.22%
1.52%
December 31, 2021
62,597
511
3.27%
61,019
21
728
0.14%
4.77%
September 30, 2021
66,692
537
3.22%
67,253
24
733
0.14%
4.36%
June 30, 2021
70,925
578
3.26%
72,241
31
739
0.17%
4.09%
March 31, 2021
69,017
611
3.54%
69,104
40
748
0.23%
4.33%
Nine Months Ended
September 30, 2022
$
48,584
$
1,328
3.65%
$
47,642
$
314
$
869
0.88%
2.43%
September 30, 2021
68,878
1,726
3.34%
69,533
95
2,220
0.18%
4.26%
- 31 -
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
September 30, 2022
$
235
$
51
2.21%
0.38%
June 30, 2022
319
133
2.73%
1.11%
March 31, 2022
460
275
3.18%
1.88%
December 31, 2021
490
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.13)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
Nine Months Ended
September 30, 2022
$
1,014
$
459
2.77%
1.22%
September 30, 2021
1,631
(494)
3.16%
(0.92)%
(1)
Portfolio yields
and costs
of borrowings
presented in
the tables
above and
the tables
on pages
32 and
33 are
calculated based
on the
average balances
of the underlying
investment portfolio/repurchase
agreement balances
and are annualized
for the periods
presented.
Average balances for quarterly periods are calculated using two data
points, the beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the tables above and the tables on page 33 include
the effect
of derivative instrument hedges for only the period presented.
(3)
Represents
interest
cost
of
our
borrowings
and
the
effect
of
derivative
instrument
hedges
attributed
to
the
period
related
to
hedging
activities divided by average MBS.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest income
was $1.3
million for
 
the quartersnine
months ended September 30,
2022 and
$1.7 million
for the
nine months ended
September
30, 2021.
Average
MBS holdings
were
$48.6
million
and $68.9
million
for the
nine months
ended
September
30, 2022
and 2021,
respectively.
The $0.4
million
decrease
in interest
income was
due to
a $20.3
million
decrease
in average
MBS holdings,
which was
partially
offset by a
31 basis point
("bp") increase
in yields.
Our interest income was $0.4 million for
the three months ended September 30, 2022 and
$0.5 million for the
three months ended
September 30, 2021.
Average MBS holdings were $41.4 million and $66.7 million for the three months ended September
30, 2022 and
2021, respectively.
The $0.1 million
decrease in
interest income
was due to a $25.3
million decrease
in average
MBS holdings,
which was
partially offset
by a 108
bp increase
in yields in
average MBS
holdings.
The tables below present the average
portfolio size, income
and yields of our respective
sub-portfolios,
consisting of structured
MBS
and PT MBS,
for the nine
months ended
September
30, 2022
and 2021,
and for each
quarter during
2022 and
2021.
- 32 -
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
September 30, 2022
$
38,384
$
3,018
$
41,402
$
383
$
62
$
445
3.99%
8.17%
4.30%
June 30, 2022
43,568
3,039
46,607
333
59
392
3.06%
7.75%
3.36%
March 31, 2022
54,836
2,905
57,741
472
19
491
3.45%
2.61%
3.40%
December 31, 2021
59,701
2,896
62,597
500
11
511
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
533
4
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
Nine Months Ended
September 30, 2022
$
45,596
$
2,988
$
48,584
$
1,188
$
140
$
1,328
3.48%
6.22%
3.65%
September 30, 2021
67,851
1,027
68,878
1,717
9
1,726
3.37%
1.25%
3.34%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
outstanding
balances
under repurchase
agreements
were $47.6
million and
$69.5 million,
generating
interest expense
of
$0.3 million
and $0.1
million for
the nine months
ended September
30, 2022
and 2021,
respectively.
Our average
cost of funds
was 0.88%
and 0.18% for nine months
ended September
30, 2022 and 2021, respectively.
There was a 70 bp increase in the average
cost of funds
and a
$21.9 million
decrease in
average outstanding repurchase agreements during
the
nine months
ended September 30,
2022, as
compared
to the nine
months ended
September
30, 2021.
Our economic
interest
expense
was $0.9
million
and $2.2
million
for the
nine
months
ended
September
30, 2022
and 2021,
respectively.
There was
a 183 bp decrease
in the average
economic cost
of funds
to 2.43%
for the nine
months ended
September
30, 2022 from
4.26%
for the nine
months ended September 30, 2021.
The $1.3 million decrease in
economic interest expense was due to the
$21.9 million
decrease in average
outstanding repurchase agreements,
combined with the
183 bp
decrease economic cost of
funds during the
nine
months ended
September
30, 2022.
Our average
outstanding
balances
under repurchase
agreements
were $40.2
million and
$67.3 million,
generating
interest expense
of
approximately
$0.2 million
and 24,000
for the three
months ended
September
30, 2022 and
2021, respectively.
Our average
cost of funds
was 2.09% and 0.14% for
three months ended
September 30,
2022 and 2021, respectively.
There was a 195 bp increase
in the average
cost of
funds,
which was
partially
offset by
a $27.0
million
decrease
in average
outstanding
repurchase
agreements
during
the three
months
ended September
 
30, 20212022,
 
and 2020as compared
 
were 18.3%to the three
 
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 ofmonths ended
 
September
 
30, 2021.
Our
economic
interest
expense
was
$0.4
million
and
$0.7
million
for
the
three
months
ended
September 30,
2022
and
2021,
respectively. There
was a 44
bp decrease
in the average
economic
cost of funds
to 3.92%
for the
three months
ended September
30, 2022
from 4.36%
for the three
months ended
September
30, 2021.
Because all of
our repurchase agreements are short-term, changes in market rates
have a
more immediate impact on our
interest
expense.
Our average
cost of funds
calculated
on a GAAP
basis was
10 bps below
the average
one-month
LIBOR and
120 bps below
the
average
six-month
LIBOR for
the quarter
ended September
30, 2022.
Our average
economic
cost of
funds was
173 bps
above the
average
one-month
LIBOR
 
and December
31, 2020:63
 
bps above
the average
($ in thousands)
six-month
Weighted
LIBOR
Percentage
for the
Average
quarter
ended September
30, 2022.
The average
term to
maturity
of the outstanding
repurchase
agreements
decreased
from 16
days at December
31, 2021
to 16 days
at September
30, 2022.
WeightedThe tables
below
present
the average
outstanding
balances
under
our repurchase
agreements,
interest
expense
and average
economic
Maturitycost of funds,
and average
one-month and
six-month LIBOR
rates for the
nine months
ended September
30, 2022 and
2021, and for
each
Fairquarter in
2022 and
Entire
2021, on
Average
both a GAAP
in
and economic
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2021
Fixed Rate MBS
$
61,372
95.3%
3.69%
333
1-Sep-51
Interest-Only MBS
2,999
4.7%
2.87%
305
15-May-51
Inverse Interest-Only MBS
19
0.0%
5.90%
212
15-May-39basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 33 -
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
September 30, 2022
$
40,210
$
210
$
394
2.09%
3.92%
June 30, 2022
45,870
73
259
0.63%
2.25%
March 31, 2022
56,846
31
216
0.22%
1.52%
December 31, 2021
61,019
21
728
0.14%
4.77%
September 30, 2021
67,253
24
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
Nine Months Ended
September 30, 2022
$
47,642
$
314
$
869
0.88%
2.43%
September 30, 2021
69,533
95
2,220
0.18%
4.26%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Three Months Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
September 30, 2022
2.19%
3.29%
(0.10)%
(1.20)%
1.73%
0.63%
June 30, 2022
0.93%
1.90%
(0.30)%
(1.27)%
1.32%
0.35%
March 31, 2022
0.25%
0.76%
(0.03)%
(0.54)%
1.27%
0.76%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
Nine Months Ended
September 30, 2022
1.12%
1.98%
(0.24)%
(1.10)%
1.31%
0.45%
September 30, 2021
0.10%
0.19%
0.08%
(0.01)%
4.16%
4.07%
Dividend Income from Orchid
Effective August
30, 2022, Orchid
effected a 1-for-5
reverse stock
split, converting
every five shares
of issued and
outstanding
Orchid
common stock into one
share of common stock.
All share and per share
amounts reported
in this quarterly
report with respect
to Orchid’s
common stock
have been
adjusted
to reflect
this reverse
stock split.
At both September
30, 2022 and
December
31, 2021,
we owned 591,071
shares of
Orchid common
stock. Orchid
paid total
dividends
of $1.995
and $2.925
per share
during the
nine months
ended September
30, 2022
and 2021,
respectively.
During the
nine months
ended
September 30, 2022 and 2021, we
received dividends on this common stock investment of approximately $1.0 million and $1.5
million,
respectively. Orchid paid total dividends of $0.545 and $0.975 per share during the three months ended September 30, 2022 and 2021,
respectively.
During the three months ended
September 30, 2022 and 2021, we received
dividends on this common stock
investment of
approximately
$0.3
million and
$0.5 million,
respectively.
Long-Term Debt
Junior Subordinated Notes
Interest
expense on
our junior
subordinated
debt securities
was $0.9
million and
$0.7 million
for the nine
months ended
September
30,
2022 and 2021, respectively.
The average rate of interest paid for the nine months
ended September 30, 2022 was 4.64% compared
to
3.67% for
the comparable
period in
2021.
- 34 -
Interest expense
on
our
junior subordinated debt
securities was
$0.4 million
and
$0.2 million
for
the
three month
periods ended
September
30, 2022
and 2021,
respectively.
The average
rate of
interest
paid for
the three
months ended
September
30, 2022
was 5.58%
compared
to 3.62%
for the comparable
period in
2021.
The junior
subordinated
debt securities
pay interest
at a floating
rate.
The rate is
adjusted quarterly
and set at
a spread of
3.50% over
the prevailing
three-month
LIBOR rate
on the determination
date.
As of September
30, 2022,
the interest
rate was
6.79%.
Note Payable
On October
30, 2019,
the Company borrowed
$680,000 from a
bank. The
note is
payable in equal
monthly principal and interest
installments of approximately
$5,000 through October
30, 2039. Interest accrues
at 4.89% through October
30, 2024. Thereafter, interest
accrues based
on the weekly
average yield
to the United
States Treasury
securities
adjusted to
a constant
maturity of
5 years, plus
3.25%.
The note
is secured
by a mortgage
on the Company’s
office building.
Gains or Losses and Other Income
The table
below presents
our gains
or losses
and other
income for
the nine and
three months
ended September
30, 2022
and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Realized (losses) gains on sales of MBS
$
(858)
$
69
$
(927)
$
-
$
69
$
(69)
Unrealized losses on MBS
(6,606)
(2,222)
(4,384)
(2,572)
(324)
(2,248)
Total losses on
MBS
(7,464)
(2,153)
(5,311)
(2,572)
(255)
(2,317)
Gains (losses) on derivative instruments
795
(280)
1,075
844
(147)
991
Gains on retained interests in securitizations
66
-
66
66
-
66
Unrealized losses on
Orchid Island Capital, Inc. common stock
(7,423)
(856)
(6,567)
(3,140)
(779)
(2,361)
We invest
in MBS
with the
intent
to earn
net income
from the
realized
yield on
those
assets
over
their related
funding
and hedging
costs,
and not for the
purpose of making short term gains from trading in these securities.
However, we have sold, and may
continue to sell,
existing assets
to
acquire new
assets, which
our
management believes
might have
higher risk-adjusted
returns in
light of
current or
anticipated interest rates, federal government programs or general economic conditions or to
manage our balance sheet
as part
of our
asset/liability
management
strategy. During
the nine
months ended
September
30, 2022
and September
30, 2021,
we received
proceeds
of
$23.1 million
and $13.1
million from
the sales
of MBS,
respectively.
The fair
value of
our MBS
portfolio
and derivative
instruments,
and the
gains (losses)
reported
on those
financial
instruments,
are driven
by changes in yields and interest rates,
the spreads that MBS trade relative
to comparable duration
U.S. Treasuries or swaps, as well as
varying levels
of demand
for MBS.
The table
below presents
historical
interest
rate data
as of the
end of quarter
during 2022
and 2021.
- 35 -
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)
September 30, 2022
4.04%
3.80%
5.35%
6.11%
3.45%
June 30, 2022
3.00%
2.97%
4.65%
5.52%
1.97%
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
(1)
Historical 5 Year and 10
Year U.S. Treasury
Rates are obtained from quoted end of day prices on the Chicago Board Options
Exchange.
(2)
Historical 15 Year and
30 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Operating Expenses
For the nine
and three months ended September 30, 2022,
our total operating expenses were approximately $6.2 million and $2.1
million,
respectively, compared to approximately
$5.1 million and $1.7 million for the nine and three months ended September 30, 2021,
respectively.
The table
below presents
a breakdown
of operating
expenses for
the nine
and three
months ended
September
30, 2022 and
2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Compensation and related benefits
$
3,836
$
3,220
$
616
$
1,230
$
1,029
$
201
Legal fees
82
113
(31)
18
37
(19)
Accounting, auditing and other professional fees
288
293
(5)
85
97
(12)
Directors’ fees and liability insurance
588
568
20
195
190
5
Administrative and other expenses
1,422
940
482
549
300
249
$
6,216
$
5,134
$
1,082
$
2,077
$
1,653
$
424
Beginning
with the
second quarter
of 2022,
Bimini began
providing
certain repurchase
agreement
trading,
clearing and
administrative
services to
Orchid.
Providing
these services
required
Bimini to
increase staffing
and other
resources,
causing an
increase
in
compensation
related expenses
of approximately
$0.5 million
and $0.2
million for
the nine
and three
month periods
ended September
30,
2022, and
increases
in other
administrative
expenses
of approximately
$0.4 million
and $0.2
million for
the nine
and three
month periods
ended September
30, 2022,
as compared
to the nine
and three
months ended
September
30, 2021.
Income Tax Provision
We recorded
an income
tax (benefit)
provision
for the nine
months ended
September
30, 2022
and 2021
of approximately
$(1.6)
million and
$0.3 million,
respectively, on
consolidated
pre-tax book
(loss) income
of $(9.4)
million and
$1.2 million,
respectively. We
recorded
an income
tax (benefit)
provision
for the three
months ended
September
30, 2022
and 2021
of approximately
$(0.3) million
and
$0.2 million,
respectively, on
consolidated
pre-tax book
(loss) income
of $(3.4)
million and
$0.6 million.
- 36 -
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2022,
our MBS portfolio
consisted
of $44.3
million of
agency or
government
MBS at fair
value and
had a
weighted
average coupon
of 3.62%.
During the
nine months
ended September
30, 2022,
we received
principal
repayments
of $7.0 million
compared
to $11.8 million
for the
comparable
period ended
September
30,
2021.
The average
prepayment
speeds for
the quarters
ended
September
30, 2022
and 2021
were 10.8%
and 18.3%,
respectively.
The following
table presents
the three-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT MBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction
of the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three-month
prepayment
rate of the
securities
in the respective
asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2022
13.1
7.5
10.8
June 30, 2022
17.2
22.9
20.0
March 31, 2022
18.5
25.6
20.9
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
The following
tables summarize
certain characteristics
of our PT
MBS and structured
MBS as of
September
30, 2022
and December
31, 2021:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2022
Fixed Rate MBS
$
41,276
93.2%
4.02%
329
1-Jul-52
Structured MBS
2,994
6.8%
2.84%
301
15-May-51
Total MBS Portfolio
$
64,39044,270
100.0%
3.40%3.62%
331327
1-Sep-511-Jul-52
December 31, 20202021
Fixed Rate MBS
$
64,90258,029
99.6%95.4%
3.89%3.69%
333330
1-Aug-501-Sep-51
Interest-OnlyStructured MBS
2512,774
0.4%4.6%
3.56%2.88%
299306
15-Jul-48
Inverse Interest-Only MBS
25
0.0%
5.84%
221
15-May-3915-May-51
Total MBS Portfolio
$
65,17860,803
100.0%
3.89%3.41%
333329
1-Aug-501-Sep-51
($ in thousands)
September 30, 20212022
December 31, 20202021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
41,93831,774
65.1%71.8%
$
38,94639,703
59.8%65.3%
Freddie Mac
22,45212,496
34.9%28.2%
26,23221,100
40.2%34.7%
Total Portfolio
$
64,39044,270
100.0%
$
65,17860,803
100.0%
- 37 -
September 30, 20212022
December 31, 20202021
Weighted Average Pass-through Purchase Price
$
109.33105.51
$
109.51109.33
Weighted Average Structured Purchase Price
$
4.814.48
$
4.284.81
Weighted Average Pass-through Current Price
$
110.3894.00
$
112.67109.30
Weighted Average Structured Current Price
$
9.4513.36
$
3.209.87
Effective Duration
(1)
2.5424.484
3.3092.103
(1)
Effective duration is the approximate percentage change in price
 
for a 100 basis point change in rates.
 
An effective duration of 2.5424.484 indicates
that an interest rate increase of 1.0% would be expected to cause a 2.542%4.484% decrease in the
 
value of the MBS in our investment portfolio at
September 30, 2021.2022.
 
An effective duration of 3.3092.103 indicates that an interest rate
 
rate increase of 1.0% would be expected to cause a 3.309%2.103%
decrease in the value of the MBS in our investment portfolio at December
 
31, 2020.2021. These figures include the structured securities in the
portfolio but do include the effect of our hedges.
Effective duration
quotes for individual investments are obtained
from The Yield
Book, Inc.
The following
 
table presents
 
a summary
 
of our portfolio
 
assets acquired
 
during the
 
nine months
 
ended September
 
30, 20212022
 
and 2020.2021.
($ in thousands)
Nine Months Ended September 30,
20212022
20202021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
21,009
$
99.14
4.12%
$
23,337
$
106.48
1.41%
$
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 of prepayments
 
of the underlying
 
mortgage
 
loans tends
 
to shorten
 
the resulting
 
cash flows
 
from our
investments
 
substantially.
 
Prepayments
 
occur for
 
various reasons,
 
including
 
refinancing
 
of underlying
 
mortgages,
 
loan payoffs
 
in
connection
 
with home
 
sales, and
 
borrowers
 
paying more
 
than their
 
scheduled
 
loan payments,
 
which accelerates
 
the amortization
 
of the
loans.
 
The duration
 
of our IO
 
and IIO portfolio
 
will vary
 
greatly depending
 
on the structural
 
features
 
of the securities.
 
While prepayment
activity will
 
always affect
 
the cash
 
flows associated
 
with the
 
securities,
 
the interest
 
only nature
 
of IO’s may
 
cause their
 
durations
 
to become
extremely
 
negative when
 
prepayments
 
are high,
 
and less negative
 
when prepayments
 
are low. Prepayments
 
affect the
 
duration
 
of IIO’s
similarly, but the
 
floating rate
 
nature of
 
the coupon
 
of IIOs (which
 
is inversely
 
related to
 
the level
 
of one month
 
LIBOR) causes
 
their price
movements
 
- and model
 
duration
 
- to be affected
 
by changes
 
in both
 
prepayments
 
and one month
 
LIBOR - both
 
current and
 
anticipated
levels.
 
As a result,
 
the duration
 
of IIO securities
 
will also
 
vary greatly.
- 35 -
Prepayments
 
on the loans
 
underlying
 
our MBS
 
can alter
 
the timing
 
of the cash
 
flows received
 
by us. As
 
a result,
 
we gauge
 
the interest
rate sensitivity
 
of its assets
 
by measuring
 
their effective
 
duration.
 
While modified
 
duration
measures
 
the price
 
sensitivity
 
of a bond
 
to
movements
 
in interest
 
rates, effective
 
duration
 
captures
 
both the
 
movement in
 
interest
 
rates and
 
the fact
 
that cash
 
flows to a
 
mortgage
related security
 
are altered
 
when interest
 
rates move.
 
Accordingly, when
 
the contract
 
interest
 
rate on a
 
mortgage
 
loan is substantially
above prevailing
 
interest
 
rates in
 
the market,
 
the effective
 
duration
 
of securities
 
collateralized
 
by such loans
 
can be quite
 
low because
 
of
expected prepayments.
 
- 38 -
We face the
 
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, 2021,2022,
 
assuming rates
 
instantaneously
 
fall 100 bps,
 
rise 100
 
bps and
 
rise 200
 
bps, adjusted
 
to reflect
 
the
impact of
 
convexity, which
 
is the
 
measure of
 
the sensitivity
 
of our hedge
 
positions
 
and Agency
 
MBS’ effective
 
duration
 
to movements
 
in
interest
 
rates.
 
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
61,37241,276
$
2,0701,973
$
(2,857)(2,149)
$
(6,133)(4,393)
3.37%4.78%
(4.66)(5.21)%
(9.99)(10.64)%
Interest-OnlyStructured MBS
2,9992,994
(955)(124)
63663
99678
(31.84)(4.14)%
21.21%2.10%
33.22%
Inverse Interest-Only MBS
19
1
(3)
(5)
6.09%
(13.97)%
(28.53)%2.61%
Total MBS
 
Portfolio
$
64,39044,270
$
1,1161,849
$
(2,224)(2,086)
$
(5,142)(4,315)
1.73%4.18%
(3.45)(4.71)%
(7.99)(9.75)%
($ in thousands)
Notional
$ Change in Fair Value
% Change in Fair Value
Amount
(1)
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
EurodollarTreasury Futures Contracts
Junior Subordinated DebtRepurchase Agreement Hedges
$
1,00014,400
$
(3)(1,115)
$
31,037
$
51,998
(1.00)(7.75)%
1.00%7.20%
2.00%13.88%
$
1,00014,400
$
(3)(1,115)
$
31,037
$
51,998
Gross Totals
$
1,113734
$
(2,221)(1,049)
$
(5,137)(2,317)
(1)
Represents
the average contract/notional
amount of Eurodollar futures
 
futures contracts.
In addition
 
to changes
 
in interest
 
rates, other
 
factors impact
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments
 
and hedging
instruments,
 
such as the
 
shape of
 
the yield
 
curve, market
 
expectations
 
as to future
 
interest
 
rate changes
 
and other
 
market conditions.
Accordingly, in
 
the event
 
of changes
 
in actual
 
interest
 
rates, the
 
change in
 
in the fair
 
value of our
 
assets would
 
likely differ
 
from that
 
shown
above and
 
such difference
 
might be
 
material and
 
adverse to
 
our stockholders.
Repurchase Agreements
As of September
 
30, 2021,2022,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number
 
of commercial
banks and
 
other financial
 
institutions
 
and had borrowings
 
in place with
 
sixfive of these
 
counterparties.
 
We believe
 
these facilities
 
provide
borrowing
 
capacity in
 
in excess of
 
of our needs.
 
None of these
 
lenders are
 
affiliated
 
with us.
 
These borrowings
 
are secured
 
by our MBS.
 
As of September
 
30, 2021,2022,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$63.243.5 million
 
with a
net weighted
average borrowing
cost of 2.98%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
11 to 31 days,
with a weighted
average maturity
of 16 days.
Securing
the repurchase
agreement
obligation
as of September
30, 2022
are
MBS with
an estimated
fair value,
including
accrued interest,
of $44.3 million
and a weighted
average maturity
of 329 months.
Through
November
10, 2022,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to those
that existed
at September
30,
2022 with
maturities
through December
19, 2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3639 -
net weighted
average borrowing
cost of 0.13%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
6 to 53 days,
with a weighted
average maturity
of 25 days.
Securing
the repurchase
agreement
obligation
as of September
30, 2021
are
MBS with
an estimated
fair value,
including
accrued interest,
of $64.6 million
and a weighted
average maturity
of 332 months.
Through
November
8, 2021,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to
those that
existed at
September
30,
2021 with
maturities
through January
14, 2022.
The table below presents information about our period-end, maximum and average
 
repurchase agreement obligations for each
quarter in 20212022 and 2020.2021.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
September 30, 20212022
$
63,16043,494
$
72,04746,977
$
67,25340,210
$
3,284
8.17%
June 30, 2022
36,926
53,289
45,870
(8,944)
(19.50)%
March 31, 2022
54,815
58,772
56,846
(2,031)
(3.57)%
December 31, 2021
58,878
62,139
61,019
(2,141)
(3.51)%
September 30, 2021
63,160
72,047
67,253
(4,093)
(6.09)%
June 30, 2021
71,346
72,372
72,241
(895)
(1.24)%
March 31, 2021
73,136
76,004
69,104
4,032
5.83%
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
ended September 30, 2020 reflects the increase in the portfolio.
During that quarter, the Company's investment in
PT MBS increased $20.4 million.
(2)
The lower ending balance relative to the average balance during the quarter
ended March 31, 2020 reflects the Company’s response to the
COVID-19 pandemic. During that quarter,
the Company's investment in PT MBS decreased $162.4 million.
Liquidity and Capital Resources
Liquidity
 
is our ability
 
to turn non-cash
 
assets into
 
cash, purchase
 
additional
 
investments,
 
repay principal
 
and interest
 
on borrowings,
fund overhead
 
and fulfill
 
margin calls.
 
Our primaryWe have both
 
immediateinternal
and external
 
sources of
 
liquidity. However,
our material
unused sources
of
liquidity
 
include cash
 
balances,
 
unencumbered
 
assets theand
availabilityour ability
 
to borrowsell encumbered
 
under repurchaseassets to
 
agreements,
and fees
and dividends
received from
Orchid.raise cash.
 
Our borrowingbalance
 
capacity will
vary oversheet also
time as the
market value
of our interest
earning assets
varies.
Our investments
also generategenerates
 
liquidity
 
on an on-going
 
basis through
payments of
 
principal
 
and interest
 
we receive
 
on our MBS
 
portfolio.portfolio
and dividends
we
receive on
our investment
in Orchid
common stock.
 
The COVID-19Internal
 
pandemic hasSources of
 
adverselyLiquidity
Our internal
 
affected oursources of
 
liquidity
 
assets under
management
and operating
results.
During March
2020,
we significantly
reducedinclude our
 
MBS cash balances,
unencumbered
assets and
our ability
 
to meet marginliquidate
 
calls andour encumbered
 
repay debts.security
holdings.
 
As describedOur balance
 
elsewheresheet also
 
in this report,
since March
2020
Bimini’s operating
results have
stabilized,generated
 
liquidity
 
has improvedon an ongoing
basis through
payments
of principal
 
and interest
we receive
on our
MBS portfolio
and dividends
we receive
on our investmentsinvestment
 
in MBS andOrchid
 
Orchid shares
have increased
as
compared to
investments
in MBS and
Orchid shares
at March
31, 2020.common stock.
 
OurWe have previously,
and may
again in the
future, employ
a hedging
 
strategy
 
that typically
 
involves
 
taking short
 
positions
 
in Eurodollar
futures,
 
T-Note futures,
 
TBAs or other
 
instruments.
Currently, our
hedge positions
are limited
to short positions
in Eurodollar
futures.
 
When the market
 
market causes these
 
these short
positions
 
to decline
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
move in price
 
in such a
 
way
that we do
 
we do not receive
 
receive enough cash
 
cash through margin
 
margin calls
to offset
 
the Eurodollar
 
related margin
 
calls. If this
were to
 
this were
to occur
in sufficient
magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size of
 
of the levered
 
portfolio,
 
pledge additional
structured
 
securities
 
to raise
funds or
 
risk operating
 
the portfolio
 
with less
 
liquidity.
External
Sources of
Liquidity
Our primary
external
sources of
liquidity
are our ability
to (i) borrow
under master
 
repurchase
 
agreements
and (ii)
use the TBA
security
market. Our
borrowing
capacity will
vary over
time as the
market value
of our interest
earning assets
varies. Our
master repurchase
agreements
 
have no stated
 
expiration,
 
but can be
 
terminated
 
at any time
 
at our option
 
or at the
 
option of
 
the
counterparty. However,
 
However, once
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase
 
agreement
 
has been
 
entered into,
 
it generally
may not be
 
terminated
 
by
either
party.
 
A negotiated
 
termination
 
can occur, but
 
may involve
 
a fee to
 
be paid by
 
the party
 
seeking to
 
- 37 -
terminate
 
the repurchase
agreement
 
transaction.
 
- 40 -
Under our
 
repurchase
 
agreement
 
funding arrangements,
 
we are required
 
to post margin
 
at the initiation
 
of the borrowing.
 
The margin
posted represents
 
the haircut,
 
which is a
 
percentage
 
of the market
 
value of the
 
collateral
 
pledged.
 
To the extent the
 
market value
 
of the
asset collateralizing
 
the financing
 
transaction
 
declines,
 
the market
 
value of our
 
posted margin
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases
 
in value,
 
we would
 
be over collateralized
 
and we
would be
 
entitled to
 
have excess
 
margin returned
 
to us by the
 
counterparty.
 
Our lenders
 
typically
 
value our
 
pledged securities
 
daily to
ensure the
 
adequacy of
 
our margin
 
and make margin
 
calls as
 
needed, as
 
do we.
 
Typically, but not always,
 
always, the parties
 
parties agree to
 
to a minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis.
As discussed Our
 
above, wemaster repurchase
 
agreements
do not specify
the haircut;
rather haircuts
are determined
on an individual
repurchase
transaction
basis.
We invest a
 
portion of
 
our capital
 
in structured
 
MBS.
 
We generally
 
do not apply
 
leverage
 
to this portion
 
of our
portfolio.
 
The leverage
inherent
 
in the structured
 
securities
 
replaces the
 
the leverage
 
obtained
 
by acquiring
 
PT securities
 
and funding
 
them in the
the repurchase
 
market.
 
This structured
 
MBS strategy
 
has been
 
a core element
 
of the Company’s
 
overall investment
 
strategy
 
since 2008.
 
However, we
 
have and
may continue
 
to pledge
 
a portion
 
of our structured
 
MBS in order
 
to raise our
 
cash levels,
 
but generally
 
will not
pledge these
 
securities
 
in
order to
 
to acquire
additional
 
assets.
In future
 
periods we
 
expect to
 
continue to
 
finance our
 
activities
 
through repurchase
 
agreements.agreements
and through
revenues
from our
advisory services
business.
 
As of September
 
30, 2021, we2022,
 
we had
cash and cash
 
and cash equivalents
 
of $7.9$5.9
 
million.
 
We generated
 
cash flows
 
of $13.4
$8.3 million
 
million from
principal
 
and interest
 
payments on
 
our MBS
portfolio
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $69.5$47.6
million during
 
the nine months
 
months ended
September
 
30, 2021.2022.
 
In
addition,
 
during the
 
nine months
 
ended September
 
30, 2021,2022,
 
we received
approximately
 
$6.59.7 million
 
in management
 
fees and
 
expense
reimbursements
 
as manager
 
of Orchid
 
and approximately
 
$1.51.0 million
 
in
dividends
 
from our
investment
 
in Orchid
 
common stock.
In order to generate additional cash to be invested in our MBS portfolio, on
October 30, 2019, we obtained a $680,000 loan
secured by a mortgage on the Company’s office property.
The loan is payable in equal monthly principal and interest installments of
approximately $4,500 through October 30, 2039. Interest 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 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.
The table below summarizes the effect that certain future contractual obligations existing as
of September 30, 2021 will have on
our liquidity and cash flows. The figures below reflect forgiveness of all principal and
interest under the PPP loan.
(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
63,160
$
-
$
-
$
-
$
63,160
Interest expense on repurchase agreements
(1)
18
-
-
-
18
Junior subordinated notes
(2)
-
-
-
26,000
26,000
Interest expense on junior subordinated notes
(1)
995
1,909
1,906
8,783
13,593
Principal and interest on mortgage loan
(1)
54
107
108
703
972
Totals
$
64,227
$
2,016
$
2,014
$
35,486
$
103,743
(1)
Interest expense
on repurchase
agreements,
junior subordinated
notes and mortgage
loan are based
on current
interest rates
as of September
30,
2021 and the
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
- 38 -
Orchid Island
 
Capital Inc.
Orchid Island
Capital continued to grow its capital base in thereported
a third quarter
2022 loss
of 2021.$84.5
million and
its shareholders
equity declined
from $506.4
million to
$400.4 million.
The market
conditions
described
below led
to the loss
as agency
MBS underperformed
comparable
duration
treasuries
and the Orchid’s
hedge positions.
The decline
in shareholders
equity is
likely to
lead to reduced
management
fees at Bimini
Advisors
going forward
if Orchid
is unable
to rebuild
its shareholders
equity since
the amount
of the management
fees paid
to the Company
are a
function of
Orchid’s equity.
 
Orchid raised net proceeds of approximately
$207.5 million through its “at the market” (“ATM”) program during the third quarter and an additional $38.4 million subsequent to
September 30, 2021. The capital raised subsequent to September 30, 2021,also
 
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.reduced its
 
As for Orchid’s financialmonthly dividend
once during
the quarter
from $0.225
per month
to $0.16 per
month.
performance, Orchid recorded GAAP net income of $0.20 per share or $26.0 millionThe reduction
 
in the third quarter of 2021.dividend
 
The net effect of the
new shares issued, net income and dividends paid resulted in Orchid’s capital base increasingdecreased
 
$176.8 million, or 32% for during the
third quarter. monthly
 
Year to date Orchid has increased its capital base by approximately $315.3 million, or 76%.dividend
 
As a result, Bimini Advisor’srevenues
advisory services revenue increased 17% overto the second quarter and, as the increased
capital base at Orchid was not in place for the
entire quarter, the run rate entering the fourth quarter is higher still.
Orchid’s financial performance and dividend activity will also
continue to impact the size of its capital base going forward.Company.
Orchid is
obligated
to reimburse
us for direct
expenses paid
on its behalf
and to pay
 
to us Orchid’s
pro rata
share of
overhead as
defined in
the management
agreement.
 
As a stockholder
of Orchid,
we will also
continue to
share in distributions, if
 
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
 
our holdings of Orchid common
shares,
shares, although
these market
value changes
do not impact
our cash flows
 
from Orchid.
- 41 -
Economic
Summary
The Company increased its holdings evolution
of Orchideconomic
and market
during
developments
pivoted in
the second third
quarter of 2020, as the shares of Orchid were trading at a significant
 
discount to Orchid’s reported book value as of2022.
Trends in place
since late
2021 have
March 31, 2020.changed in
the third
quarter.
 
The Company currently owns approximately 2.6 million sharesoutlook
for the domestic
economy of Orchid.
the United
States, particularly
with respect
to inflation,
the level
of
The independent Board of Directors of Orchid has interest
rates and
expectations
for monetary
policy from
the ability to terminateFed changed
during the
 
management agreement and thus end our ability to
collect management fees and share overhead costs.quarter.
 
Should Orchid terminateAs the management agreement without cause,second
 
it will be
obligated to pay us a termination fee equal to three times the average annual managementquarter of
 
fee, as defined in the management
agreement, before or on the last day of the current automatic renewal term.
Economic Summary
The effects2022 ended,
 
of COVID-19the
market expected
 
continued tothat the
 
dominatemonetary
 
tightening
policies implemented
by the Fed
to control
inflation
would soon
succeed, and
that by
early in
2023 the
Fed would
likely start
to unwind
their rate
increases
in order
to avert
an economic activity
slowdown
resulting
from these
policies. The
catalyst for
the changes
that occurred
 
during the
 
third quarter
 
of 2021,2022 was
 
particularlyclear evidence
 
the Deltathat not
 
variant that
first emergedonly was
 
in earnestinflation
 
during July.persisting,
 
Daily newbut that
 
infectionsit
was becoming
 
from themore broad
 
Delta variantbased and
 
rose rapidlyentrenched.
 
duringAs the
summer but
appeared
to peak in
early September Fed
 
and have
been slowly
falling since.
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
goods
and services
and shortages
of labor
in many industries.
Coupled
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
across the
economy.
The supply
imbalances
for goods
and services
have in turn
led to price
pressures
for both,
driving inflation
to multi-decade
highs.
The Fed chairman,
among other
members of
 
the FederalFOMC
 
Open Marketbecame aware
 
Committeeof this, their
 
(“FOMC”)public
comments consistently
 
has maintainedsought to
 
these inflationarydispel the
 
forces arenotion that
 
temporarythey would
be easing
monetary policy
in early 2023
as the futures
markets were
pricing.
As the quarter
unfolded
 
and willthe inflation
 
ease oncedata continued
 
theto reflect
effects ofthis trend,
 
the COVIDmarket
 
pandemic fadegrew to
accept that
the Fed would
have to
raise the
Fed Funds
target further
into restrictive
territory.
At the conclusion
of their
meeting
on November
2, 2022,
Fed chairman
Powell
expressed
the view
that since
the incoming
economic
data since
their September
meeting was
so strong,
the terminal
funds rate
would
likely have
to be higher
than the
Fed expected
in September.
The market
reacted quickly
to this guidance
 
and workersthe terminal
 
can returnrate priced
into
the Fed funds
futures market
was nearly
5.15% on
November
4, 2022.
The market
is now very
sensitive
 
to work.income
 
Yet, as implied byeconomic
 
market pricing
of inflation
linked U.S.
Treasurydata,
securities
and opinions
expressed
by various
market participants,particularly
 
inflation
 
may provedata.
Contributing
to the change
in economic
and interest
rate trends
were developments
abroad, particularly
in Europe
and the United
Kingdom.
While inflation
has proven
 
to be more
 
than transitory,
and of late
even FOMC
members themselves
have admitted
inflation
has remained
high longer
than they
had anticipated.
Over the course
of the third
quarterrobust and
 
into thechallenging
 
fourth, expectations
for growthto control
 
in the U.S.,
 
economy continuedit has been
even more
so in Europe
and
most of the
world outside
of China,
which is grappling
with persistent
COVID-19
cases that
have forced
the government
 
to decline.intermittently
lock down
 
On October
28, 2021,various population
 
the advancedcenters.
 
read on grossThe war
 
domestic productin Ukraine
 
growth forhas contributed
significantly
to food
and energy
price pressures
globally, more
so than in
 
the U.S.
 
economy wasThe result
 
reported to
be 2.0%.
Expectations
for growth
during the
quarter were
significantly
higher at
the beginning
of the quarter.
As noted
above, job
growth has
decelerated,
and supply
constraints
of goods
and services
are keeping
activity levels
suppressed.
Over the
course of
the balance
of the year
it should
become
- 39 -
apparent
whether
the supply
constraints,
especially with
respect
to labor, are
transitory
now thatis essentially
 
all formscentral
banks across
the globe
– outside
 
of pandemic
related
unemployment
insurance
have endedChina
 
and the newJapan
 
cases of– are raising
rates.
Like the
Fed, the
 
Delta variantcentral banks’
 
efforts have
yet to slow
inflation
and more
rate hikes
are very
likely.
Food and
energy inflation
poses additional
pressure
on governments
who are
eager to
ease the
burden of
elevated prices
for essentials
like food
and energy, but
are constrained
because their
efforts themselves
might increase
inflationary
pressures
and run counter
to central
bank actions
that are
attempting
to
constrain
economic activity
and demand.
A further
complicating
factor has
been the
U.S. dollar.
As the COVIDFed
 
virus are subsiding.is forced
to continue
to raise
rates in
the U.S.,
the dollar
has
appreciated
against all
other currencies.
 
This in turn
 
should also
answer theforces other
 
question aboutcentral banks
 
theto raise
 
transitoryrates to
 
nature ofprotect their
 
inflation.
The housingown currencies,
 
market remainsoften above
and beyond
 
robust aswhat their
 
evidenceddomestic economic
 
by salescircumstances
 
of newmight warrant.
Risk sentiment
is at extremely
depressed
levels and
 
existing homes,all asset
 
as well
as new home
construction.
However,
as home prices
have risen
at 10% –
20% overclasses across
 
the last yearfinancial
 
and supplymarkets have
 
shortagesgenerated
 
of goodsnegative
 
and materials
are constraining
new homeyear-to-
construction,
this trend
may slow.
If this were
to occur, it would
be beneficialdate returns
 
for the Company’s2022,
 
RMBS portfolio
as prepayments
related to
housing turnover
may decelerate.
Legislative
Response
and the
Fed
Congress
passed the
CARES Act
quickly in
response
to the pandemic’s
emergence
in the spring
of 2020
and followed
with additional
legislation
over the
ensuing months.
However, as certain
provisions
of the CARES
Act expired,
such as supplemental
unemployment
insurance
in Julyoutside 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 in, particularly
over the
Christmas
holiday.
As mentioned
above, the
Federal government
eventually
passed an
additional
stimulus
package in
late December
of 2020energy and
 
again in Marchcertain food
 
of 2021.commodities.
 
In addition,
the Fed has
provided,
and
continues
to provide,
as much support
to the markets
and the economy
as it can
within the
constraints
of its mandate.
During the
third
quarter of
2020, the
Fed unveiled
a new monetary
policy framework
focused on
average inflation
rate targeting
that allows
the Fed Funds
rate to remain
quite low, even
if inflationEconomic growth
 
is expected
 
to temporarilycontinue
 
surpass the
2% target
level. Further,to slow over
 
the Fed hasbalance
of the year,
 
indicated
that it will
look past
the presence
of very tight
labor markets,
should they
be present
at the time.
This marks
a significant
shift from
their prior
policy
framework,
which was
focused on
the unemployment
rate as a
key indicator
of impending
inflation.
Adherence
to this policy
could steepen
the U.S.
Treasury curve
as short-term
rates could
remain low
for a considerable
period but
longer-term
rates could
rise given
the Fed’s
intention
to let inflation
potentially
run above
2%both in the
 
future asU.S. and
 
the economyglobally, and likely
 
more fullycontract in
 
recovers.
The response
of U.S.
Treasury rates
appeared
to follow
this pattern
precisely
during the
first quarter
of 2021,
but have
since reversed
since early
in the second
quarter
2021.2023.
Interest
 
Rates
InterestAs the market
 
rates acrossincorporated
inflation
data and
 
the U.S.Fed’s response
 
Treasury curve
and U.S.
dollar swap
curve were
little changed
duringthrough the
 
thirdsecond quarter
 
of 2021.2022,
 
The
only notable
development
within theinterest
 
rates complexbegan
 
was the slightto rise
significantly.
 
flatteningOn August
1, 2022,
the 10-year
U.S. Treasury
Note closed
with a yield
 
of both curves2.5759%,
 
between theshortly before
 
five-
and 30-year
points as
the
market anticipates
the eventual
tapering
of asset purchases
beginning
in the fourth
quarter of
2021 and
increases
to 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 Fedbegan to
temper market
 
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 indicatedexpectations
 
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 releasedwould
 
their summarypivot away
 
of economicfrom their
 
projections,tightening
 
or “Dotand begin
 
Plot” as
it is known.
As was the
case with
the June
FOMC Dot
Plot, the
Dot Plot
indicated FOMC
members anticipated
increasingto lower
 
the Fed Funds
 
rate sooner
and by a largerin early
 
amount2023.
The
yield on the
10-year U.S.
Treasury Note
closed just
above 3.83%
on September
30, 2022,
and just under
4.25% on
October 24,
2022.
This increase
was much
less than
 
the increase
in short-term
rates.
Interest
rates on
U.S. Treasury
Note maturities
inside one
year
increased
by well over
100 basis
points and
by more than
160 basis
points for
maturities
of three
months or
less – in
each case
by the end
of the third
quarter of
2022.
With the continued
increases
in market
 
anticipated.expectations
 
Nineof the Fed’s
terminal rate,
maturities
of three or
fewer
months have
increased
by more
than 250
basis points
from the
end of the
 
eighteen FOMCsecond quarter
 
members,through November
 
as evidenced
by the Dot
Plot released
in
September, expect
the Fed to
increase the
funds rate
at least once
in10, 2022.
 
This surprised
the market,
and the market
pricingAs of
forward September
short-term
rates quickly
adjusted
to reflect
these expectations.
As the fourth
quarter has
unfolded and
inflationary
pressures
have continued
to build,30, 2022,
 
market pricing
 
of forwardimplied the
 
short-termterminal rate
 
rates have
continuedfor the current
 
to reflectcycle would
 
additionalbe approximately
 
increases4.53%, which
 
to the Fedwould be
 
Funds rate.reached late
 
Further, as inflationin the
first quarter
 
persists atof 2023.
 
higher levelsAs of November
10, 2022,
pricing is
for a terminal
rate of approximately
4.85% sometime
late in June
of 2023
 
and continues
with the
 
to challengeFed Funds
 
the
Fed’s assertionrate still
 
that it willapproximately
 
prove transitory,
longer maturity
rates have
moved higher
so far4.25% in
 
the fourth
quarter.
early 2024.
- 4042 -
The Fed has
repeatedly
acknowledged
their efforts
to bring
inflation under
control and
taking the
Fed Funds
rate above
neutral may
cause the
economy to
enter a recession.
They deem
these steps
as necessary
to prevent
inflation
from remaining
higher than
the Fed’s
target rate
of inflation.
However, as it
appears the
Fed will
have to increase
the Fed Funds
rate considerably
higher than
was believed
to
be the case
even a few
months ago,
and central
banks across
the globe
are doing
likewise,
financial
conditions
have begun
to deteriorate
and liquidity
in many financial
markets has
declined.
If such trends
persist and
evidence appears
that certain
financial
markets are
not
operating
smoothly, or financial
conditions
are prohibiting
economic
activity from
operating
smoothly, central
banks may
face a dilemma
of
continuing
to increase
interest
rates or
implementing
accommodations
to permit
the smooth
operation
of financial
markets and
the
economy –
assuming
this were
to occur
before inflation
could be
brought under
control.
The outcome
in such a
scenario
cannot be
predicted
with any
confidence
at this time.
The Agency
 
RMBSMBS Market
PerformanceReturns for
 
for the Agency
 
RMBSMBS market
 
for the third
 
quarter wasof
 
a modest2022 were
 
0.01%, generally(5.4)% and
 
in-line with
most other
asset classes.
The excess
return to
comparable
duration
U.S. Treasuries
and swaps
for the Agency
RMBS sub-index
was 0.1%
for both
for the quarter.
Within the
Agency RMBS
sector, higher
coupon fixed
rate securities
outperformed
lower coupons,
specifically
the coupon
currently
in
widespread
production.
Total returns for
the third
quarter for
2.0% and 2.5%
securities
were -0.4%
and 0.00%,
respectively.
For 3.0%
and
3.5% coupons
thethese returns
 
were 0.6%1.7%
 
and 0.5%,lower than
 
respectively.comparable
duration
 
Thirty-yearLIBOR swaps.
 
and fifteen-yearThe largest
 
securitiesMBS investors
 
both returnedhave generally
 
0.1% forbeen selling
or decreasing
their exposure
to the sector.
Agency MBS
spreads relative
to benchmark
interest
rates increased
to levels
observed in
March of
2020 by
 
the quarter. As
mentioned
above, the
Fed announced
they will
begin to
taper their
asset purchases
in November
and, absent
an adjustment
in the pace
end of
their tapering,
which could
occur if
economic conditions
warrant,
conclude the
$40 billion
per month
purchases
of Agency
RMBS assets
by
mid-2022. Given
the length
of time
the Fed has
been supporting
the Agency
RMBS market,
coupled with
banks that
are flush
with deposits
that need
to 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
2.5% coupons
predominantly. These
factors are
what drove
the relative
underperformance
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
 
20212022 and
have exceeded
those levels
in October
of 2022.
The largest
investors
of Agency
MBS, the
Fed via quantitative
easing (which
is now
quantitative
tightening
as the Fed
allows their
holdings of
Agency MBS
to run-off),
large domestic
banks (which
due to quantitative
tightening
by the Fed
are experiencing
declines in
reserves/deposits)
and large
money managers
(which have
experienced
significant
outflows
as investors
leave fixed
income investments),
are collectively
causing demand
for Agency
MBS to decline
materially
and driving
the spread
widening.
As the U.S.
dollar has
strengthened
against most
other currencies
across the
globe, there
is the chance
certain
central banks
– namely the
Bank of
Japan – may
be forced
to intervene
in the currency
markets to
support their
local currency,
in this case
the Yen.
They would
do so by selling
U.S. dollar-denominated
assets and
 
beyond, is,buying Yen.
 
as always,The only
 
the levelU.S. dollar-denominated
assets they
own
are U.S.
Treasuries and
Agency MBS,
and selling
these would
represent
another source
 
of
prepayments. downward
 
With interestpressure
 
rates relativelyon Agency
 
steady duringMBS. The
relative performance
 
across the third
 
quarter and,Agency MBS
 
after suchuniverse was
 
a prolongedskewed in
 
periodfavor of
low interest
rates
prepayment
speeds on
 
higher coupon,
 
premium priced30-year securities
that are
currently
in
production
by originators.
Lower coupon
 
securities,
 
were expectedespecially
 
tothose held
in large
amounts by
the Fed,
and which
may eventually
 
slow.
This appears
to be finally
happening,sold
as evidenced
by the AugustFed,
 
and September
prepayment
reports,
released in
September
and October, respectively.
As interest
rates have
moved higher
so far in performed
 
the fourthworst.
 
quarter theseThese results
are consistent
with the
relative duration
of the securities,
as higher
 
coupons have
shorter durations,
 
been impacted
further quarteror less sensitivity
 
to date.movements
in interest
rates.
As both the
domestic and
the global
economies
appear to
be slowing,
the more
credit sensitive
sectors of
the fixed
income markets
have come
under pressure
and are
likely to
weaken further
if the economies
do indeed
contract.
Actions by
the Fed as
described
above
may prevent
the sector
from performing
well in the
near term
but, if the
economy does
contract
and enter
a recession,
the sector
could do
well on a
relative performance
basis owing
to the lack
of credit
exposure
of Agency
MBS.
This is consistent
with the
sector’s
history of
performance
in a counter-cyclical
manner –
doing well
when the
economy is
soft and
relatively
poorly when
the economy
is strong.
Recent Legislative
 
and Regulatory
 
Developments
The Fed conducted
large scale
overnight
repo operations
from late
2019 until
July 2020In response
 
to address
disruptionsthe deterioration
 
in the markets
for U.S.
 
Treasury,
Agency debt
andTreasuries, Agency
 
MBS financingand other
 
markets. Thesemortgage
 
operationsand fixed
 
ceased inincome markets
resulting
 
July 2020
afterfrom the
 
central bankimpacts of
 
successfully
tamed volatile
funding costs
that had
threatened
to cause disruption
across the
financial
system.
The Fed has
taken a number
of other
actions to
stabilize
markets as
a result
of the impacts
of the COVID-19
 
pandemic.
In March of
2020, the
Fed announced
a $700 billion
asset purchase
program
to provide
liquidity
to the U.S.
Treasury and
Agency RMBS
markets. The
Fed also loweredpandemic,
 
the Fed Funds
rate to a
range of
0.0% – 0.25%,
after having
already
lowered the
Fed Funds
rate by 50
bps earlier
in the
month. Later
that same
month the
Fed announcedimplemented
 
a program
 
to acquireof quantitative
 
U.S. Treasurieseasing. Through
 
and AgencyNovember
 
RMBS inof 2021,
the Fed was
 
the amounts
needed to
support smooth
market functioning.
With these
purchases,
market conditions
improved substantially.
Currently, the
Fed is committed
 
to
purchasing
 
$80 billion
 
of U.S.
 
Treasuries and
 
$40 billion
 
of Agency
 
RMBSMBS each
 
month. ChairmanIn
 
Powell and
the Fed have
reiterated
their
commitment
to this levelNovember
 
of 2021,
it
began tapering
its net asset
 
purchases
 
at everyeach month
 
meetingand ended
 
since theirnet asset
 
meeting onpurchases
entirely
by early March
of 2022.
On May 4,
2022, the
FOMC announced
a plan for
reducing
the Fed’s balance
sheet. In
 
June 30,of 2022,
 
2020. However,in accordance
 
at the Novemberwith this
 
2021
meeting,plan, the
 
Fed concludedbegan
 
that substantialreducing
 
further progressits
balance sheet
 
towards their
dual mandate
had been
met and they
will begin
to taper
their
asset purchases
in November.
They further
stated that
the paceby a maximum
 
of the tapering
could be adjusted
if economic
conditions
warranted,
but
otherwise
would conclude
the tapering
in mid-2022.
The Fed has
taken various
other steps
to support
certain other
fixed income
markets,
to support
mortgage
servicers
and to implement
various portions
of the Coronavirus
Aid, Relief,
and Economic
Security
(“CARES”)
Act.
The CARES
Act was passed
by Congress
and signed
into law
on March 27,
2020.
This over
$2 trillion
COVID-19
relief bill,
among
other things,
provided
for direct
payments to
each American
making up
to $75,000
a year, increased
unemployment
benefits
for up to
four
months (on
top of state
benefits),
funding to
hospitals
and health
providers,
loans and
investments
to businesses,
states and
municipalities
and grants
to the airline
industry. On April
24, 2020,
President
Trump signed
an additional
funding
bill into
law that
provided
an additional
$484$30 billion
 
of fundingU.S.
Treasuries and
$17.5 billion
of Agency
MBS each
month. On
September
21, 2022,
the
FOMC announced
the Fed’s decision
 
to individuals,continue
 
small businesses,reducing
 
hospitals,the balance
 
health caresheet by a
 
providersmaximum
of $60 billion
of U.S Treasuries
 
and additional$35
billion of
 
coronavirusAgency MBS
 
testing efforts.
Various
provisions
of the CARES
Act began
to expire
in July 2020,
including
a moratorium
on evictions,
expanded unemployment
benefits,
and a
moratorium
on foreclosures.
On August
8, 2020,
President
Trump issued Executive
Order 13945,
directing
the Department
of Health
and
Human Services,
the Centers
for Disease
Control and
Prevention
(“CDC”),
the Department
of Housing
and Urban
Development,
and
Department
of the Treasury
to take measures
to temporarily
halt residential
evictions
and foreclosures,
including through
temporary
financial
assistance.
per month.
- 4143 -
On December
27, 2020,
an additional
$900 billion
coronavirus
aid package
was signed
into law
as part of
the Consolidated
Appropriations
Act of 2021,
providing for
extensions
of many of
the CARES
Act policies
and programs
as well as
additional
relief.
The
package provided
for, among other
things, direct
payments to
most Americans
with a gross
income of
less than
$75,000 a
year, extension
of unemployment
benefits through
March 14,
2021, funding
for procurement
of vaccines
and health
providers,
loans to qualified
businesses,
funding for
rental assistance
and funding
for schools.
On January
 
29, 2021,
 
the CDC issued
 
issued guidance
extending
 
eviction
moratoriums
 
for covered
 
persons put
 
through March
31, 2021,
which was
extended to
July 31, 2021.
On August
26, 2021,
the U.S.
Supreme
Court issued
a decision
ending the
CDC eviction
moratorium.
In addition,
on February
9, 2021,
the FHFA announced
that the foreclosure
moratorium
begun underin place by
 
the CARES
 
Act
through March
31, 2021.
The FHFA subsequently
extended
the foreclosure
moratorium
for loans
 
backed by
 
Fannie Mae
 
and Freddie
 
Mac
and
the eviction
 
moratorium
 
for real
 
estate owned
by Fannie
Mae and Freddie
Mac until
July 31,
2021 and
September
30, 2021,
ownedrespectively. The
U.S. Housing
and Urban
Development
Department
subsequently
extended
the FHA
foreclosure
and eviction
moratoria
to
July 31, 2021,
and September
30, 2021,
respectively.
Despite
the expirations
of these
foreclosure
moratoria,
a final rule
adopted by
the
CFPB on
June 28,
2021, effectively
prohibited
servicers
from initiating
a foreclosure
before January
1, 2022,
in most instances.
Foreclosure
activity has
risen since
the end of
the moratorium,
with foreclosure
starts in
the third
quarter of
2022 up 167%
from the
comparable
period in
2021, but
still remaining
slightly
below pre-pandemic
levels.
In January
2019, the
Trump administration
made statements
of its plans
to work with
Congress to
overhaul
 
Fannie Mae
 
and Freddie
Mac and expectations
 
Mac wereto announce
 
extendeda framework
 
until March
31, 2021,
which was
further extended
through September
30, 2021.
On July 30,
2021,for the
FHA announced
an extension development
 
of the eviction
moratorium
through September
30, 2021a policy
 
for foreclosedcomprehensive
 
borrowershousing finance
 
and
other occupantsreform soon.
 
and noted
the expiration
of the foreclosure
moratorium
on July 31,
2021.On
On March 11, 2021,
the $1.9
trillion American
Rescue Plan
Act of 2021
was signed
into law.
This stimulus
program furthered
the
Federal government’s
efforts to
stabilize the
economy and
provide
assistance
to sectors
of the population
still suffering
from the
various
physical and
economic
effects of
the pandemic.
On September
 
30, 2019,
 
the FHFA announced
 
that Fannie
 
Mae and Freddie
 
Mac were
 
allowed to
 
increase their
 
capital buffers
 
to $25 billion
billion and
$20 $20 billion,
 
respectively, from
 
fromthe prior
limit of $3
billion each.
This step
could ultimately
lead to
Fannie Mae
and Freddie
Mac being
privatized
and represents
the first
concrete
step on the
 
prior limitroad to GSE
 
of $3 billion
each.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
 
in December
 
2020.
 
On
January 14,
 
2021, the
 
U.S. Treasury
 
and the FHFA
 
executed letter
 
agreements
 
allowing
 
the GSEs
 
to continue
 
to retain
 
capital up
 
to their
regulatory
 
minimums,
 
including
 
buffers, as
 
prescribed
 
in the December
 
rule.
 
These letter
 
agreements
 
provide, in
 
in part, (i)
 
(i) there will
 
will be no
exit from
conservatorship
 
until all
 
material litigation
 
is settled
 
and the GSE
 
has common
 
equity Tier
 
1 capital
 
of at least
 
3% of its
 
assets, (ii)
the GSEs
 
will comply
 
with the
 
FHFA’s regulatory capital
 
framework,
 
(iii) higher-risk
 
single-family
 
mortgage
 
acquisitions
 
will be
 
restricted
 
to
current levels,
 
and (iv)
 
the U.S.
 
Treasury and
 
the FHFA will
 
establish
 
a timeline
 
and process
 
for future
 
GSE reform.
 
However, no definitive
proposals
 
or legislation
 
have been
 
released or
 
or enacted with
 
with respect to
 
to ending the
 
the conservatorship,
 
unwinding
 
the GSEs,
 
or materially
reducing the
 
the roles of
 
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 U.S.
Treasury and
the FHFA suspended
 
certain
policy provisions
 
added toin the January
 
the letter
agreements
on January
14, 2021,agreement,
 
including
 
limits on
 
the enterprises'loans acquired
 
for cash windows,
consideration,
 
multifamily
 
lending,loans, loans
 
with higher
risk characteristics
 
and second
 
homes and
and investment
 
properties.
 
The enterprisesOn February
25, 2022,
the FHFA published
a final rule,
effective as
of
April 26,
2022, amending
the GSE capital
framework
established
in December
2020 by, among
other things,
replacing
the fixed
leverage
buffer equal
to 1.5% of
a GSE’s adjusted
total assets
with a dynamic
leverage
buffer equal
to 50% of
a GSE’s stability
capital buffer,
reducing
the risk weight
floor from
10% to 5%,
and removing
the requirement
that the
GSEs must
apply an overall
effectiveness
adjustment
to their
credit risk
transfer
exposures.
On June 14,
2022, the
GSEs announced
that they
 
will continueeach
charge a
50 bps fee
for
commingled
securities
issued on
or after
July 1, 2022
 
to buildcover
the additional
 
capital required
for such
securities
under the
GSE capital
framework.
Industry
groups have
expressed
concern that
this poses
a risk to
 
the continuing
provisionsfungibility
 
of the letterUniform
 
agreements.Mortgage-Backed
 
Security
Additionally, the(“UMBS”),
 
FHFA is reviewingwhich could
 
the enterprisenegatively
 
regulatory
capital frameworkimpact liquidity
 
and expects
to announce
further actionpricing
 
in the nearmarket
 
future.for TBA
securities.
In 2017,
 
policymakers
 
announced
 
that LIBOR
 
will be replaced
 
by December
 
31, 2021.
 
The directive
 
was spurred
 
by the fact
 
that
banks are
 
uncomfortable
 
contributing
 
to the LIBOR
 
panel given
 
the shortage
 
of underlying
 
transactions
 
on which
 
to base levels
 
and the
liability
associated
 
with submitting
 
an unfounded
 
level. TheHowever,
 
the ICE Benchmark
 
Administration,
 
in its capacity
 
as administrator
 
of
USD LIBOR,
has confirmedannounced
 
that it willintends
 
cease to extend
publication
 
of (i) theUSD LIBOR
(other than
 
one-week and
 
two-month
 
USD LIBORtenors) by
 
settings immediately18
months to
 
followingJune 2023.
 
the LIBOR
publicationNotwithstanding
 
on Decemberthis extension,
 
31, 2021,
and (ii) the
overnight
and one,
three, six
and 12-month
USD LIBOR
settings immediately
following
the
LIBOR publication
on June 30,
2023. Aa joint
statement
 
by key regulatory
 
authorities
 
calls on banks
 
to cease
 
entering
 
into
new contracts
 
contracts
that use USD
 
USD LIBOR
as a
reference
 
rate by no
 
later than
 
December
 
31, 2021.
 
The Alternative
- 44 -
On December
 
Reference7, 2021,
 
Rates Committee,the CFPB
released
 
a steering
committeefinal rule
 
comprisedthat amends
Regulation
Z, which
implemented
the Truth in
Lending Act,
aimed
at addressing
cessation
 
of largeLIBOR
 
U.S. financialfor both
 
institutions,closed-end
(e.g., home
mortgage)
and open-end
(e.g., home
equity line
of credit)
products.
The
rule, which
mostly became
effective
in April
of 2022,
establishes
requirements
for the selection
of replacement
indices for
existing LIBOR-
linked consumer
loans. Although
the rule
does not mandate
the use of
SOFR as the
alternative
rate, it
identifies
SOFR as a
comparable
rate for
closed-end
products
and states
that for
open-end products,
the CFPB
 
has proposeddetermined
 
replacingthat ARRC’s
 
USD-LIBORrecommended
 
with a newspread-adjusted
indices based
 
on SOFR
for consumer
products to
replace the
one-month,
three-month,
or six-month
USD LIBOR
index “have
historical
fluctuations
that are
substantially
similar to
those of
the LIBOR
indices that
they are
intended
to replace.”
The CFPB
reserved judgment,
however, on a
SOFR-based
spread-adjusted
replacement
index to
replace the
one-year USD
LIBOR until
it obtained
additional
information.
On March 15,
2022, the
Adjustable
Interest
Rate (LIBOR)
Act (the “LIBOR
Act”) was
signed into
law as part
of the Consolidated
Appropriations
Act, 2022
(H.R. 2471).
The LIBOR
Act provides
for a ratestatutory
 
based on U.S.replacement
 
repo
trading.benchmark
 
Many banksrate for
 
believecontracts
that use
LIBOR
as a benchmark
and do not
contain any
fallback mechanism
independent
of LIBOR.
Pursuant to
the LIBOR
Act, SOFR
becomes the
new
benchmark
rate by operation
of law for
any such contract.
The LIBOR
Act establishes
a safe harbor
from litigation
for claims
arising out
of
or related
to the use
of SOFR
as the recommended
benchmark
replacement.
The LIBOR
Act makes
clear that
 
it may takeshould
 
four not be construed
to fivedisfavor
 
years tothe use of
 
completeany benchmark
on a prospective
basis.
On July 28,
2022, the
Fed published
a proposed
rule to implement
the LIBOR
Act.
Since the
GSEs have
generally
been using
30-
day average
SOFR in their
newly issued
multifamily
loans and
other structured
products,
the Fed proposed
that the
benchmark
replacement
for Agency
MBS be the
30-day average
SOFR plus
the applicable
tenor spread
adjustment
specified
in the LIBOR
Act.
Comments
for the proposed
rule closed
August 29,
2022, and
any final
rule will
go into effect
30 days after
publication
in the Federal
Register.
The LIBOR
Act also
attempts
to forestall
challenges
that it is
impairing
contracts.
It provides
that the
discontinuance
of LIBOR
and
the automatic
statutory
 
transition
 
to SOFR,a replacement
 
for certain,rate neither
 
despiteimpairs or
affects the
 
2021 deadline.rights of
a party to
receive payment
under such
We will monitorcontracts,
nor allows
a party to
discharge
their performance
obligations
or to declare
a breach
of contract.
It amends
 
the emergenceTrust Indenture
Act of 1939
to state
that the
“the right
 
of this new
rate carefully
as it will
potentially
become the
new benchmark
for hedges
and a rangeany holder
 
of
interest rate any indenture
 
investments.security to
 
At this time,receive payment
 
however, no consensusof the principal
 
exists asof and interest
on such
indenture
security shall
not be deemed
 
to what ratebe impaired
 
or ratesaffected”
 
may becomeby application
 
accepted alternativesof the LIBOR
 
Act to LIBOR.any
indenture
security.
Effective January
 
1, 2021,
 
Fannie Mae,
 
in alignment
 
with Freddie
 
Mac, willextended
 
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
monthly payments
 
to twenty-four
 
consecutively
 
missed monthly
 
payments (i.e.,
 
24 months
 
past due).
 
This new
 
timeframe
 
will apply
applied to
- 42 -
outstanding
 
single-family
 
pools and
 
newly issued
 
single-family
 
pools and
 
was first
 
reflected
 
when January
 
2021 factors
 
were released
 
on
the fourth
 
business day
 
in February
 
2021.
 
For Agency
 
RMBSMBS investors,
 
when a delinquent
 
loan is bought
 
out of a
 
pool of mortgage
 
loans, the
 
removal of
 
the loan
 
from the
 
pool
is the same
 
as a total
 
prepayment
 
of the loan.
 
The respective
 
GSEs currently
anticipate,anticipated,
 
however, that
 
delinquent
 
loans will
 
be
repurchased
 
in
most cases
 
before the
 
24-month deadline
 
deadline under one
 
one of the
following
 
exceptions
 
listed below.
•
 
a loan that
 
is paid in
 
full, or
 
where the
 
related lien
 
is released
 
and/or the
 
note debt
 
is satisfied
 
or forgiven;
•
 
a loan repurchased
 
by a seller/servicer
 
under applicable
 
selling
 
and servicing
 
requirements;
•
 
a loan entering
 
a permanent
 
modification,
 
which generally
 
requires
 
it to be
 
removed from
 
the MBS.MBS (during
 
During any
modification
 
trial
period, the
 
loan will
 
remain in
 
the MBS until
 
the trial
 
period ends;ends);
•
 
a loan subject
 
to a short
 
sale or
deed-in-lieu
 
of foreclosure;
 
or
•
 
a loan referred
 
to foreclosure.
- 45 -
Because of
 
these exceptions,
 
the GSEs
currently
 
believe based
 
on prevailing
 
assumptions
 
and market
 
conditions
 
this change
 
will
have only
 
only a
marginal impact
 
impact on
prepayment
 
speeds, in
 
aggregate.
 
Cohort level
 
impacts may
 
vary. For example,
 
more than
 
half of loans
referred
 
referred to
foreclosure
 
are historically
 
referred
 
within six
 
months of
 
delinquency. The
 
degree to
 
which speeds
 
are affected
 
depends on
delinquency
 
delinquency
levels, borrower
 
response, and
 
and referral
 
to foreclosure
 
timelines.
The scope
 
and nature
 
of the actions
 
the U.S.
 
government
 
or the Fed
 
will ultimately
 
undertake
 
are unknown
 
and will
 
continue to
evolve especially
in light of
the COVID-19
pandemic,
President Biden’s
new administration
and the new
Congress
in the United
States.
Effect on
Us
Regulatory
 
developments,
 
movements
 
in interest
 
rates and
 
prepayment
 
rates affect
 
us in many
 
ways, including
 
the following:
Effects on
 
our Assets
A change
 
in or elimination
 
of the guarantee
 
structure
 
of Agency
 
RMBSMBS may increase
 
increase our costs
 
costs (if,(if, for
 
for example,
guarantee
 
fees
increase)
 
or require
 
us to change
 
our investment
 
strategy
 
altogether.
 
For example,
 
the elimination
 
of the guarantee
 
structure
 
of Agency
RMBSMBS may cause
 
cause us to change
 
change our
investment
 
strategy
 
to focus
 
on non-Agency
 
RMBS, whichMBS,
 
which in
turn would
 
require us
 
to significantly
increase our
 
monitoring
 
of the credit
 
risks of our
 
investments
 
in addition
 
to interest
 
rate and
 
prepayment
 
risks.
Lower long-term
 
interest
 
rates can affect
 
affect the value
 
value of our Agency
 
RMBS inAgency MBS
 
in a number
 
of ways. If
 
If prepayment
 
rates are
 
relatively
 
low
(due, in
 
part, to
 
the refinancing
 
problems described
 
above), lower
 
long-term
 
interest
 
rates can
 
increase the
 
value of higher-coupon
 
Agency
RMBS. ThisMBS.
 
This is because
 
investors
 
typically place
 
place a premium
 
on assets
 
with yields
 
that are
 
higher than
 
market yields.
 
Although
 
lower long-
term interest
 
rates may
 
increase
 
asset values
 
in our portfolio,
 
we may not
 
be able to
 
invest new
 
funds in similarly-yielding
 
assets.
If prepayment
 
levels increase,
 
the value
 
of our Agency
 
RMBSMBS affected
 
by such prepayments
 
may decline.
 
This is because
 
a principal
prepayment
 
accelerates
 
the effective
 
term of an
 
Agency RMBS,MBS,
 
which would
 
shorten the
 
period during
 
which an
 
investor would
 
receive
above-market
 
returns (assuming
 
the yield
 
on the prepaid
 
asset is
 
higher than
 
market yields).
 
Also, prepayment
 
proceeds
 
may not
 
be able
to be reinvested
 
in similar-yielding
 
assets. Agency
 
RMBSMBS backed
 
by mortgages
 
with high
 
interest
 
rates are
 
more susceptible
 
to prepayment
prepayment
risk because
 
holders of
 
of those mortgages
 
are most
 
likely to
 
refinance
 
to a lower
 
rate. IOs
 
and IIOs,
 
however, may
 
be the types
of Agency
RMBSMBS most
 
sensitive
 
to increased
 
prepayment
 
rates. Because
 
the holder
 
of an IO
 
or IIO receives
 
no principal
 
payments,
 
the
values of
 
of IOs
and IIOs are
 
are entirely
dependent
 
on the existence
 
of a principal
 
balance on
 
the underlying
 
mortgages.
 
If the principal
 
balance
is eliminated
 
eliminated
due to prepayment,
 
IOs and IIOs
 
essentially
 
become worthless.
 
Although
 
increased
 
prepayment
 
rates can
 
negatively
 
affect
the value
 
value of
our IOs and
 
and IIOs, they
 
they have the
 
the opposite effect
 
effect on
POs. Because
 
POs act like
 
zero-coupon
 
bonds, meaning
 
they are
purchased
 
at a
discount to
 
to their par
 
par value and
 
and have
an effective
 
interest rate
 
rate based on
 
on the discount
 
and the term
 
of the underlying
 
loan, an
- 43 -
increase in
 
in
prepayment
 
rates would
 
reduce the
 
effective term
 
of our POs
 
and accelerate
 
the yields
 
earned on
 
those assets,
 
which would
increase our
net income.
Higher long-term
 
rates can
 
also affect
 
the value
 
of our Agency
 
RMBS.MBS.
 
As long-term
 
rates rise,
 
rates available
 
to borrowers
 
also rise.
 
This tends
 
to cause prepayment
 
activity to
 
slow and
 
extend the
 
expected average
 
life of mortgage
 
cash flows.
 
As the expected
 
average
life of the
 
mortgage
 
cash flows
 
increases,
 
coupled with
 
higher discount
 
rates, the
 
value of Agency
 
RMBSMBS declines.
 
Some of the
instruments
 
instruments
the Company
 
uses to hedge
 
our Agency
 
RMBSMBS assets,
 
such as interest
 
rate futures,
 
swaps and
 
swaptions,
 
are stable
average
 
average life
instruments.
 
This means
 
that to the
 
the extent we
 
we use such
instruments
 
to hedge
 
our Agency
 
RMBSMBS assets,
 
our hedges
 
may not adequately
adequately
protect us
 
from price
 
declines,
 
and therefore
 
may negatively
 
impact our
 
book value.
 
It is for
 
this reason
 
we use interest
 
only
securities
 
in
our portfolio.
 
As interest
 
rates rise,
 
the expected
 
average life
 
of these
 
securities
 
increases,
 
causing generally
 
positive price
 
price
movements
 
as
the number
 
and size of
 
of the cash
 
flows increase
 
the longer
 
the underlying
 
mortgages
 
remain outstanding.
 
This makes
interest only
 
interest
only
securities
 
desirable
 
hedge instruments
 
for pass-through
 
Agency RMBS.MBS.
 
- 46 -
As described
 
above, the
 
Agency RMBSMBS
 
market began
 
to experience
 
severe dislocations
 
in mid-March
 
2020 as a
 
result of
 
the
economic,
 
health and
 
market
turmoil
 
brought about
 
by COVID-19.
 
InOn March of23,
 
2020, the
 
Fed announced
 
that it would
 
purchase
 
Agency
RMBSMBS and U.S.
 
U.S. Treasuries in
 
in the amounts
 
needed to
 
support smooth
 
market functioning,
 
which largely
 
stabilized
 
the Agency
 
RMBSMBS market,
market, abut ended
 
commitment
it reaffirmed
at all subsequent
Fed meetings.
At the November
2021 meeting,
the Fed concluded
that the
economy
had progressed
to the point
that they
could begin
the process
of tapering
their asset
purchases.
Beginningthese purchases
 
in November,March
 
the Fed will
reduce their2022 and
 
purchases ofannounced
 
treasuryplans to
 
securitiesreduce its
 
by $10 billion
per month
and their
purchases
of Agency
MBS by $5
billion per
month.
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.balance sheet.
 
The Fed’s planned
reduction
 
of the Fed’sits balance
purchases
of Agency
RMBSsheet could
 
negatively
impact our
 
investment
 
portfolio.
 
Further, the
 
moratoriums
 
on foreclosures
 
and evictions
described
 
above will
 
likely
delay
potential
 
defaults on
 
loans that
would otherwise
 
be bought
 
out of Agency
 
MBS pools
 
as described
 
above.
 
Depending
 
on the
ultimate
resolution
 
of the foreclosures,foreclosure
or evictions,
 
when and
and if it occurs,
 
occurs, these loans
 
loans may
be removed
 
from the
 
pool into
 
which they
 
were
securitized.
 
If this were
 
to occur, it would
 
would have
the effect
of delaying
 
a prepayment
 
on the Company’s
 
securities
 
until such
 
time. AsTo the
extent the
 
the majorityCompany’s Agency
 
of the Company’sMBS assets
 
Agency RMBSwere acquired
 
assets were
acquired at
a premium
 
to par, this will
 
tend to increase
the realized
yield on
the asset
in
question.
To the extent they
were acquired
at a discount,
this will
tend to decrease
 
the realized
 
yield on the
 
asset in question.
Because we
 
base our
 
investment
 
decisions on
 
on risk management
 
principles
 
rather than
 
anticipated
 
movements
 
in interest
 
rates, in
 
a
volatile interest
 
rate environment
 
we may allocate
 
more capital
 
to structured
 
Agency RMBSMBS
 
with shorter
 
durations.
 
We believe
 
these
securities
 
have a lower
 
sensitivity
 
to changes
 
in long-term
 
interest
 
rates than
 
other asset
 
classes.
 
We may attempt
 
to mitigate
 
our
exposure to
 
to changes in
 
in long-term
 
interest rates
 
rates by
investing
 
in IOs and
 
IIOs, which
 
typically
 
have different
 
sensitivities
 
to changes
 
in long-
term interest
 
rates than
 
PT RMBS,MBS,
 
particularly
 
PT RMBSMBS backed
 
by fixed-rate
 
mortgages.
Effects on our
 
our borrowing
 
costs
We leverage
 
our PT RMBSMBS
 
portfolio and
 
and a portion
 
of our structured
 
Agency RMBSMBS
 
with principal
 
balances through
 
the use of
 
short-short-term
term repurchase
 
agreement
 
transactions.
 
The interest
 
rates on
 
our debt
 
are determined
 
by the short
 
term interest
 
rate markets.
 
An
increaseIncreases in
 
the
Fed Funds
 
rate, SOFR
or LIBOR
 
would increasetypically
 
increase our
borrowing
 
costs, which
 
could affect
 
our interest
 
rate spread
 
if there
 
is no
corresponding
 
increase in
 
the interest
 
we earn on
 
on our assets.
 
This would
 
be most prevalent
 
with respect
 
to our Agency
 
RMBSMBS backed
 
by
fixed rate
 
rate mortgage
 
loans because
 
the interest
 
rate on a
 
fixed-rate
 
mortgage
 
loan does
 
not change
 
even though
 
market rates
 
may change.
In order
 
to protect
 
our net interest
 
margin against
 
increases
 
in short-term
 
interest
 
rates, we
 
may enter into
 
into interest
 
rate swaps,
 
which
economically
 
convert our
 
floating-rate
 
repurchase
 
agreement
 
debt to fixed-rate
 
debt, or
 
utilize other
 
hedging instruments
 
such as
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
contracts
 
or interest
 
rate swaptions.
Summary
- 44 -
Once again
COVID-19
dominated
economic activity
this quarter.
However, we may
be atIn a crossroads
as the effectscontinuation
 
of the Delta
variant appearextremely
 
to be waningturbulent
 
and the numbervolatile
 
of peoplemarket conditions
 
with either
a vaccination
and/or prior
infections
of the virus
grow.
Pandemic
related
relief measures
such as supplemental
unemployment
insurance
payments and
foreclosure
moratoriums
have lapsed.
Hopefully
the
combination
of all of
these factors
will lead
to surging
job growth
and act to
quickly lessen
the severe
supply shortage
of goods
and labor.
This in turn
should slow
the stubbornly
high inflation
the economy
has suffered.
If these
events come
to pass, the
economy appears
to be
positioned
to perform
very well.
The Fed views
this outcome
as likely
and will
commence
a tapering
of their
asset purchases
in November
as they slowly
remove the
considerable
accommodation
theythat have
 
provided the
marketexisted since
 
the onset
 
of the pandemic.COVID-19
pandemic,
 
Conversely, if
these events
do not unfold
andduring the
 
supply shortagesthird quarter
 
of goods
and labor
remain,2022 the
 
economy will
likely continue
to suffer from
elevated
levelsstate of
 
inflation.
Under this
scenario
the path
of economic
growth
is less certain,markets
 
and the pathoutlook
changed
materially.
The perception
 
of monetaryinflation
 
policy couldon the
part of the
 
prove toFed has shaped
 
be quitethe rates
markets, currency
challenging
markets and
the outlook
 
for the Fed.economy
since the
spring of
2021.
This is when
inflation
first began
to accelerate
in the U.S.
During the
third quarter,
the Fed’s outlook,
or more accurately,
the markets
perception
of how
the Fed saw
inflation,
changed significantly.
Through early
August of
2022 the
markets perceived
that, while
inflation
was not transitory,
the Fed would
be able to
dampen demand
by raising
rates and
cause inflation
to decrease
back towards
the Fed’s long-term
target of
2%.
 
Further, the
market anticipated
this would
happen by
early in 2023
and that
the Fed would
then start
to loosen
monetary
policy shortly
thereafter.
The performanceFed,
through repeated
public comments
by various
Fed
officials and
ultimately
by the Chairman
at the Fed’s
annual central
banker symposium
in Jackson
Hole, Wyoming
in late August,
stressed that
this was not
going to
be the case.
Incoming economic
data
over the
period was
persistently
strong, indicating
the rate
increases
to date had
yet to slow
demand.
More importantly,
incoming
inflation
data showed
no evidence
of slowing
at all and
was in fact
becoming more
widespread,
possibly
even well
entrenched.
This reinforced
the
notion the
Fed will
have to take
rates higher
and for longer.
- 47 -
The result
of these
developments
was significant
and widespread.
Germane to
Royal Palm
and levered
Agency MBS
investors
were
increases
in market
interest
rates and
a widening
in the spreads
that Agency
MBS securities
trade relative
to comparable
duration
U.S.
Treasuries or
swaps.
The yield
on the 10-year
closed just
above 3.83%
on September
30, 2022,
and nearly
4.25% on
October
24, 2022.
As of November
10, 2022,
the market
is pricing
in a terminal
rate of
4.85% in
June of 2023.
As the market
has continued
to increase
expectations
 
of the Fed’s
terminal
rate, all
shorter maturity
U.S. Treasuries
have increased
in yield
as well.
Interest
rates on
maturities
inside one
year increased
by well over
100 basis
points and
by more than
160 basis
points for
maturities
of three
months or
less – in
each case
by the end
of the quarter.
Maturities
of three
months or
less have
increased
by over
250 basis
points since
the end of
the second
quarter –
a very rare
event in the
U.S. Treasury
market.
Agency MBS
spreads relative
to benchmark
interest
rates increased
to levels
observed
in March
of 2020 by
the end of
the third
quarter of
2022 and
have exceeded
those levels
in October
of 2022.
Returns for
the Agency
 
RMBSMBS market
was very
modest in
absolute returns,
at 0.0% and
0.1% versus
comparable
duration
interest rates
and swaps.
Performance
 
for the sectorthird
 
was generallyquarter of
 
in line with2022
were (5.4)%
 
other sectorsand these
 
of the fixedreturns were
 
income markets.1.7% lower
 
Within the
Agency RMBSthan comparable
 
universe,duration
LIBOR swaps.
The relative
 
performance
 
wasacross the
Agency
MBS universe
is skewed
 
towardsin favor
of higher
 
coupons andcoupon, 30-year
 
away from
lower couponssecurities
 
that compriseare
 
the bulk ofcurrently
 
recent
in production
 
and Fed purchases.by originators.
 
This has continuedLower coupon
securities,
 
into theespecially
 
fourth quarter,those held
 
in large
 
part because
at the November
FOMC meetingamounts by
 
the Fed,
stated they
will begin
to taper
their asset
purchases
 
and likelywhich
 
concludemay eventually
be sold by
the Fed,
have performed
the worst.
These results
are consistent
with the
 
process inrelative duration
 
mid-2022.
Prepayment
speeds, particularly
on high
couponof the securities,
 
have moderatedas higher
 
and are likelycoupons have
shorter durations,
or less sensitivity
 
to do so
movements
 
even morein interest
 
with ratesrates. Actions
 
higher soby the Fed
 
farmay prevent
the sector
from performing
well in the
 
fourth quarternear term
but, if the
economy does
contract
 
and the typicalenter
 
seasonal
slow down
as we approacha recession,
 
the wintersector
 
months.could do well
on a relative
performance
basis owing
to the lack
of credit
exposure
of Agency
MBS.
This is consistent
with the
sector’s
history of
performance
in a counter-cyclical
manner –
doing well
when the
economy is
soft and
relatively
poorly when
the economy
is strong.
Critical Accounting Estimates
Our consolidated
 
financial
 
statements
 
are prepared
 
in accordance
 
with GAAP.
 
GAAP requires
 
our management
 
to make some
complex and
 
subjective
 
decisions
 
and assessments.
 
Our most
 
critical accounting
 
policies involve
 
decisions
 
and assessments
 
which could
significantly
 
affect reported
 
assets,
 
liabilities,
 
revenues
 
and expenses,
and these
 
decisions
 
and assessments
 
can change
 
significantly
each reporting
 
period.
 
There have
 
been no changes
 
to the processes
 
used to determine
 
our critical
 
accounting
 
estimates
 
as discussed
 
in
our annual
 
report on
 
Form 10-K
 
for the year
 
ended December
 
31, 2020.2021.
Capital Expenditures
At September 30, 2021,2022, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At 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.We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide the information
otherwise required under this item.
- 48 -
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
- 45 -
As of the end of the period covered by this report (the “evaluation date”), we
 
carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer (the “CEO”)
 
and Chief Financial Officer (the “CFO”), of
the effectiveness of the design and operation of our disclosure controls and procedures,
 
as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation,
 
the CEO and CFO concluded our disclosure controls
and procedures, as designed and implemented, were effective as of the evaluation date (1)
 
in ensuring that information regarding the
Company and its subsidiaries is accumulated and communicated to our management,
 
including our CEO and CFO, by our employees,
as appropriate to allow timely decisions regarding required disclosure and (2)
 
in providing reasonable assurance that information we
must disclose in our periodic reports under the Exchange Act is recorded,
 
processed, summarized and reported within the time periods
prescribed by the SEC’s rules and forms.
Changes in Internal ControlsControl 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
 
to materially affect, the Company’s internal control over
financial reporting.
 
 
 
 
 
- 4649 -
PART II.
 
OTHER INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in
 
in the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company
 
of additional indemnity claims totaling $0.2 million. The demand is
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the
related MLPA’s.
 
The Company
believes the demands are without merit and intends to defend
against the demand vigorously.demands
 
vigorously. No
provision or accrual has been
recorded as of September 30, 2021 related to the Citigroup
demand. demands.
We are not party to any other material pending legal proceedings as described
 
in Item 103 of Regulation S-K.
ITEM 1A.
 
RISK FACTORS.
There have
been no material
changes to the
risk factors
disclosed
in our Annual
 
Report on Form
10-K for the
year ended
December 31, 2021,
 
2020, filed
with the SEC
on March 15,
2021.11, 2022.
ITEM 2. UNREGISTERED
SALES OF
EQUITY SECURITIES
AND USE
OF PROCEEDS
In JulyOn September 16, 2021, the Board authorized a share repurchase plan
 
the Company
completed
a “modified
Dutch auction”
tender offer
and paid an
aggregate of
$1.6 million,
including fees
and related
expenses,
pursuant 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 Board
of Directors
of the Company
(the “Board”)
approved a Stock
Repurchase
Plan (the
“2018
Repurchase
Plan”).
Pursuant to
the 2018 Repurchase
Plan, the
Company could
purchase up
to 500,000
shares of
its Class
A
Common Stock
from time
to time, subject
to certain
limitations
imposed by
Rule 10b-18
10b5-1 of the Securities
Exchange Act
of
1934.
The 2018 Repurchase
Plan was terminated
on September
16, 2021.
On September
16, 2021, the
Board authorized
a share repurchase
plan pursuant
to Rule 10b5-1
of the Securities
Exchange Act
of 1934 (the
“2021 “2021 Repurchase
Plan”). Pursuant
to the 2021
Repurchase
Plan, the Company
 
may purchase
shares of its
Class A
Common
Stock from
time to time
for an aggregate
purchase price
not to exceed
 
$2.5 million.
 
The table below
presents the
Company’s share
repurchase activity
for the three months
 
months ended
September 30,
 
2021.2022.
Approximate Dollar
Shares Purchased
Maximum NumberAmount of Shares
Total Number
Weighted-Average
as Part of Publicly
of Shares or Approximate
Dollar Amount of Shares
That May Yet be
of Shares
Price Paid
Announced
Repurchased Under
Repurchased
Per Share
Programs
the Authorization
July 1, 20212022 - July 31, 202130, 2022
812,879218,311
$
1.931.61
-218,311
429,596$
1,505,329
August 1, 20212022 - August 31, 20212022
-3,611
-1.47
-3,611
429,5961,500,007
September 1, 20212022 - September 30, 20212022
1,1954,048
1.921.37
1,1954,048
$
2,500,0001,494,444
Totals / Weighted Average
814,074225,970
$
1.931.60
1,195225,970
2,500,000$
1,494,444
The Company
did not have
any unregistered
sales of its
equity securities
during the
 
three months
ended September
30,
2021. 2022.
 
ITEM 3.
 
DEFAULTS UPON SENIOR
 
UPON SENIOR SECURITIES
None.
- 47 -
ITEM 4.
 
MINE SAFETY
 
DISCLOSURES.
 
Not Applicable.
ITEM 5.
 
OTHER INFORMATION
None.
- 50 -
ITEM 6. EXHIBITS
Exhibit No
3.1
3.2
3.23.3
3.33.4
3.4
3.5
31.1
31.2
32.1
32.2
101.INS
Instance Document***
101.SCH
Taxonomy Extension Schema
Document***
101.CAL
Taxonomy Extension Calculation
Linkbase Document***
101.DEF
Additional
Taxonomy Extension Definition
Linkbase Document***
101.LAB
Taxonomy Extension Label
Linkbase Document***
101.PRE
Taxonomy Extension Presentation
Linkbase Document***
*
 
Filed herewith.
**
 
Furnished
herewith
***
 
Submitted electronically herewith.
 
 
- 4851 -
Signatures
Pursuant to the requirements
 
of Section 13 or 15(d)
 
of the Securities Exchange
 
Act of 1934, as amended,
 
the registrant has duly
 
caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BIMINI CAPITAL MANAGEMENT,
 
INC.
Date:
 
November 9, 202114, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date:
 
November 9, 202114, 2022
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas,
 
IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)