UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
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incorporation or organization)
(I.R.S. Employer
Identification No.)
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(Address of principal executive offices) (Zip Code)
(
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(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.
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
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Accelerated filer
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Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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Indicate 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, 2021
Class B Common Stock, $0.001 par value
November 9, 2021
Class C Common Stock, $0.001 par value
November 9, 2021
BIMINI CAPITAL MANAGEMENT, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
1
Condensed Consolidated Balance Sheets (unaudited)
1
Condensed Consolidated Statements of Operations (unaudited)
2
Condensed Consolidated Statement of Stockholders’ Equity (unaudited)
3
Condensed Consolidated Statements of Cash Flows (unaudited)
4
Notes to Condensed Consolidated Financial Statements (unaudited)
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
44
ITEM 4. Controls and Procedures
55
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
46
ITEM 1A. Risk Factors
46
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
46
ITEM 3. Defaults Upon Senior Securities
46
ITEM 4. Mine Safety Disclosures
46
ITEM 5. Other Information
46
ITEM 6. Exhibits
46
SIGNATURES
48
- 1 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
$
Unpledged
Total mortgage -backed securities
Cash and cash equivalents
Restricted cash
Orchid Island Capital, Inc. common stock, at fair value
Accrued interest receivable
Property and equipment, net
Deferred tax assets
Due from affiliates
Other assets
Total Assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
Long-term debt
Accrued interest payable
Other liabilities
Total Liabilities
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $
designated Series A Junior Preferred Stock,
no shares issued and outstanding as of September 30, 2021 and December 31, 2020
Class A Common stock, $
and 11,608,555 shares issued and outstanding as of September 30, 2021
Class B Common stock, $
issued and outstanding as of September 30, 2021 and December 31, 2020
Class C Common stock, $
issued and outstanding as of September 30, 2021 and December 31, 2020
Additional paid-in capital
Accumulated deficit
(297,331,338 )
(298,166,582 )
Stockholders’ Equity
Total Liabilities and Stockholders' Equity
$
$
See Notes to Condensed Consolidated Financial Statements
- 2 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine and Three Months Ended September 30, 2021 and 2020
Nine Months Ended September
Three Months Ended September
2021
2020
2021
2020
Revenues:
Advisory services
$
$
$
$
Interest income
Dividend income from Orchid Island Capital, Inc. common stock
Total revenues
Interest expense
Repurchase agreements
(94,926 )
(1,030,372 )
(23,729 )
(42,955 )
Long-term debt
(747,577 )
(893,299 )
(248,465 )
(261,341 )
Net revenues
Other income (expense):
Unrealized (losses) gains on mortgage-backed securities
(2,221,521 )
(323,659 )
Realized gains (losses) on mortgage-backed securities
(5,804,656 )
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(856,468 )
(778,607 )
(Losses) gains on derivative instruments
(280 )
(5,292,346 )
(147 )
Gains on retained interests in securitizations
-
58,735
-
58,735
Other income (expense)
(8,248 )
(8,890 )
Total other (expense) income
(2,854,649 )
(10,703,929 )
(1,032,766 )
Expenses:
Compensation and related benefits
Directors' fees and liability insurance
Audit, legal and other professional fees
Administrative and other expenses
Total expenses
Net income (loss) before income tax provision
(8,251,176 )
Income tax provision
Net income (loss)
$
$
(17,547,035 )
$
$
Basic and Diluted Net income (loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
$
(1.51
$
$
CLASS B COMMON STOCK
Basic and Diluted
$
$
(1.51
$
$
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
CLASS B COMMON STOCK
Basic and Diluted
See Notes to Condensed Consolidated Financial Statements
- 3 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine and Three Months Ended September 30, 2021 and 2020
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2020
$
$
$
(292,677,440 )
$
Net loss
-
(22,332,947 )
(22,332,947 )
Balances, March 31, 2020
$
$
$
(315,010,387 )
$
Net income
-
Balances, June 30, 2020
$
$
$
(311,542,262 )
$
Net income
-
Balances, September 30, 2020
$
$
$
(310,224,475 )
$
Balances, January 1, 2021
$
$
$
(298,166,582 )
$
Net income
-
Balances, March 31, 2021
$
$
$
(296,876,152 )
$
Net loss
-
(919,786 )
(919,786 )
Balances, June 30, 2021
$
$
$
(297,795,938 )
$
Net income
-
Class A common shares repurchased and retired
(814,074 )
(815 )
(1,569,694 )
(1,570,509 )
Balances, September 30, 2021
$
$
$
(297,331,338 )
$
See Notes to Condensed Consolidated Financial Statements
- 4 -
BIMINI CAPITAL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 2021 and 2020
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
$
(17,547,035 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
Deferred income tax provision
Losses on mortgage-backed securities, net
Gains on retained interests in securitizations
-
(58,735)
PPP loan forgiveness
(153,724
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
(38,935 )
Realized and unrealized losses on forward settling TBA securities
Changes in operating assets and liabilities:
Accrued interest receivable
(45,524 )
Due from affiliates
(302,326 )
Other assets
(84,426 )
Accrued interest payable
(51,990 )
(561,918 )
Other liabilities
(98,625 )
(26,123 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(26,189,505 )
(43,129,835 )
Sales
Principal repayments
Costs associated with termination of retained interests
Net settlement of forward settling TBA contracts
(1,500,000
Purchases of Orchid Island Capital, Inc. common stock
(4,071,593 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(1,364,069 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal repayments on repurchase agreements
(197,873,114 )
(640,729,398 )
Proceeds from long-term debt
Principal repayments on long-term debt
(16,108 )
(15,238 )
Class A common shares repurchased and retired
(1,570,509 )
NET CASH USED IN FINANCING ACTIVITIES
(3,497,731 )
(139,131,901 )
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(1,366,354 )
(5,294,975 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
$
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest expense
$
$
Income taxes
$
$
(1,568,363 )
See Notes to Condensed Consolidated Financial Statements
- 5 -
BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”) formed in September 2003, is a
holding company. The Company operates in two business segments through its principal wholly-owned operating subsidiary, Royal
Palm Capital LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the
Securities and Exchange Commission), are collectively referred to as "Bimini Advisors." Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services.
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."
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm. All
inter-company accounts and transactions have been eliminated from the consolidated financial statements.
Variable Interest Entities (“VIEs”)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of the VIE. Bimini Capital
has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes. See Note
8 for a description of the accounting used for this VIE.
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, 2021
and December 31, 2020.
September 30, 2021
December 31, 2020
Cash and cash equivalents
$
$
Restricted cash
Total cash, cash equivalents and restricted cash
$
$
The Company maintains cash balances at several banks and excess margin with an exchange clearing member. At times, balances
may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit
Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash balances are
uninsured, but are held in separate accounts that are segregated from the general funds of the counterparty. The Company limits
uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to significant
credit risk on cash and cash equivalents or restricted cash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of
the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain
overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are
recognized over the period of time in which the service is performed.
Mortgage-Backed Securities
- 7 -
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed certificates issued by Freddie Mac, Fannie Mae
or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only (“IIO”)
securities representing interest in or obligations backed by pools of mortgage-backed loans. We refer to MBS and CMOs as PT MBS.
We refer to IO and IIO securities as structured MBS. The Company has elected to account for its investment in MBS under the fair
value option. Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of
operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and
is consistent with the underlying economics and how the portfolio is managed.
The Company records MBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the
most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or
third-party broker quotes, when available.
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are
not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains and
losses on MBS in the consolidated statements of operations. For IO securities, the income is accrued based on the carrying value and
the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of
investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future
reporting periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective
yield and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of
MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities
in the accompanying consolidated statements of operations.
The amount reported as unrealized gains or losses on mortgage-backed
securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any
premium or discount lost as a result of principal repayments during the period.
Orchid Island Capital, Inc. Common Stock
The Company accounts for its investment in Orchid common shares at fair value. The change in the fair value and dividends received
on this investment are reflected in the consolidated statements of operations. We estimate the fair value of our investment in Orchid 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 in the consolidated statements of operations.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other
exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Treasury Note (“T-
Note”) and Eurodollar futures contracts, and “to-be-announced” (“TBA”) securities transactions, but it may enter into other derivative
- 8 -
instruments in the future.
The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.
Derivative instruments are carried at fair value, and changes in fair value 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.
Holding derivatives creates exposure to credit risk related to the potential for failure by counterparties to honor their commitments. In
the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided
for under the terms of the agreement. The Company’s derivative agreements require it to post or receive collateral to mitigate such risk. In
addition, the Company uses only registered central clearing exchanges and well-established commercial banks as counterparties,
monitors positions with individual counterparties and adjusts posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the
consolidated financial statements or in the accompanying notes. MBS, Orchid common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these
instruments are presented in Note 13 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, 2021 and
December 31, 2020, due to the short-term nature of these financial instruments.
It is impractical to estimate the fair value of the Company’s junior subordinated notes. Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in Note 8 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30
years. Property and equipment is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful
lives of the assets. Depreciation is included in administrative and other expenses in the consolidated statement of operations.
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Earnings Per Share
Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.
- 9 -
Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive
dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock. Accordingly, shares of the
Class B Common Stock are included in the computation of basic EPS using the 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.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate
Reform on Financial Reporting
.” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank
Offered Rate (“LIBOR,”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for
- 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 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% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in the 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 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,
2021 and 2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Management fee
$
$
$
$
Allocated overhead
Total
$
$
$
$
At September 30, 2021 and December 31, 2020, the net amount due from Orchid was approximately $
$
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s MBS portfolio as of September 30, 2021 and December 31, 2020:
(in thousands)
September 30, 2021
December 31, 2020
Fixed-rate MBS
$
$
Interest-Only MBS
Inverse Interest-Only MBS
Total
$
$
- 11 -
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, the Company had met all margin call
requirements.
As of September 30, 2021 and December 31, 2020, the Company’s repurchase agreements had remaining maturities as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
September 30, 2021
Fair value of securities pledged, including accrued
interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
-
December 31, 2020
Fair value of securities pledged, including accrued
interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
In addition, cash pledged to counterparties for repurchase agreements was approximately $
September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, the Company had an aggregate
amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and
cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $
respectively. As of September 30, 2021 and December 31, 2020, 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
$
$
(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
$
$
(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
$
$
(2,328 )
$
$
Junior subordinated debt funding hedges
(517 )
T-Note futures contracts (short positions)
Repurchase agreement funding hedges
(1,006 )
Net TBA securities
(1,441 )
Losses on derivative instruments
$
$
(5,292 )
$
$
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 -
Assets Pledged to Counterparties
The table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of
September 30, 2021 and December 31, 2020.
($ in thousands)
September 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
$
$
$
$
$
Structured MBS - at fair value
Accrued interest on pledged securities
Restricted cash
Total
$
$
$
$
$
$
Assets Pledged from Counterparties
The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements and derivative agreements as
of September 30, 2021 and December 31, 2020. Cash received as margin is recognized in cash and cash equivalents with a
corresponding amount recognized as an increase in repurchase agreements or other liabilities in the consolidated balance sheets.
($ in thousands)
Assets Pledged to Bimini
September 30, 2021
December 31, 2020
Repurchase agreements
$
$
Total
$
$
NOTE 7. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar
arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions.
The Company reports its assets and liabilities subject to these arrangements on a gross basis. The following tables present information
regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of September
30, 2021 and December 31, 2020.
(in thousands)
Offsetting of Liabilities
Gross Amount Not Offset in the
Net Amount
Consolidated Balance Sheet
Gross Amount
of Liabilities
Financial
Gross Amount
Offset in the
Presented in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2021
Repurchase Agreements
$
$
$
$
(61,470 )
$
(1,690 )
$
$
$
$
$
(61,470 )
$
(1,690 )
$
December 31, 2020
Repurchase Agreements
$
$
$
$
(61,719 )
$
(3,352 )
$
$
$
$
$
(61,719 )
$
(3,352 )
$
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 6 for a discussion of collateral posted for, or received against,
- 14 -
repurchase obligations and derivative instruments.
NOTE 8. LONG-TERM DEBT
Long-term debt at September 30, 2021 and December 31, 2020 is summarized as follows:
(in thousands)
September 30, 2021
December 31, 2020
Junior subordinated debt
$
$
Note payable
Paycheck Protection Plan ("PPP") loan
Total
$
$
Junior Subordinated Debt
During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) of which 100% of
the common equity is owned by Bimini Capital. It was formed for the purpose of issuing trust preferred capital securities to third-party
investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital.
The debt securities held by BCTII are the sole assets of BCTII.
As of September 30, 2021 and December 31, 2020, the outstanding principal balance on the junior subordinated debt securities owed
to BCTII was $
interest that floats at a spread of
% over the prevailing three-month LIBOR rate. As of September 30, 2021, the interest rate was
%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions
and are redeemable at Bimini Capital's option, in whole or in part and without penalty. Bimini Capital's BCTII Junior Subordinated Notes
are subordinate and junior in right of payment to all present and future senior indebtedness.
BCTII is a VIE because the holders of the equity investment at risk do not have substantive decision-making ability over BCTII’s
activities. Since Bimini Capital's investment in BCTII’s common equity securities was financed directly by BCTII as a result of its loan of the
proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share
investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not
consolidated the financial statements of BCTII into its consolidated financial statements, and this investment is accounted for on the equity
method.
The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to BCTII as a
liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets). For financial
statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.
Note Payable
On October 30, 2019, the Company borrowed $
installments of approximately $
accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus
%.
The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $
Act in the form of a low interest loan. PPP loans carry a fixed rate of
% 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 2021
$
2022
2023
2024
2025
After 2025
Total
$
NOTE 9. 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, 2021 and 2020.
Stock Repurchase Plans
On March 26, 2018, the Board of Directors of the Company (the “Board”) approved a Stock Repurchase Plan (the “2018 Repurchase
Plan”). Pursuant to the 2018 Repurchase Plan, the Company could purchase up to
time to time, subject to certain limitations imposed by Rule 10b-18 of the Securities Exchange Act of 1934.
The 2018 Repurchase Plan
was terminated on September 16, 2021
.
During the three months ended September 30, 2021, the Company repurchased a total of
Plan at an aggregate cost of approximately $
, including commissions and fees, for a weighted average price of $
From the inception of the 2018 Repurchase Plan through its termination, the Company repurchased a total of
aggregate cost of approximately $
, including commissions and fees, for a weighted average price of $
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of
1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common
Stock from time to time for an aggregate purchase price not to exceed $
means, including, without limitation, open market transactions. The 2021 Repurchase Plan does not obligate the Company to purchase
any shares, and it expires on September 16, 2023. The authorization for the 2021 Repurchase Plan may be terminated, increased or
decreased by the Company’s Board of Directors in its discretion at any time.
There were no shares repurchased during the nine months
ended September 30, 2021 under 2021 Repurchase Plan.
Tender Offer
In July 2021, the Company completed a “modified Dutch auction” tender offer and paid $1.5 million, excluding fees and related
expenses, to repurchase
The aggregate cost of
the tender offer, including commissions and fees, was approximately $
NOTE 10. 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 $
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. The demand is based on Royal Palm’s alleged breaches of certain representations and warranties in the
related MLPA’s. The Company believes the demands are without merit and intends to defend against the demand vigorously. No
provision or accrual has been recorded as of September 30, 2021 related to the Citigroup demand.
Management is not aware of any other significant reported or unreported contingencies at September 30, 2021.
NOTE 11. INCOME TAXES
The total income tax provision recorded for the nine months ended September 30, 2021 and 2020 was $
million, respectively, on consolidated pre-tax book income (loss) of $
) 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 $
ended September 30, 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 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 $
was necessary for the net operating loss carryforwards and capital loss carryforwards during the three months ended March 31, 2020.
NOTE 12. EARNINGS PER SHARE
Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an
amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of
Directors. The Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is
presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A
EPS as the conditions for conversion to Class A common stock were not met at September 30, 2021 and 2020.
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, 2021 and 2020.
The table below reconciles the numerator and denominator of EPS for the nine and three months ended September 30, 2021 and
2020.
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
- 17 -
Basic and diluted EPS per Class A common share:
Income (loss) attributable to Class A common shares:
Basic and diluted
$
$
(17,499
$
$
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
Effect of weighting
Weighted average shares-basic and diluted
Income (loss) per Class A common share:
Basic and diluted
$
$
(1.51
$
$
(in thousands, except per-share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Basic and diluted EPS per Class B common share:
Income (loss) attributable to Class B common shares:
Basic and diluted
$
$
(48
$
$
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
32
32
Weighted average shares-basic and diluted
Income (loss) per Class B common share:
Basic and diluted
$
$
(1.51
$
$
NOTE 13. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price). 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, 2021 and 2020. When determining fair value measurements, the Company considers the principal
or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the
asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded
in active markets, the Company looks to market observable data for similar assets. Fair value measurements for the retained interests are
generated by a model that requires management to make a significant number of assumptions, and this model resulted in a value of zero
at both September 30, 2021 and December 31, 2020.
The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the
- 18 -
Company based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary,
the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company
and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These
techniques include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment
speeds), spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S.
Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black
Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The
appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed
trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain
characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life
of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or
adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the
underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers
and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are
readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2
valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates
and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model.
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and
December 31, 2020:
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
September 30, 2021
Mortgage-backed securities
$
$
$
$
Orchid Island Capital, Inc. common stock
December 31, 2020
Mortgage-backed securities
$
$
$
$
Orchid Island Capital, Inc. common stock
During the nine months ended September 30, 2021 and 2020, there were no transfers of financial assets or liabilities between levels
1, 2 or 3.
NOTE 14. SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments: the asset management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid. Total revenues received under this management
agreement for the nine months ended September 30, 2021 and 2020, were approximately $
accounting for approximately
% and
% of consolidated revenues, respectively.
- 19 -
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, 2021 and 2020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(108 )
Interest and dividend income
Interest expense
(95 )
(748 )
(2)
(843 )
Net revenues
(748 )
(108 )
Other income
(3,008 )
(3)
(2,854 )
Operating expenses
(4)
(3,396 )
(1,738 )
(5,134 )
Intercompany expenses
(1)
(108 )
Income (loss) before income taxes
$
$
(1,704 )
$
(594 )
$
$
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(116 )
Interest and dividend income
Interest expense
(1,030 )
(893 )
(2)
(1,923 )
Net revenues
(893 )
(116 )
Other expenses
(10,238 )
(466 )
(3)
(10,704 )
Operating expenses
(4)
(2,632 )
(2,375 )
(5,007 )
Intercompany expenses
(1)
(116 )
Income (loss) before income taxes
$
$
(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
$
$
$
$
$
Advisory services, other operating segments
(1)
(35 )
Interest and dividend income
Interest expense
(24 )
(248 )
(2)
(272 )
Net revenues
(248 )
(35 )
Other
(1,033 )
(1,033 )
Operating expenses
(4)
(1,157 )
(496 )
(1,653 )
Intercompany expenses
(1)
(35 )
Income (loss) before income taxes
$
$
(545 )
$
(248 )
$
$
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
$
$
$
$
Advisory services, other operating segments
(1)
(32 )
- 20 -
Interest and dividend income
Interest expense
(43 )
(261 )
(2)
(304 )
Net revenues
(261 )
(32 )
Other
(3)
Operating expenses
(4)
(956 )
(659 )
(1,615 )
Intercompany expenses
(1)
(32 )
Income (loss) before income taxes
$
$
$
(212 )
$
$
(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services .
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses) on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportional share of total revenues.
Assets in each reportable segment as of September 30, 2021 and December 31, 2020 were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
September 30, 2021
$
$
$
December 31, 2020
NOTE 15. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both September 30, 2021 and December 31, 2020, the Company owned
approximately
% and
% of Orchid’s outstanding common stock on such dates. The Company received dividends on this
common stock investment of approximately $
and approximately $
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief
Executive Officer and Chairman of the Board of Directors of Orchid, receives compensation from Orchid, and owns shares of common
stock of Orchid. In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also
serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors,
receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, our
independent directors, each own shares of common stock of Orchid.
- 21 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations should be 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-looking
statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many
factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly
Reports on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital, LLC. We operate in two business segments: the
asset management segment, which includes (a) the investment advisory services provided by Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which includes the investment activities conducted
by Royal Palm.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the
Securities and Exchange Commission), are collectively referred to as “Bimini Advisors.” Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and
expense reimbursements. As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day
operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated to it.
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"). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency
MBS: (i) traditional pass-through Agency MBS, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or
Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS”) and (ii) structured Agency
MBS, such as interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other
types of structured Agency MBS. In addition, Royal Palm receives dividends from its investment in Orchid common shares.
Stock Repurchase 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 under the 2021 Repurchase
Plan through September 30, 2021.
Tender Offer
In July 2021, we completed a “modified Dutch auction” tender offer and paid $1.5 million, excluding fees and related expenses, to
repurchase 812,879 shares of our Class A common stock, which were retired, at a price of $1.85 per share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (in addition to those related to the COVID-19 pandemic) may impact our results of
operations and financial condition. These factors include:
• interest rate trends;
• the difference between Agency MBS yields and our funding and hedging costs;
• competition for, and supply of, investments in Agency MBS;
• actions taken by the U.S. government, including the presidential administration, the U.S. Federal Reserve (the “Fed”), the
Federal Open Market Committee (the “FOMC”), the Federal Housing Finance Agency (the “FHFA”) and the U.S. Treasury;
• prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; and
• the equity markets and the ability of Orchid to raise additional capital; and
• other market developments.
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These
factors include:
• our degree of leverage;
• our access to funding and borrowing capacity;
• our borrowing costs;
• our hedging activities;
• the market value of our investments;
• the requirements to qualify for a registration exemption under the Investment Company Act;
• our ability to use net operating loss carryforwards and net capital loss carryforwards to reduce our taxable income;
• the impact of possible future changes in tax laws or tax rates; and
• our ability to manage the portfolio of Orchid and maintain our role as manager.
Results of Operations
Described below are the Company’s results of operations for the nine and three months ended September 30, 2021, as compared to
the nine and three months ended September 30, 2020.
Net Income (Loss) Summary
Consolidated net income for the nine months ended September 30, 2021 was $0.8 million, or $0.07 basic and diluted income per 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.
Consolidated net income for the three months ended September 30, 2021 was $0.5 million, or $0.04 basic and diluted income per share
- 23 -
of Class A Common Stock, as compared to consolidated net income of $1.3 million, or $0.11 basic and diluted income per share of Class A
Common Stock, for the three months ended September 30, 2020.
The components of net income (loss) for the nine and three months ended September 30, 2021 and 2020, along with the changes in
those components are presented in the table below:
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Advisory services revenues
$
6,758
$
4,969
$
1,789
$
2,547
$
1,629
$
918
Interest and dividend income
3,245
4,414
(1,169)
1,043
1,097
(54)
Interest expense
(843)
(1,924)
1,081
(272)
(304)
32
Net revenues
9,160
7,459
1,701
3,318
2,422
896
Other (expense) income
(2,855)
(10,703)
7,848
(1,033)
1,119
(2,152)
Expenses
(5,134)
(5,007)
(127)
(1,653)
(1,615)
(38)
Net income (loss) before income tax provision
1,171
(8,251)
9,422
632
1,926
(1,294)
Income tax provision
(336)
(9,296)
8,960
(167)
(608)
441
Net income (loss)
$
835
$
(17,547)
$
18,382
$
465
$
1,318
$
(853)
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to
hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
We have not designated our derivative financial instruments as hedge accounting relationships, but rather hold them for economic
hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of
operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not
impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense
has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses that
pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on
these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these
derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or
losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates
applicable to the term covered by the instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period
with the actual interest expense incurred on borrowings to reflect total economic interest 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 Income
(in thousands)
Interest Expense on Repurchase Agreements
Net Portfolio
Effect of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
September 30, 2021
$
537
$
24
$
(709)
$
733
$
513
$
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
December 31, 2020
597
43
(615)
658
554
(61)
September 30, 2020
604
43
(1,065)
1,108
561
(504)
June 30, 2020
523
60
(456)
516
463
7
March 31, 2020
2,040
928
(456)
1,384
1,112
656
Nine Months Ended
September 30, 2021
$
1,726
$
95
$
(2,125)
$
2,220
$
1,631
$
(494)
September 30, 2020
3,167
1,030
(1,978)
3,008
2,137
159
(1)
Reflects the effect of derivative instrument hedges for only the period presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income (Loss)
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
September 30, 2021
$
513
$
(196)
$
248
$
(57)
$
305
$
265
$
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
571
(137)
250
(58)
308
321
(445)
December 31, 2020
554
(61)
257
(40)
297
297
(358)
September 30, 2020
561
(504)
261
(40)
301
300
(805)
June 30, 2020
463
7
282
(40)
322
181
(315)
March 31, 2020
1,112
656
350
(40)
390
762
266
Nine Months Ended
September 30, 2021
$
1,631
$
(494)
$
748
$
(173)
$
921
$
883
$
(1,415)
September 30, 2020
2,137
159
893
(120)
1,013
1,244
(854)
(1)
Calculated by adding the effect of derivative instrument hedges attributed 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)
-
Interest and dividend income
-
3,245
-
-
3,245
Interest expense
-
(95)
(2)
-
(843)
Net revenues
6,866
3,150
(748)
(108)
9,160
Other income
-
(3,008)
(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)
(2)
-
(1,923)
Net revenues
5,085
3,384
(893)
(116)
7,460
Other expenses
-
(10,238)
(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)
(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)
(2)
-
(304)
Net revenues
1,661
1,054
(261)
(32)
2,422
Other
-
1,070
(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 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 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 Segment
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 million of net portfolio interest income, consisting of $1.7 million of interest
income from MBS assets offset by $0.1 million of interest expense on repurchase liabilities. For the comparable period ended September
30, 2020, we generated $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
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, 2021
$
66,692
$
537
3.22%
$
67,253
$
24
$
733
0.14%
4.36%
June 30, 2021
70,925
578
3.26%
$
72,241
31
739
0.17%
4.09%
March 31, 2021
69,017
611
3.54%
69,104
40
748
0.23%
4.33%
December 31, 2020
69,161
597
3.45%
67,878
43
658
0.25%
3.88%
September 30, 2020
62,981
604
3.84%
61,151
43
1,108
0.28%
7.25%
June 30, 2020
53,630
523
3.90%
51,987
60
516
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
928
1,384
2.83%
4.22%
Nine Months Ended
September 30, 2021
$
68,878
$
1,726
3.34%
$
69,533
$
95
$
2,220
0.18%
4.26%
September 30, 2020
84,251
3,167
5.01%
81,431
1,031
3,008
1.69%
4.92%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
September 30, 2021
$
513
$
(196)
3.08%
(1.14)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
December 31, 2020
554
(61)
3.20%
(0.42)%
September 30, 2020
561
(504)
3.56%
(3.40)%
June 30, 2020
463
7
3.44%
(0.07)%
- 29 -
March 31, 2020
1,112
656
3.16%
1.77%
Nine Months Ended
September 30, 2021
$
1,631
$
(494)
3.16%
(0.92)%
September 30, 2020
2,136
159
3.32%
0.09%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 29 and 30 are calculated based on the
average 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 30 include the effect
of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging
activities divided by average MBS.
(4)
Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest income was $1.7 million for the nine months ended September 30, 2021 and $3.2 million for the nine months ended
September 30, 2020. Average MBS holdings were $68.9 million and $84.3 million for the nine months ended September 30, 2021 and 2020,
respectively. The $1.5 million decrease in interest income was due to a $15.4 million decrease in average MBS holdings, combined with a
167 bp decrease in yields.
Our interest income was $0.5 million for the three months ended September 30, 2021 and $0.6 million for the three months ended
September 30, 2020. Average MBS holdings were $66.7 million and $63.0 million for the three months ended September 30, 2021 and
2020, respectively. The $0.1 million decrease in interest income was due to a 62 bp decrease in yields, partially offset by a $3.7 million
increase in average MBS holdings.
The tables below present the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS
and PT MBS, for the nine months ended September 30, 2021 and 2020, and for each quarter during 2021 and 2020.
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
September 30, 2021
$
64,641
$
2,051
$
66,692
$
533
$
4
$
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
June 30, 2020
53,101
529
53,630
502
21
523
3.78%
16.12%
3.90%
March 31, 2020
135,044
1,098
136,142
2,029
11
2,040
6.01%
3.93%
5.99%
Nine Months Ended
September 30, 2021
$
67,851
$
1,027
$
68,878
$
1,717
$
9
$
1,726
3.37%
1.25%
3.34%
September 30, 2020
83,570
681
84,251
3,119
48
3,167
4.98%
9.42%
5.01%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average outstanding balances under repurchase agreements were $69.5 million and $81.4 million, generating interest expense of
$0.1 million and $1.0 million for the nine months ended September 30, 2021 and 2020, respectively. Our average cost of funds was 0.18%
and 1.69% for nine months ended September 30, 2021 and 2020, respectively. There was a 151 bp decrease in the average cost of funds
and a $11.9 million decrease in average outstanding repurchase agreements 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.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
- 32 -
2021
2020
Change
2021
2020
Change
Realized gains (losses) on sales of MBS
$
69
$
(5,805)
$
5,874
$
69
$
-
$
69
Unrealized (losses) gains on MBS
(2,222)
304
(2,526)
(324)
276
(600)
Total (losses) gains on MBS
(2,153)
(5,501)
3,348
(255)
276
(531)
Losses on derivative instruments
-
(5,292)
5,292
-
-
-
Gains on retained interests in securitizations
-
59
(59)
-
59
(59)
Unrealized (losses) gains on
Orchid Island Capital, Inc. common stock
(856)
39
(895)
(779)
794
(1,573)
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs,
and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell,
existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or
anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our
asset/liability management strategy. During the nine months ended September 30, 2020, we received proceeds of $171.2 million from the
sales of MBS.
Most of these sales occurred during the second half of March 2020 as we sold assets in order to maintain our leverage ratio
at prudent levels, maintain sufficient cash and liquidity and reduce risk associated with the market turmoil brought about by COVID-19.
During the nine months ended September 30, 2021, we received proceeds of $13.1 million from the sales of MBS.
The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are
sensitive to changes in interest rates. The table below presents historical interest rate data for each quarter end during 2021 and 2020.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 Year and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.
(2)
Historical 15 Year and 30 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration Ltd.
Operating Expenses
For the nine and three months ended September 30, 2021, our total operating expenses were approximately $5.1 million and $1.7
million, respectively, compared to approximately $5.0 million and $1.6 million for the nine and three months ended September 30, 2020,
respectively. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2021 and
2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Compensation and related benefits
$
3,220
$
3,157
$
63
$
1,029
$
1,010
$
19
Legal fees
113
122
(9)
37
27
10
Accounting, auditing and other professional fees
293
345
(52)
97
94
3
Directors’ fees and liability insurance
568
512
56
190
166
24
Administrative and other expenses
940
871
69
300
319
(19)
$
5,134
$
5,007
$
127
$
1,653
$
1,616
$
37
- 33 -
Income Tax Provision
We recorded an income tax provision for the nine and three months ended September 30, 2021 of approximately $0.3 million and
$0.2 million, respectively, on consolidated pre-tax book income of $1.2 million and $0.6 million, respectively. We recorded an income
tax provision for the nine and three months ended September 30, 2020 of approximately $9.3 million and $0.6 million, respectively, on
consolidated pre-tax book (loss) income of $(8.3) million and $1.9 million.
As a result of adverse economic impacts of COVID-19 on our business, management performed an assessment of the need for
additional valuation allowances against existing deferred tax assets. Following the more-likely-than-not standard that benefits will not be
realized in the future, we determined an additional valuation allowance of approximately $11.2 million was necessary during the three
months ended March 31, 2020 for the net operating loss carryforwards and capital loss carryforwards.
Financial Condition:
Mortgage-Backed Securities
As of September 30, 2021, our MBS portfolio consisted of $64.4 million of agency or government MBS at fair value and had a
weighted average coupon of 3.40%. During the nine months ended September 30, 2021, we received principal repayments of $11.8
million compared to $11.2 million for the comparable period ended September 30, 2020. The average prepayment speeds for the quarters
ended September 30, 2021 and 2020 were 18.3% and 15.8%, respectively.
The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT MBS sub-
portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage
pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart
below represents the three-month prepayment rate of the securities in the respective asset category.
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
The following tables summarize certain characteristics of our PT MBS and structured MBS as of September 30, 2021 and December
31, 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
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-39
- 34 -
Total MBS Portfolio
$
64,390
100.0%
3.40%
331
1-Sep-51
December 31, 2020
Fixed Rate MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only MBS
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only MBS
25
0.0%
5.84%
221
15-May-39
Total MBS Portfolio
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
September 30, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
41,938
65.1%
$
38,946
59.8%
Freddie Mac
22,452
34.9%
26,232
40.2%
Total Portfolio
$
64,390
100.0%
$
65,178
100.0%
September 30, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
109.33
$
109.51
Weighted Average Structured Purchase Price
$
4.81
$
4.28
Weighted Average Pass-through Current Price
$
110.38
$
112.67
Weighted Average Structured Current Price
$
9.45
$
3.20
Effective Duration
(1)
2.542
3.309
(1)
Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 2.542 indicates
that an interest rate increase of 1.0% would be expected to cause a 2.542% decrease in the value of the MBS in our investment portfolio at
September 30, 2021. An effective duration of 3.309 indicates that an interest rate increase of 1.0% would be expected to cause a 3.309%
decrease in the value of the MBS in our investment portfolio at December 31, 2020. These figures include the structured securities in the
portfolio but do include the effect of our hedges.
Effective duration quotes for individual investments are obtained from The Yield Book, Inc.
The following table presents a summary of our portfolio assets acquired during the nine months ended September 30, 2021 and 2020.
($ in thousands)
Nine Months Ended September 30,
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
23,337
$
106.48
1.41%
$
43,130
$
111.44
1.99%
Structured MBS
2,852
10.01
0.43%
-
-
-
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally
seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably
priced by the market. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT MBS generally ranges up
to 30 years. However, the effect 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.
We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured
MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets
and the duration of our liabilities. We generally calculate duration and effective duration using various third-party models or obtain these
quotes from third parties. However, empirical results and various third-party models may produce different duration numbers for the same
securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge
positions as of September 30, 2021, assuming rates instantaneously fall 100 bps, rise 100 bps and rise 200 bps, adjusted to reflect the
impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency MBS’ effective duration to movements in
interest rates.
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
61,372
$
2,070
$
(2,857)
$
(6,133)
3.37%
(4.66)%
(9.99)%
Interest-Only MBS
2,999
(955)
636
996
(31.84)%
21.21%
33.22%
Inverse Interest-Only MBS
19
1
(3)
(5)
6.09%
(13.97)%
(28.53)%
Total MBS Portfolio
$
64,390
$
1,116
$
(2,224)
$
(5,142)
1.73%
(3.45)%
(7.99)%
($ in thousands)
Notional
$ Change in Fair Value
% Change in Fair Value
Amount
(1)
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Eurodollar Futures Contracts
Junior Subordinated Debt Hedges
$
1,000
$
(3)
$
3
$
5
(1.00)%
1.00%
2.00%
$
1,000
$
(3)
$
3
$
5
Gross Totals
$
1,113
$
(2,221)
$
(5,137)
(1)
Represents the average contract/notional amount of Eurodollar futures contracts.
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments and hedging
instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown
above and such difference might be material and adverse to our stockholders.
Repurchase Agreements
As of September 30, 2021, 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 six of these counterparties. We believe these facilities provide
borrowing capacity in excess of our needs. None of these lenders are affiliated with us. These borrowings are secured by our MBS.
As of September 30, 2021, we had obligations outstanding under the repurchase agreements of approximately $63.2 million with a
- 36 -
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 $64.6 million and a weighted average maturity of 332 months. Through
November 8, 2021, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30,
2021 with maturities through January 14, 2022.
The table below presents information about our period-end, maximum and average repurchase agreement obligations for each
quarter in 2021 and 2020.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
September 30, 2021
$
63,160
$
72,047
$
67,253
$
(4,093)
(6.09)%
June 30, 2021
71,346
72,372
72,241
(895)
(1.24)%
March 31, 2021
73,136
76,004
69,104
4,032
5.83%
December 31, 2020
65,071
70,684
67,878
(2,807)
(4.14)%
September 30, 2020
70,685
70,794
61,151
9,534
15.59%
(1)
June 30, 2020
51,617
52,068
51,987
(370)
(0.71)%
March 31, 2020
52,357
214,921
131,156
(78,799)
(60.08)%
(2)
(1)
The higher ending balance relative to the average balance during the quarter 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 primary immediate sources of liquidity include cash balances, unencumbered assets, the
availability to borrow under repurchase agreements, and fees and dividends received from Orchid. Our borrowing capacity will vary over
time as the market value of our interest earning assets varies. Our investments also generate liquidity on an on-going basis through
payments of principal and interest we receive on our MBS portfolio.
The COVID-19 pandemic has adversely affected our liquidity, assets under management and operating results. During March 2020,
we significantly reduced our MBS assets to meet margin calls and repay debts. As described elsewhere in this report, since March 2020
Bimini’s operating results have stabilized, liquidity has improved and our investments in MBS and Orchid shares have increased as
compared to investments in MBS and Orchid shares at March 31, 2020.
Our hedging strategy 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 causes these short positions to decline
in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio
move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this
were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional
structured securities to raise funds or risk operating the portfolio with less liquidity.
Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the
counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally
may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to
- 37 -
terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin
posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the
asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to
post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we
would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to
ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum
threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis.
As discussed above, we invest a portion of our capital in structured MBS. We generally do not apply leverage to this portion of our
portfolio. The leverage inherent in the structured securities replaces the leverage obtained by acquiring PT securities and funding them in
the repurchase market. This structured MBS strategy has been a core element of the Company’s overall investment strategy since 2008.
However, we have and may continue to pledge a portion of our structured MBS in order to raise our cash levels, but generally will not
pledge these securities in order to acquire additional assets.
In future periods we expect to continue to finance our activities through repurchase agreements. As of September 30, 2021, we had
cash and cash equivalents of $7.9 million. We generated cash flows of $13.4 million from principal and interest payments on our MBS
portfolio and had average repurchase agreements outstanding of $69.5 million during the nine months ended September 30, 2021. In
addition, during the nine months ended September 30, 2021, we received approximately $6.5 million in management fees and expense
reimbursements as manager of Orchid and approximately $1.5 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 the third quarter of 2021. 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, exhausted the remaining capacity under the ATM program
in place at the time and Orchid announced a new ATM program on October 29, 2021, of $250 million. As for Orchid’s financial
performance, Orchid recorded GAAP net income of $0.20 per share or $26.0 million in the third quarter of 2021. The net effect of the
new shares issued, net income and dividends paid resulted in Orchid’s capital base increasing $176.8 million, or 32% for during the
third quarter. Year to date Orchid has increased its capital base by approximately $315.3 million, or 76%. As a result, Bimini Advisor’s
advisory services revenue increased 17% over the second quarter and, as the increased capital base at Orchid was not in 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.
Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid’s pro rata share of overhead as
defined in the management agreement. As a stockholder of Orchid, we will also continue to share in distributions, if any, paid by
Orchid to its stockholders. Our operating results are also impacted by changes in the market value of our holdings of Orchid common
shares, although these market value changes do not impact our cash flows from Orchid. The Company increased its holdings of Orchid
during the second quarter of 2020, as the shares of Orchid were trading at a significant discount to Orchid’s reported book value as of
March 31, 2020. The Company currently owns approximately 2.6 million shares of Orchid.
The independent Board of Directors of Orchid has the ability to terminate the management agreement and thus end our ability to
collect management fees and share overhead costs. Should Orchid terminate the management agreement without cause, it will be
obligated to pay us a termination fee equal to three times the average annual management fee, as defined in the management
agreement, before or on the last day of the current automatic renewal term.
Economic Summary
The effects of COVID-19 continued to dominate economic activity during the third quarter of 2021, particularly the Delta variant that
first emerged in earnest during July. Daily new infections from the Delta variant rose rapidly during the summer but appeared to peak in
early September and have been 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 Federal Open Market Committee (“FOMC”) has maintained these inflationary forces are temporary and will ease once the
effects of the COVID pandemic fade and workers can return to work. Yet, as implied by market pricing of inflation linked U.S. Treasury
securities and opinions expressed by various market participants, inflation may prove 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 quarter and into the fourth, expectations for growth in the U.S. economy continued to decline. On October
28, 2021, the advanced read on gross domestic product growth for the U.S. economy was 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 that essentially all forms of pandemic related
unemployment insurance have ended and the new cases of the Delta variant of the COVID virus are subsiding. This in turn should also
answer the question about the transitory nature of inflation.
The housing market remains robust as evidenced by sales of new and existing homes, as well as new home construction. However,
as home prices have risen at 10% – 20% over the last year and supply shortages of goods and materials are constraining new home
construction, this trend may slow. If this were to occur, it would be beneficial for the Company’s RMBS portfolio as prepayments related to
housing turnover may decelerate.
Legislative Response and 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 July of this year, there appeared to be a need for additional stimulus for the economy to deal with the surge in the pandemic
that occurred as cold weather set in, particularly over the Christmas holiday. As mentioned above, the Federal government eventually
passed an additional stimulus package in late December of 2020 and again in March of 2021. 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 inflation is expected to temporarily surpass the 2% target level. Further, the Fed has 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% in the future as the economy more fully 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.
Interest Rates
Interest rates across the U.S. Treasury curve and U.S. dollar swap curve were little changed during the third quarter of 2021. The
only notable development within the rates complex was the slight flattening of both curves between the five- and 30-year points as 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 Fed chairman have looked through the effects of the
pandemic and see the impact fading. At the November FOMC meeting, the Fed announced they would commence the tapering of their
asset purchases beginning in November. The pace of the tapering will be $10 billion of treasury securities per month and $5 billion of
Agency MBS per month. The Fed stated the pace of tapering could be adjusted if economic conditions warranted. The Fed indicated that
absent an adjustment to the pace of the tapering of their asset purchases they would likely complete the tapering by mid next year. At the
conclusion of the Fed’s September FOMC meeting the Fed released their summary of economic projections, or “Dot Plot” as it is known.
As was the case with the June FOMC Dot Plot, the Dot Plot indicated FOMC members anticipated increasing the Fed Funds rate sooner
and by a larger amount than the market anticipated. Nine of the eighteen FOMC members, as evidenced by the Dot Plot released in
September, expect the Fed to increase the funds rate at least once in 2022. This surprised the market, and the market pricing of forward
short-term rates quickly adjusted to reflect these expectations.
As the fourth quarter has unfolded and inflationary pressures have continued to build, market pricing of forward short-term rates have
continued to reflect additional increases to the Fed Funds rate. Further, as inflation persists at higher levels and continues to challenge the
Fed’s assertion that it will prove transitory, longer maturity rates have moved higher so far in the fourth quarter.
- 40 -
The Agency RMBS Market
Performance for the Agency RMBS market for the third quarter was a modest 0.01%, generally 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 the returns were 0.6% and 0.5%, respectively. Thirty-year and fifteen-year securities both returned 0.1% for the quarter. As
mentioned above, the Fed announced they will begin to taper their asset purchases in November and, absent an adjustment in the pace 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 2021 and beyond, is, as always, the level of
prepayments. With interest rates relatively steady during the third quarter and, after such a prolonged period of low interest rates
prepayment speeds on higher coupon, premium priced securities were expected to eventually slow. This appears to be finally happening,
as evidenced by the August and September prepayment reports, released in September and October, respectively. As interest rates have
moved higher so far in the fourth quarter these coupons have been impacted further quarter to date.
Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 until July 2020 to address disruptions in the U.S. Treasury,
Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully tamed volatile
funding costs that had threatened to cause disruption across the financial system.
The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. 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 lowered 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 announced a program to acquire U.S. Treasuries and Agency RMBS in 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 RMBS each month. Chairman Powell and the Fed have reiterated their
commitment to this level of asset purchases at every meeting since their meeting on June 30, 2020. However, at the November 2021
meeting, the Fed concluded that substantial further progress towards their dual mandate had been met and they will begin to taper their
asset purchases in November. They further stated that the pace 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 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts. Various
provisions of the CARES Act began to expire in July 2020, including a moratorium on evictions, 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.
- 41 -
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 guidance extending eviction
moratoriums for covered persons 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 under the CARES Act for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate
owned by Fannie Mae and Freddie Mac were extended until March 31, 2021, which was further extended through September 30, 2021.
On July 30, 2021, the FHA announced an extension of the eviction moratorium through September 30, 2021 for foreclosed borrowers and
other occupants and noted the expiration of the foreclosure moratorium on July 31, 2021.
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 and $20 billion, respectively, from the prior limit of $3 billion each. On June 30, 2020, the FHFA released a proposed rule on a new
regulatory framework for the GSEs which seeks to implement both a risk-based capital framework and minimum leverage capital
requirements. The final rule on the new capital framework for the GSEs was published in the federal register in December 2020. On
January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue to retain capital up to their
regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no
exit from conservatorship until all material litigation is settled and the GSE has common equity Tier 1 capital of at least 3% of its assets, (ii)
the GSEs will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to
current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. However, no definitive
proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially
reducing the roles of the GSEs in the U.S. mortgage market. On June 23, 2021, President Biden removed the director of the FHFA and
appointed an acting director. On September 14, 2021, the FHFA suspended certain provisions added to the letter agreements on January
14, 2021, including limits on the enterprises' cash windows, multifamily lending, loans with higher risk characteristics, and second homes
and investment properties. The enterprises will continue to build capital under the continuing provisions of the letter agreements.
Additionally, the FHFA is reviewing the enterprise regulatory capital framework and expects to announce further action in the near future.
In 2017, policymakers announced that LIBOR will be replaced by December 31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the
liability associated with submitting an unfounded level. The ICE Benchmark Administration, in its capacity as administrator of USD LIBOR,
has confirmed that it will cease publication of (i) the one-week and two-month USD LIBOR settings immediately following the LIBOR
publication on December 31, 2021, and (ii) the overnight and one, three, six and 12-month USD LIBOR settings immediately following the
LIBOR publication on June 30, 2023. A joint statement by key regulatory authorities calls on banks to cease entering into new contracts
that use USD LIBOR as a reference rate by no later than December 31, 2021. The Alternative Reference Rates Committee, a steering
committee comprised of large U.S. financial institutions, has proposed replacing USD-LIBOR with a new SOFR, a rate based on U.S. repo
trading. Many banks believe that it may take four to five years to complete the transition to SOFR, for certain, despite the 2021 deadline.
We will monitor the emergence of this new rate carefully as it will potentially become the new benchmark for hedges and a range of
interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, will extend the 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 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 RMBS 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, however, that delinquent loans will be
repurchased in most cases before the 24-month deadline under one of the following exceptions listed below.
• a loan that is paid in full, or where the related lien is released and/or the note debt is satisfied or forgiven;
• a loan repurchased by a seller/servicer under applicable selling and servicing requirements;
• a loan entering a permanent modification, which generally requires it to be removed from the MBS. During any modification trial
period, the loan will remain in the MBS until the trial period ends;
• a loan subject to a short sale or deed-in-lieu of foreclosure; or
• a loan referred to foreclosure.
Because of these exceptions, the GSEs currently believe based on prevailing assumptions and market conditions this change will
have only a marginal impact on prepayment speeds, in aggregate. Cohort level impacts may vary. For example, more than half of loans
referred to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on
delinquency levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to
evolve, especially in light of the COVID-19 pandemic, President Biden’s new administration and the new Congress in the United States.
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 RMBS may increase our costs (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency
RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways. If prepayment rates are relatively low
(due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency
RMBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-
term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.
If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline. This is because a principal
prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor 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 RMBS backed by mortgages with high interest rates are more susceptible to
prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types
of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the
values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance
is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect
the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are
purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an
- 43 -
increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would
increase our net income.
Higher long-term rates can also affect the value of our Agency RMBS. 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 RMBS declines. Some of the
instruments the Company uses to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable
average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not
adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only
securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price
movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes
interest only securities desirable hedge instruments for pass-through Agency RMBS.
As described above, the Agency RMBS 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. In March of 2020, the Fed announced that it would purchase Agency
RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS
market, a 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. Beginning in November, the Fed will
reduce their purchases of treasury securities 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. The reduction of the Fed’s purchases of Agency RMBS could negatively
impact our investment portfolio. Further, the moratoriums on foreclosures 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, when
and if it occurs, these loans may be removed from the pool into which they were securitized. If this were to occur, it would have the effect
of delaying a prepayment on the Company’s securities until such time. As the majority of the Company’s Agency RMBS assets were
acquired at a premium to par, this will tend to increase the realized yield on the asset in question.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a
volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-
term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-
term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. An
increase in the Fed Funds rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency RMBS backed by
fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which
economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as
Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
- 44 -
Once again COVID-19 dominated economic activity this quarter. However, we may be at a crossroads as the effects of the Delta
variant appear to be waning and the number of people 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 they have provided the market since the onset of the pandemic. Conversely, if
these events do not unfold and the supply shortages of goods and labor remain, the economy will likely continue to suffer from elevated
levels of inflation. Under this scenario the path of economic growth is less certain, and the path of monetary policy could prove to be quite
challenging for the Fed.
The performance of the Agency RMBS market was very modest in absolute returns, at 0.0% and 0.1% versus comparable duration
interest rates and swaps. Performance for the sector was generally in line with other sectors of the fixed income markets. Within the
Agency RMBS universe, performance was skewed towards higher coupons and away from lower coupons that comprise the bulk of recent
production and Fed purchases. This has continued into the fourth quarter, in large part because at the November FOMC meeting the Fed
stated they will begin to taper their asset purchases and likely conclude the process in mid-2022. Prepayment speeds, particularly on high
coupon securities, have moderated and are likely to do so even more with rates higher so far in the fourth quarter and the typical seasonal
slow down as we approach the winter months.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. GAAP requires our management to make some
complex and subjective decisions and assessments. Our most critical 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.
Capital Expenditures
At September 30, 2021, 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.
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 Controls over Financial Reporting
There were no material changes in the Company’s internal control over financial reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
- 46 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services, LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. The demand is based on Royal Palm’s alleged breaches of certain representations and warranties in the
related MLPA’s. The Company believes the demands are without merit and intends to defend against the demand vigorously. No
provision or accrual has been recorded as of September 30, 2021 related to the Citigroup demand.
We are not party to any other material pending legal proceedings as described in Item 103 of Regulation S-K.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2020, filed with the SEC on March 15, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2021, the Company completed a “modified Dutch auction” tender offer and paid an aggregate of $1.6 million,
including fees and related expenses, to repurchase 812,879 shares of Bimini Capital’s Class A common stock at a price of
$1.93 per share. The tender offer was announced on May 27, 2021.
On March 26, 2018, the 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 of
1934. The 2018 Repurchase Plan was terminated on September 16, 2021.
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities
Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase
shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million.
The table below presents the Company’s share repurchase activity for the three months ended September 30, 2021.
Shares Purchased
Maximum Number
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, 2021 - July 31, 2021
812,879
$
1.93
-
429,596
August 1, 2021 - August 31, 2021
-
-
-
429,596
September 1, 2021 - September 30, 2021
1,195
1.92
1,195
$
2,500,000
Totals / Weighted Average
814,074
$
1.93
1,195
2,500,000
The Company did not have any unregistered sales of its equity securities during the three months ended September 30,
2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
- 47 -
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No
3.1
3.2
3.3
3.4
3.5
31.1
31.2
32.1
32.2
101.INS
Instance Document***
101.SCH
Taxonomy Extension Schema Document***
101.CAL
Taxonomy Extension Calculation Linkbase Document***
101.DEF
Additional Taxonomy Extension Definition Linkbase Document***
101.LAB
Taxonomy Extension Label Linkbase Document***
101.PRE
Taxonomy Extension Presentation Linkbase Document***
* Filed herewith.
** Furnished herewith
*** Submitted electronically herewith.
- 48 -
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 9, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date: November 9, 2021
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)
Exhibit 31.1
CERTIFICATIONS
I, Robert E. Cauley, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant"); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
|
|
a) |
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: November 9, 2021 |
|
|
|
|
|
/s/ Robert E. Cauley |
|
|
Robert E. Cauley |
|
|
Chairman of the Board and Chief Executive Officer |
|
Exhibit 31.2
CERTIFICATIONS
I, G. Hunter Haas, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant"); |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
|
|
a) |
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
|
Date: November 9, 2021 |
|
|
|
|
|
/s/ G. Hunter Haas, IV |
|
|
G. Hunter Haas, IV |
|
|
President and Chief Financial Officer |
|
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
I, Robert E. Cauley, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2021 (the “Report”) filed with the Securities and Exchange Commission:
1. fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934
|
November 9, 2021 |
|
/s/ Robert E.Cauley |
|
|
|
Robert E. Cauley, Chairman of the Board and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
I, G. Hunter Haas, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2021 (the “Report”) filed with the Securities and Exchange Commission:
1. fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934
|
November 9, 2021 |
|
/s/ G. Hunter Haas, IV |
|
|
|
G. Hunter Haas, IV President and Chief Financial Officer |