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bmnm10q20210930p1i0.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☑
QUARTERLY
 
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
 
001-32171
Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
72-1571637
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
ý
 
No
☐
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
ý
 
No
☐
Indicate by check mark whether the registrant is
 
a large accelerated filer,
 
an accelerated filer, a non-accelerated filer,
 
a smaller reporting company,
 
or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☐
 
(Do not check if a smaller reporting company)
Smaller reporting company
☒
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes
☐
 
No
ý
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
May 13, 2022
10,485,489
Class B Common Stock, $0.001 par value
May 13, 2022
31,938
Class C Common Stock, $0.001 par value
May 13, 2022
31,938
 
BIMINI CAPITAL MANAGEMENT, INC.
 
TABLE OF CONTENTS
 
Page
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Consolidated
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Consolidated
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Consolidated
 
Statement
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Consolidated
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to
 
Condensed
 
Consolidated
 
Financial
 
Statements
 
(unaudited)
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
20
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
About Market
 
Risk
40
ITEM 4. Controls
 
and Procedures
40
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
41
ITEM 1A.
 
Risk Factors
41
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
41
ITEM 3. Defaults
 
Upon Senior
 
Securities
41
ITEM 4. Mine
 
Safety Disclosures
41
ITEM 5. Other
 
Information
41
ITEM 6. Exhibits
42
SIGNATURES
43
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 1 -
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
BALANCE SHEETS
(Unaudited)
March 31, 2022
December 31, 2021
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
54,663,513
$
60,788,129
Unpledged
15,689
15,015
Total mortgage
 
-backed securities
54,679,202
60,803,144
Cash and cash equivalents
4,619,873
8,421,410
Restricted cash
3,364,000
1,391,000
Orchid Island Capital, Inc. common stock, at fair value
8,434,910
11,679,107
Accrued interest receivable
214,550
229,942
Property and equipment, net
2,020,854
2,024,190
Deferred tax assets
36,258,788
35,036,312
Due from affiliates
1,065,608
1,062,155
Other assets
1,353,093
1,437,381
Total Assets
$
112,010,878
$
122,084,641
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
54,814,689
$
58,877,999
Long-term debt
27,433,290
27,438,976
Accrued interest payable
71,797
55,610
Other liabilities
548,134
2,712,206
Total Liabilities
82,867,910
89,084,791
 
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.001
 
par value;
10,000,000
 
shares authorized;
100,000
 
shares
designated Series A Junior Preferred Stock,
9,900,000
 
shares undesignated;
no shares issued and outstanding as of March 31, 2022 and December
 
31, 2021
-
-
Class A Common stock, $
0.001
 
par value;
98,000,000
 
shares designated:
10,513,914
and
10,702,194
 
shares issued and outstanding as of March 31, 2022
 
and December 31, 2021, respectively.
10,514
10,702
Class B Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of March 31, 2022 and December 31, 2021
32
32
Class C Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of March 31, 2022 and December 31, 2021
32
32
Additional paid-in capital
330,503,142
330,880,252
Accumulated deficit
(301,370,752)
(297,891,168)
Stockholders’ Equity
29,142,968
32,999,850
Total Liabilities
 
and Stockholders' Equity
$
112,010,878
$
122,084,641
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 2 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
Three Months Ended March 31,
2022
2021
Revenues:
Advisory services
$
3,075,362
$
2,025,409
Interest income
491,389
610,618
Dividend income from Orchid Island Capital, Inc. common stock
402,280
506,095
Total revenues
3,969,031
3,142,122
Interest expense
Repurchase agreements
(31,242)
(39,858)
Long-term debt
(256,066)
(249,548)
Net revenues
3,681,723
2,852,716
Other income (expense):
Unrealized losses on mortgage-backed securities
(3,114,204)
(1,392,261)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(3,244,197)
2,050,332
Gains on derivative instruments
-
243
Other income
97
86
Total other (expense)
 
income
(6,358,304)
658,400
Expenses:
Compensation and related benefits
1,343,956
1,123,530
Directors' fees and liability insurance
195,898
188,020
Audit, legal and other professional fees
144,689
137,168
Administrative and other expenses
340,936
307,865
Total expenses
2,025,479
1,756,583
Net (loss) income before income tax (benefit) provision
(4,702,060)
1,754,533
Income tax (benefit) provision
(1,222,476)
464,103
Net (loss) income
$
(3,479,584)
$
1,290,430
Basic and Diluted Net (loss) income Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
(0.33)
$
0.11
CLASS B COMMON STOCK
Basic and Diluted
$
(0.33)
$
0.11
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
10,624,563
11,608,555
CLASS B COMMON STOCK
Basic and Diluted
31,938
31,938
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 3 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2021
11,672,431
$
11,673
$
332,642,758
$
(298,166,582)
$
34,487,849
Net income
-
-
-
1,290,430
1,290,430
Balances, March 31, 2021
11,672,431
$
11,673
$
332,642,758
$
(296,876,152)
$
35,778,279
Balances, January 1, 2022
10,766,070
$
10,766
$
330,880,252
$
(297,891,168)
$
32,999,850
Net loss
-
-
-
(3,479,584)
(3,479,584)
Class A common shares repurchased and retired
(188,280)
(188)
(377,110)
-
(377,298)
Balances, March 31, 2022
10,577,790
$
10,578
$
330,503,142
$
(301,370,752)
$
29,142,968
See Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 4 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONDENSED CONSOLIDATED
 
STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
2022
2021
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net (loss) income
$
(3,479,584)
$
1,290,430
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating
 
activities:
Depreciation
17,312
17,313
Deferred income tax (benefit) provision
(1,222,476)
464,103
Losses on mortgage-backed securities, net
3,114,204
1,392,261
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
3,244,197
(2,050,332)
Changes in operating assets and liabilities:
Accrued interest receivable
15,392
(9,859)
Due from affiliates
(3,453)
(79,186)
Other assets
84,288
(97,358)
Accrued interest payable
16,187
(15,576)
Other liabilities
(2,164,072)
(801,855)
NET CASH (USED IN) PROVIDED BY OPERATING
 
ACTIVITIES
(378,005)
109,941
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
-
(12,367,589)
Principal repayments
3,009,738
3,297,727
Purchases of property and equipment
(13,976)
-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
2,995,762
(9,069,862)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
102,465,690
74,799,000
Principal repayments on repurchase agreements
(106,529,000)
(66,734,114)
Principal repayments on long-term debt
(5,686)
(5,420)
Class A common shares repurchased and retired
(377,298)
-
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(4,446,294)
8,059,466
NET DECREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(1,828,537)
(900,455)
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
9,812,410
10,911,357
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
7,983,873
$
10,010,902
SUPPLEMENTAL DISCLOSURES OF CASH
 
FLOW INFORMATION:
Cash paid during the period for:
Interest expense
$
271,121
$
304,982
See Notes to Condensed Consolidated Financial Statements
- 5 -
BIMINI CAPITAL
 
MANAGEMENT, INC.
NOTES TO CONDENSED
 
CONSOLIDATED FINANCIAL
 
STATEMENTS
(Unaudited)
March 31,
 
2022
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
 
Description
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”)
 
formed in September 2003, is a
holding company.
 
The Company operates in two business segments through its principal wholly-owned
 
operating subsidiary, Royal
Palm Capital LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with
 
the
Securities and Exchange Commission), are collectively referred to as "Bimini Advisors."
 
Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.
 
("Orchid") and receives fees for providing these services.
Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments
 
and shares of Orchid common
stock, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries
 
are collectively referred to as "Royal Palm."
 
Segment Reporting
The Company’s operations are classified into two principal reportable segments: the asset
 
management segment and the
investment portfolio segment. These segments are evaluated by management in deciding
 
how to allocate resources and in assessing
performance.
 
The accounting policies of the operating segments are the same as the
 
Company’s accounting policies with the
exception that inter-segment revenues and expenses are included in the presentation
 
of segment results.
 
For further information see
Note 13.
 
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini
 
Capital, Bimini Advisors and Royal Palm.
 
All
inter-company accounts and transactions have been eliminated from the consolidated
 
financial statements.
Basis of
 
Presentation
 
The accompanying unaudited condensed consolidated financial statements
 
have been prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) for interim financial
 
information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X.
 
Accordingly, they may not include all of the information and footnotes required by GAAP for complete
financial statements.
 
In the opinion of management, all adjustments (consisting of normal recurring
 
accruals) considered necessary for
a fair presentation have been included.
 
Operating results for the three-month periods ended March 31, 2022 are
 
not necessarily
indicative of the results that may be expected for the year ending December
 
31, 2022.
The consolidated balance sheet at December 31, 2021 has been derived from the
 
audited financial statements at that date but
does not include all of the information and footnotes required by GAAP for complete
 
consolidated financial statements.
 
For further
information, refer to the financial statements and footnotes thereto included in the
 
Company’s Annual Report on Form 10-K for the year
ended December 31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 6 -
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
 
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
 
and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
 
the reporting period. Actual results could differ from
those estimates.
 
Significant estimates affecting the accompanying consolidated financial statements include determining
 
the fair
values of MBS and derivatives, the value of Orchid Common Stock, determining
 
the amounts of asset valuation allowances, and the
computation of the income tax provision or benefit and the deferred tax asset allowances
 
recorded for each accounting period.
Variable Interest Entities (“VIEs”)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the
 
primary beneficiary of the VIE. Bimini Capital
has a common share investment in a trust used in connection with the issuance
 
of Bimini Capital's junior subordinated notes. See Note
7 for a description of the accounting used for this VIE.
The Company obtains interests in VIEs through its investments in mortgage-backed
 
securities.
 
The interests in these VIEs are
passive in nature and are not expected to result in the Company obtaining a controlling
 
financial interest in these VIEs in the future.
 
As
a result, the Company does not consolidate these VIEs and accounts for the interest
 
in these VIEs as mortgage-backed securities.
 
See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities.
 
The maximum exposure to
loss for these VIEs is the carrying value of the mortgage-backed securities.
Cash and Cash Equivalents and Restricted Cash
Cash and
 
cash equivalents
 
include
 
cash on deposit
 
with financial
 
institutions
 
and highly
 
liquid investments
 
with original
 
maturities
 
of
three months
 
or less at
 
the time
 
of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and
derivative
 
instruments.
 
The following
 
table presents
 
the Company’s
 
cash, cash
 
equivalents
 
and restricted
 
cash as of
 
March 31,
 
2022 and
December
 
31, 2021.
March 31, 2022
December 31, 2021
Cash and cash equivalents
$
4,619,873
$
8,421,410
Restricted cash
3,364,000
1,391,000
Total cash, cash equivalents
 
and restricted cash
$
7,983,873
$
9,812,410
The Company
 
maintains
 
cash balances
 
at several
 
banks and
 
excess margin
 
with an exchange
 
clearing member.
 
At times,
 
balances
may exceed
 
federally
 
insured
 
limits. The
 
Company has
 
not experienced
 
any losses
 
related to
 
these balances.
 
The Federal
 
Deposit
Insurance Corporation
 
insures eligible
 
accounts up
 
to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash balances
 
are
uninsured,
 
but are held
 
in separate
 
accounts that
 
are segregated
 
from the
 
general funds
 
of the counterparty.
 
The Company
 
limits
uninsured
 
balances to
 
only large,
 
well-known
 
banks
 
and exchange
 
clearing members
 
and believes
 
that it is
 
not exposed
 
to significant
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Advisory Services
Orchid is
 
externally
 
managed and
 
advised by
 
Bimini Advisors
 
pursuant
 
to the terms
 
of a management
 
agreement.
 
Under the
 
terms of
the management
 
agreement,
 
Orchid is
 
obligated
 
to pay Bimini
 
Advisors a
 
monthly management
 
fee and a
 
pro rata
 
portion of
 
certain
overhead
 
costs and
 
to reimburse
 
the Company
 
for any direct
 
expenses incurred
 
on its behalf.
 
Revenues
 
from management
 
fees are
recognized
 
over the
 
period of
 
time in which
 
the service
 
is performed.
- 7 -
Mortgage-Backed
 
Securities
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed
 
securities issued by Freddie Mac, Fannie Mae
or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only
 
(“IO”) securities and inverse interest-only (“IIO”)
securities representing interest in or obligations backed by pools of mortgage-backed
 
loans. 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 Orchid’s
 
common shares
 
on a
market approach
 
using “Level
 
1” inputs
 
based on
 
the quoted
 
market price
 
of Orchid’s
 
common stock
 
on a national
 
stock exchange.
Retained
 
Interests
 
in Securitizations
The Company
 
holds retained
 
interests
 
in the subordinated
 
tranches
 
of securities
 
created in
 
securitization
 
transactions.
 
These retained
interests
 
currently
 
have a recorded
 
fair value
 
of zero,
 
as the prospect
 
of future
 
cash flows
 
being received
 
is uncertain.
 
Any cash
 
received
from the
 
retained
 
interests
 
is reflected
 
as a gain
 
in the consolidated
 
statements
 
of operations.
- 8 -
Derivative
 
Financial
 
Instruments
The Company
 
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
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.
 
Gains and
 
losses on
 
derivatives,
 
except those
 
that result
 
in cash receipts
 
or payments,
 
are
included in
 
operating
 
activities
 
on the statements
 
of cash flows.
 
Cash payments
 
and cash receipts
 
from settlement
 
of derivatives,
 
including
current period
 
net cash settlements
 
on interest
 
rate swaps,
 
are classified
 
as an investing
 
activity
 
on the statements
 
of cash flows.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
by counterparties
 
to honor
 
their commitments.
 
In
the event
 
of default
 
by a counterparty,
 
the Company
 
may have difficulty
 
recovering
 
its collateral
 
and may not
 
receive payments
 
provided
for under
 
the terms
 
of the agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive collateral
 
to mitigate
 
such risk.
 
In
addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
 
banks as
 
counterparties,
monitors positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair value of financial instruments for which it is practicable to estimate that
 
value is disclosed, either in the body of the
consolidated financial statements or in the accompanying notes. MBS,
 
Orchid common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods
 
and assumptions used to estimate fair value for these
instruments are presented in Note 12 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest
 
receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates
 
their carrying value as of March 31, 2022 and
December 31, 2021, due to the short-term nature of these financial instruments.
 
It is impractical to estimate the fair value of the Company’s junior subordinated notes.
 
Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates
 
would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in
 
Note 7 to the consolidated financial statements.
Property
 
and Equipment,
 
net
Property and equipment, net, consists of computer equipment with a depreciable
 
life of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings
 
and improvements with depreciable lives of 30
years.
 
Property and equipment is recorded at acquisition cost and depreciated
 
to their respective salvage values using the straight-line
method over the estimated useful lives of the assets. Depreciation is included in administrative
 
and other expenses in the consolidated
statement of operations.
- 9 -
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its PT
 
MBS through
 
the use of
 
repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
 
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Earnings
 
Per Share
Basic EPS is calculated as income available to common stockholders divided
 
by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class
 
method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result
 
is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible
 
into Class A Common Stock, are entitled to receive
dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock.
 
Accordingly, shares of the
Class B Common Stock are included in the computation of basic EPS using
 
the two-class method and, consequently, are presented
separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation
 
as these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stock are
 
not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A Common
 
Stock were not met.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax
 
assets and liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities using enacted
 
tax rates. The measurement of net
deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it
 
is more likely than not that they will
not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31,
 
2018 remain open for examination.
Although management believes its calculations for tax returns are correct and the positions
 
taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm
 
and
its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain
 
tax positions will be sustained upon
examination based on the facts, circumstances and information available at the
 
end of each period.
 
The measurement of uncertain tax
positions is adjusted when new information is available, or when an event occurs
 
that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely than
 
not that the position will be sustained upon
examination by the relevant taxing authority based on the technical merits
 
of the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realized upon
 
settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as an unrecognized
 
tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,
 
if applicable, within the income tax
provision.
- 10 -
Recent Accounting
 
Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848):
Facilitation
of the Effects of Reference Rate Reform on Financial Reporting
.”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP
requirements for modifications on debt instruments, leases, derivatives, and other
 
contracts, related to the expected market transition
from the London Interbank Offered Rate (“LIBOR,”),
 
and certain other floating rate benchmark indices, or collectively, IBORs, to
alternative reference rates. ASU 2020-04 generally considers contract modifications
 
related to reference rate reform to be an event that
does not require contract remeasurement at the modification date nor a reassessment
 
of a previous accounting determination. The
guidance in ASU 2020-04 is optional and may be elected over time, through December
 
31, 2022, as reference rate reform activities
occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial statements.
 
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply
 
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
 
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
 
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
 
31, 2022, as reference rate reform
activities occur. The Company
 
does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the
 
terms of a management agreement.
 
As Manager,
Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its management
 
team, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervision
 
and oversight of Orchid's board of directors and
 
has only
such functions and authority as delegated to it. Bimini Advisors receives a monthly
 
management fee in the amount of:
●
One-twelfth of 1.50% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
 
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
On April 1, 2022, pursuant to the third amendment to the management agreement
 
entered into on November 16, 2021, the
Company began providing certain repurchase agreement trading, clearing and
 
administrative services to Orchid that had been
previously provided by AVM, L.P.
 
under an agreement terminated on March 31, 2022.
 
In consideration for such services, Orchid will
pay the following fees to the Company:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding
 
in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance
 
less than or equal to $5 billion, and
multiplied by 1.0 basis points for any amount of aggregate outstanding principal
 
balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel
 
of the Manager equal to $10,000 per month.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 11 -
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred
 
on its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in
 
the management agreement. The management
agreement has been renewed through February 20, 2023
 
and provides for automatic one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated
 
to pay Bimini Advisors a termination fee equal to three
times the average annual management fee, as defined in the management
 
agreement, before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue from
 
Orchid for the three months ended March 31, 2022 and 2021.
(in thousands)
Three Months Ended March 31,
2022
2021
Management fee
$
2,634
$
1,621
Allocated overhead
441
404
Total
$
3,075
$
2,025
At March 31, 2022 and December 31, 2021, the net amount due from Orchid was
 
approximately $
1.1
 
million and $
1.1
 
million,
respectively.
NOTE 3.
 
MORTGAGE-BACKED SECURITIES
 
The following
 
table presents
 
the Company’s
 
MBS portfolio
 
as of March
 
31, 2022
 
and December
 
31, 2021:
(in thousands)
March 31, 2022
December 31, 2021
Fixed-rate MBS
$
51,644
$
58,029
Interest-Only MBS
3,019
2,759
Inverse Interest-Only MBS
16
15
Total
$
54,679
$
60,803
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
 
March 31,
 
2022, the
 
Company had
 
met all margin
 
call
requirements.
As of March
 
31, 2022
 
and December
 
31, 2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 12 -
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31, 2022
Fair value of securities pledged, including accrued
interest receivable
$
-
$
39,616
$
15,262
$
-
$
54,878
Repurchase agreement liabilities associated with
these securities
$
-
$
39,761
$
15,054
$
-
$
54,815
Net weighted average borrowing rate
-
0.34%
0.35%
-
0.34%
December 31, 2021
Fair value of securities pledged, including accrued
interest receivable
$
-
$
60,859
$
159
$
-
$
61,018
Repurchase agreement liabilities associated with
these securities
$
-
$
58,793
$
85
$
-
$
58,878
Net weighted average borrowing rate
-
0.14%
0.70%
-
0.14%
In addition,
 
cash pledged
 
to counterparties
 
for repurchase
 
agreements
 
was approximately
 
$
3.4
 
million and
 
$
1.4
 
million as
 
of March
31, 2022
 
and December
 
31, 2021,
 
respectively.
If, during
 
the term
 
of a repurchase
 
agreement,
 
a lender
 
files
 
for bankruptcy,
 
the Company
 
might experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable,
and cash posted by the Company as collateral, if any.
 
At March
 
31, 2022
 
and December
 
31, 2021,
 
the Company
 
had an aggregate
amount at
 
risk (the
 
difference
 
between the
 
amount loaned
 
to the Company,
 
including
 
interest
 
payable, and
 
the fair
 
value of securities
 
and
cash pledged
 
(if any),
 
including
 
accrued interest
 
on such securities)
 
with all
 
counterparties
 
of approximately
 
$
3.4
 
million and
 
$
3.5
 
million,
respectively.
 
As of March
 
31, 2022
 
and December
 
31, 2021,
 
the Company
 
did not have
 
an amount
 
at risk with
 
any individual
 
counterparty
greater than
 
10% of the
 
Company’s equity.
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
Bimini’s assets
 
pledged
 
as collateral
 
under its
 
repurchase
 
agreements
 
as of March
 
31, 2022
 
and
December
 
31, 2021.
($ in thousands)
March 31, 2022
December 31, 2021
PT MBS - at fair value
$
51,644
$
58,029
Structured MBS - at fair value
3,020
2,759
Accrued interest on pledged securities
214
230
Restricted cash
3,364
1,391
Total
$
58,242
$
62,409
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 13 -
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
cash pledged
 
to Bimini
 
from counterparties
 
under repurchase
 
agreements
 
as of March
 
31, 2022
 
and
December
 
31, 2021.
 
Cash received
 
as margin
 
is recognized
 
in cash and
 
cash equivalents
 
with a corresponding
 
amount recognized
 
as an
increase in
 
repurchase
 
agreements
 
or other
 
liabilities
 
in the consolidated
 
balance sheets.
($ in thousands)
Assets Pledged to Bimini
March 31, 2022
December 31, 2021
Cash
$
148
$
106
Total
$
148
$
106
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivatives
 
and repurchase
 
agreements
 
are subject
 
to underlying
 
agreements
 
with master
 
netting or
 
similar
arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
 
bankruptcy
 
of either
 
party to the
 
transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
 
basis.
 
The following
 
tables present
 
information
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the
 
Company had
 
presented
 
them on a
 
net basis as
 
of March
 
31,
2022 and
 
December
 
31, 2021.
(in thousands)
Offsetting of Liabilities
Gross Amount Not Offset in the
Net Amount
Consolidated Balance Sheet
Gross Amount
of Liabilities
Financial
Gross Amount
Offset in the
Presented in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
March 31, 2022
Repurchase Agreements
$
54,815
$
-
$
54,815
$
(51,451)
$
(3,364)
$
-
$
54,815
$
-
$
54,815
$
(51,451)
$
(3,364)
$
-
December 31, 2021
Repurchase Agreements
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
The amounts
 
disclosed
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
are limited
 
to the amount
 
sufficient
 
to reduce
 
the
asset or
 
liability
 
presented
 
in the consolidated
 
balance sheet
 
to zero.
 
The fair
 
value of the
 
actual collateral
 
received by
 
or posted
 
to the
same counterparty
 
typically
 
exceeds the
 
amounts presented.
 
See Note
 
5 for a discussion
 
of collateral
 
posted for, or
 
received against,
repurchase
 
obligations
 
and derivative
 
instruments.
NOTE 7.
 
LONG-TERM DEBT
Long-term
 
debt at March
 
31, 2022
 
and December
 
31, 2021
 
is summarized
 
as follows:
(in thousands)
March 31, 2022
December 31, 2021
Junior subordinated debt
$
26,804
$
26,804
Secured note payable
629
635
Total
$
27,433
$
27,439
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 14 -
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 March
 
31, 2022
 
and December
 
31, 2021,
 
the outstanding
 
principal
 
balance on
 
the junior
 
subordinated
 
debt securities
 
owed to
BCTII was
 
$
26.8
 
million.
 
The BCTII
 
trust preferred
 
securities
 
and Bimini
 
Capital's
 
BCTII Junior
 
Subordinated
 
Notes have
 
a rate of interest
that floats
 
at a spread
 
of
3.50
% over the
 
prevailing
 
three-month
 
LIBOR rate.
 
As of March
 
31, 2022,
 
the interest
 
rate was
4.33
%. The BCTII
trust preferred
 
securities
 
and Bimini
 
Capital's
 
BCTII Junior
 
Subordinated
 
Notes require
 
quarterly
 
interest
 
distributions
 
and are redeemable
at Bimini
 
Capital's
 
option, in
 
whole or
 
in part and
 
without penalty.
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes are
 
subordinate
 
and
junior in
 
right of
 
payment to
 
all present
 
and future
 
senior indebtedness.
 
BCTII is
 
a VIE because
 
the holders
 
of the equity
 
investment
 
at risk do
 
not have
 
substantive
 
decision-making
 
ability over
 
BCTII’s
activities.
 
Since Bimini
 
Capital's
 
investment
 
in BCTII’s
 
common equity
 
securities
 
was financed
 
directly by
 
BCTII as
 
a result of
 
its loan of
 
the
proceeds
 
to Bimini
 
Capital,
 
that investment
 
is not considered
 
to be an
 
equity investment
 
at risk.
 
Since Bimini
 
Capital's
 
common share
investment
 
in BCTII
 
is not a variable
 
interest,
 
Bimini Capital
 
is not the
 
primary beneficiary
 
of BCTII.
 
Therefore,
 
Bimini Capital
 
has not
consolidated
 
the financial
 
statements
 
of BCTII
 
into its consolidated
 
financial
 
statements,
 
and this
 
investment
 
is accounted
 
for on the
 
equity
method.
The accompanying
 
consolidated
 
financial
 
statements
 
present
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as a
liability
 
and Bimini
 
Capital's
 
investment
 
in the common
 
equity securities
 
of BCTII
 
as an asset
 
(included
 
in other
 
assets).
 
For financial
statement
 
purposes,
 
Bimini Capital
 
records payments
 
of interest
 
on the Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as interest
 
expense.
Secured
 
Note Payable
On October
 
30, 2019,
 
the Company
 
borrowed
 
$
680,000
 
from a bank.
 
The note
 
is payable
 
in equal
 
monthly principal
 
and interest
installments
 
of approximately
 
$
5,000
 
through October
 
30, 2039.
 
Interest
 
accrues at
 
4.89% through
 
October 30,
 
2024. Thereafter,
 
interest
accrues based
 
on the weekly
 
average
 
yield to the
 
United States
 
Treasury securities
 
adjusted to
 
a constant
 
maturity of
 
5 years,
 
plus
3.25
%.
The note
 
is secured
 
by a mortgage
 
on the Company’s
 
office building.
The table
 
below presents
 
the future
 
scheduled
 
principal
 
payments
 
on the Company’s
 
long-term
 
debt.
 
(in thousands)
Last nine months of 2022
$
17
2023
24
2024
25
2025
26
2026
28
After 2026
27,313
Total
$
27,433
NOTE 8.
 
COMMON STOCK
There were
 
no issuances
 
of Bimini
 
Capital's Class
 
A Common
 
Stock, Class
 
B Common
 
Stock or Class
 
C Common
 
Stock during
 
the
three months
 
ended March
 
31, 2022
 
and 2021.
 
- 15 -
Stock Repurchase
 
Plans
On March 26,
 
2018, the
 
Board of
 
Directors
 
of the Company
 
(the “Board”)
 
approved
 
a Stock Repurchase
 
Plan (the
 
“2018 Repurchase
Plan”).
 
Pursuant
 
to the 2018
 
Repurchase
 
Plan, the
 
Company could
 
purchase
 
up to
500,000
 
shares of
 
its Class
 
A Common
 
Stock from
time to time,
 
subject to
 
certain limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange Act
 
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. Share
 
repurchases
 
may be executed
 
through
 
various
means, including,
 
without limitation,
 
open market
 
transactions.
 
The 2021 Repurchase
 
Plan does
 
not obligate
 
the Company
 
to purchase
any shares,
 
and it expires
 
on September
 
16, 2023.
 
The authorization
 
for the 2021
 
Repurchase
 
Plan may
 
be terminated,
 
increased
 
or
decreased
 
by the Company’s
 
Board of
 
Directors
 
in its discretion
 
at any time.
During the
 
three months
 
ended March
 
31, 2022,
 
the Company
 
repurchased
 
a total of
188,280
 
shares under
 
the 2021
 
Repurchase
Plan at an
 
aggregate
 
cost of approximately
 
$
0.4
 
million, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of $
2.00
 
per share.
From the
 
inception
 
of the 2021
 
Repurchase
 
Plan through
 
March 31,
 
2022, the
 
Company repurchased
 
a total of
280,567
 
shares at
 
an
aggregate
 
cost of approximately
 
$
0.6
 
million, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of $
2.03
 
per share.
NOTE 9.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
 
legal actions arising in the ordinary course of
business.
 
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amount
 
of $
33.1
 
million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of additional
 
indemnity claims totaling $
0.2
 
million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the related MLPA’
 
s.
 
The Company
believes the demands are without merit and intends to defend against the demands
 
vigorously.
 
No provision or accrual has been
recorded related to the Citigroup demands.
Management is not aware of any other significant reported or unreported contingencies
 
at March 31, 2022.
NOTE 10.
 
INCOME TAXES
 
The total income tax (benefit) provision recorded for the three months ended March
 
31, 2022 and 2021 was $
(1.2)
 
million and $
0.5
million, respectively, on consolidated pre-tax book (loss) income of $
(4.7)
 
million and $
1.8
 
million in the three months ended March 31,
2022 and 2021, 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 16 -
NOTE 11.
 
EARNINGS PER SHARE
Shares of
 
Class B common
 
stock,
 
participating
 
and convertible
 
into Class
 
A common
 
stock, are
 
entitled to
 
receive dividends
 
in an
amount equal
 
to the dividends
 
declared
 
on each share
 
of Class A
 
common stock
 
if, and when,
 
authorized
 
and declared
 
by the Board
 
of
Directors.
 
The Class
 
B common
 
stock is included
 
in the computation
 
of basic EPS
 
using the
 
two-class
 
method, and
 
consequently
 
is
presented
 
separately
 
from Class
 
A common
 
stock.
 
Shares of
 
Class B common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A
EPS as the
 
conditions
 
for conversion
 
to Class A
 
common stock
 
were not
 
met at March
 
31, 2022
 
and 2021.
Shares of
 
Class C common
 
stock are
 
not included
 
in the basic
 
EPS computation
 
as these shares
 
do not have
 
participation
 
rights.
Shares of
 
Class C common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A EPS
 
as the conditions
 
for conversion
 
to Class
 
A
common stock
 
were not
 
met at March
 
31, 2022
 
and 2021.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the three
 
months ended
 
March 31,
 
2022 and
 
2021.
(in thousands, except per-share information)
2022
2021
Basic and diluted EPS per Class A common share:
(Loss) income attributable to Class A common shares:
Basic and diluted
$
(3,470)
$
1,286
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
10,514
11,609
Effect of weighting
 
111
-
Weighted average shares-basic and diluted
10,625
11,609
(Loss) income per Class A common share:
Basic and diluted
$
(0.33)
$
0.11
(in thousands, except per-share information)
2022
2021
Basic and diluted EPS per Class B common share:
(Loss) income attributable to Class B common shares:
Basic and diluted
$
(10)
$
4
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
Effect of weighting
 
-
-
Weighted average shares-basic and diluted
32
32
(Loss) income per Class B common share:
Basic and diluted
$
(0.33)
$
0.11
NOTE 12.
 
FAIR VALUE
Fair value
 
is the price
 
that would
 
be received
 
to sell an
 
asset or
 
paid to transfer
 
a liability
 
(an exit
 
price). A
 
fair value
 
measure should
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability, including
 
the assumptions
 
about the
 
risk inherent
in a particular
 
valuation
 
technique,
 
the effect
 
of a restriction
 
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required
disclosures
 
include stratification
 
of balance
 
sheet amounts
 
measured
 
at fair value
 
based on
 
inputs the
 
Company uses
 
to derive
 
fair value
measurements.
 
These stratifications
 
are:
●
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical
 
assets or
 
liabilities
 
traded in
 
active markets
(which include
 
exchanges
 
and over-the-counter
 
markets with
 
sufficient
 
volume),
●
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical
 
or similar
 
instruments
 
in markets
 
that are
 
not active
 
and model-based
 
valuation
 
techniques
 
for which
 
all
significant
 
assumptions
 
are observable
 
in the market,
 
and
- 17 -
●
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 three
months ended
 
March 31,
 
2022 and
 
2021. When
 
determining
 
fair value
 
measurements,
 
the Company
 
considers
 
the principal
 
or most
advantageous
 
market in
 
which it
 
would transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the asset.
When possible,
 
the Company
 
looks to
 
active and
 
observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
 
in
active markets,
 
the Company
 
looks to
 
market observable
 
data for
 
similar assets.
 
Fair value
 
measurements
 
for the retained
 
interests
 
are
generated
 
by a model
 
that requires
 
management
 
to make a
 
significant
 
number of
 
assumptions,
 
and this model
 
resulted
 
in a value
 
of zero
at both March
 
31, 2022
 
and December
 
31, 2021.
The Company's
 
MBS and TBA
 
securities
 
are valued
 
using Level
 
2 valuations,
 
and such valuations
 
currently
 
are determined
 
by the
Company based
 
on independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, when
 
available.
 
Because the
 
price estimates
 
may vary,
the Company
 
must make
 
certain
 
judgments
 
and 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
 
March 31,
 
2022 and
December
 
31, 2021:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 18 -
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
March 31, 2022
Mortgage-backed securities
$
54,679
$
-
$
54,679
$
-
Orchid Island Capital, Inc. common stock
8,435
8,435
-
-
December 31, 2021
Mortgage-backed securities
$
60,803
$
-
$
60,803
$
-
Orchid Island Capital, Inc. common stock
11,679
11,679
-
-
During the
 
three months
 
ended March
 
31, 2022
 
and 2021,
 
there were
 
no transfers
 
of financial
 
assets or
 
liabilities
 
between levels
 
1, 2
or 3.
NOTE 13.
 
SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments: the asset
 
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
 
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist
 
of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
 
Total revenues received under this management
agreement for the three months ended March 31, 2022 and 2021, were approximately $
3.1
 
million and $
2.0
 
million, respectively,
accounting for approximately
77
% and
64
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted
 
by Royal Palm.
 
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the three months ended March 31, 2022 and 2021
 
is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
3,075
$
-
$
-
$
-
$
3,075
Advisory services, other operating segments
(1)
30
-
-
(30)
-
Interest and dividend income
-
894
-
-
894
Interest expense
-
(31)
(256)
(2)
-
(287)
Net revenues
3,105
863
(256)
(30)
3,682
Other expenses
-
(6,358)
-
-
(6,358)
Operating expenses
(4)
(1,543)
(483)
-
-
(2,026)
Intercompany expenses
(1)
-
(30)
-
30
-
Income (loss) before income taxes
$
1,562
$
(6,008)
$
(256)
$
-
$
(4,702)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,025
$
-
$
-
$
-
$
2,025
Advisory services, other operating segments
(1)
36
-
-
(36)
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 19 -
Interest and dividend income
-
1,117
-
-
1,117
Interest expense
-
(40)
(250)
(2)
-
(290)
Net revenues
2,061
1,077
(250)
(36)
2,852
Other income
-
658
1
(3)
-
659
Operating expenses
(4)
(1,103)
(653)
-
-
(1,756)
Intercompany expenses
(1)
-
(36)
-
36
-
Income (loss) before income taxes
$
958
$
1,046
$
(249)
$
-
$
1,755
(1)
Includes fees paid by Royal Palm to Bimini Advisors for advisory services
 
.
(2)
Includes interest on long-term debt.
(3)
Includes gains 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 March 31, 2022 and December 31, 2021
 
were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
March 31, 2022
$
2,063
$
101,412
8,536
$
112,011
December 31, 2021
1,901
111,022
9,162
122,085
NOTE 14. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both March 31, 2022 and December 31, 2021, the Company owned
2,595,357
 
shares of Orchid common stock, representing
approximately
1.5
% and
1.5
%, respectively, of Orchid’s outstanding common stock on such dates.
 
The Company received dividends
on this common stock investment of approximately $
0.4
 
million and $
0.5
 
million during the three months ended March 31, 2022 and
2021, respectively.
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief
Executive Officer and Chairman of the Board of Directors of Orchid, is eligible to receive compensation
 
from Orchid, and owns shares
of common stock of Orchid.
 
In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the
Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of
Directors, receives compensation from Orchid, and owns shares of common stock
 
of Orchid. Robert J. Dwyer and Frank E. Jaumot, our
independent directors, each own shares of common stock of Orchid.
 
- 20 -
ITEM 2. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS.
 
The following discussion of our financial condition and results of operations should
 
be read in conjunction with the consolidated
financial statements and notes to those statements included in Item 1 of this Form
 
10-Q. The discussion may contain certain forward-
looking statements that involve risks and uncertainties. Forward-looking statements
 
are those that are not historical in nature. As a
result of many factors, such as those set forth under “Risk Factors” in our
 
most recent Annual Report on Form 10-K, our actual results
may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding
 
company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital,
 
LLC. We operate in two business segments: the
asset management segment, which includes (a) the investment advisory services provided
 
by Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which
 
includes the investment activities conducted
by Royal Palm.
 
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered
 
with the
Securities and Exchange Commission), are collectively referred to as
 
“Bimini Advisors.”
 
Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement,
 
the Company receives management fees and
expense reimbursements.
 
As manager, Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day
operations.
 
Pursuant to the terms of the management agreement, Bimini Advisors
 
provides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all times
 
subject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated to
 
it.
 
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries
 
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS")
 
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our investment
 
strategy focuses on, and our
portfolio consists of, two categories
 
of Agency MBS: (i) traditional pass-through Agency MBS,
 
such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”)
 
and collateralized mortgage obligations (“CMOs”) issued
by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest only
 
securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types of
 
structured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock Repurchase
 
Plan
On September
 
16, 2021,
 
the Board
 
authorized
 
a share repurchase
 
plan pursuant
 
to Rule 10b5-1
 
of the Securities
 
Exchange
 
Act of
1934 (the
 
“2021 Repurchase
 
Plan”). Pursuant
 
to the 2021
 
Repurchase
 
Plan, we
 
may purchase
 
shares of
 
our Class
 
A Common
 
Stock from
time to time
 
for an aggregate
 
purchase price
 
not to exceed
 
$2.5 million.
 
Share repurchases
 
may be executed
 
through various
 
means,
including,
 
without limitation,
 
open market
 
transactions.
 
The 2021
 
Repurchase
 
Plan does
 
not obligate
 
the Company
 
to purchase
 
any
shares, and
 
it expires
 
on September
 
16, 2023.
 
The authorization
 
for the 2021
 
Repurchase
 
Plan may be
 
terminated,
 
increased
 
or
decreased
 
by the Company’s
 
Board of
 
Directors
 
in its discretion
 
at any time.
 
From
 
the commencement
 
of the 2021
 
Repurchase
 
Plan,
through March
 
31, 2022,
 
we repurchased
 
a total of
 
280,567 shares
 
at an aggregate
 
cost of approximately
 
$0.6 million,
 
including
commissions
 
and fees,
 
for a weighted
 
average price
 
of $2.03
 
per share.
 
During the
 
three months
 
ended March
 
31, 2022,
 
the Company
repurchased
 
a total of
 
188,280 shares
 
at an aggregate
 
cost of approximately
 
$0.4 million,
 
including
 
commissions
 
and fees,
 
for a weighted
average price
 
of $2.00
 
per share.
- 21 -
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;
●
the equity markets and the ability of Orchid to raise additional capital;
 
●
geo-political events that affect the U.S. and international economies, such as the current crisis
 
in Ukraine; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
 
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments;
●
the requirements to qualify for a registration exemption under the Investment Company Act;
●
our ability to use net operating loss carryforwards and net capital loss carryforwards
 
to reduce our taxable income;
●
the impact of possible future changes in tax laws or tax rates;
●
increases in our cost of funds resulting from increases in the Fed Funds rate that
 
are controlled by the Fed and are likely to
continue to occur in 2022; 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
 
three months
 
ended March
 
31, 2022,
 
as compared
 
to the three
months ended
 
March 31,
 
2021.
Net (Loss)
 
Income Summary
Consolidated
 
net loss for
 
the three
 
months ended
 
March 31,
 
2022 was
 
$3.5 million,
 
or $0.33
 
basic and
 
diluted loss
 
per share
 
of Class
A Common
 
Stock, as
 
compared
 
to a 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
 
March 31,
 
2021. The
 
components
 
of net (loss)
 
income for
 
the three
 
months ended
 
March 31,
2022 and
 
2021, along
 
with the
 
changes in
 
those components
 
are presented
 
in the table
 
below.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 22 -
(in thousands)
Three Months Ended March 31,
2022
2021
Change
Advisory services revenues
$
3,075
$
2,025
$
1,050
Interest and dividend income
894
1,117
(223)
Interest expense
(287)
(289)
2
Net revenues
3,682
2,853
829
Other (expense) income
(6,358)
658
(7,016)
Expenses
(2,025)
(1,757)
(268)
Net (loss) income before income tax (benefit) provision
(4,701)
1,754
(6,455)
Income tax (benefit) provision
(1,221)
464
(1,685)
Net (loss) income
$
(3,480)
$
1,290
$
(4,770)
GAAP and
 
Non-GAAP
 
Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to
hedge a portion of the interest rate risk on repurchase agreements in a rising
 
rate environment.
 
We have not designated our derivative financial instruments as hedge accounting relationships,
 
but rather hold them for
economic hedging purposes. Changes in fair value of these instruments are presented
 
in a separate line item in our consolidated
statements of operations and not included in interest expense. As such, for financial reporting
 
purposes, interest expense and cost of
funds are not impacted by the fluctuation in value of the derivative instruments.
 
For the purpose of computing economic net interest income and ratios relating
 
to cost of funds measures, GAAP interest
expense, as reflected in our consolidated statements of operations, is
 
adjusted to reflect the realized and unrealized gains or losses on
certain derivative instruments the Company uses that pertain to each period presented.
 
We believe that adjusting our GAAP interest
expense for the periods presented by the gains or losses on these derivative
 
instruments may not accurately reflect our economic
interest expense for these periods. The reason is that these derivative instruments
 
may cover periods that extend into the future, not
just the current period.
 
Any realized or unrealized gains or losses on the derivative instruments reflect
 
the change in market value of
the instrument caused by changes in underlying interest rates applicable to
 
the term covered by the instrument, which changes are
reflective of the future periods covered by the derivative instrument, not just
 
the current period.
For each period presented, we have combined the effects of the derivative financial instruments
 
in place for the respective period
with the actual interest expense incurred on borrowings to reflect total economic
 
interest expense for the applicable period. Interest
expense, including the effect of derivative instruments for the period, is referred to as economic interest
 
expense. Net interest income,
when calculated to include the effect of derivative instruments for the period, is referred to
 
as economic net interest income. This
presentation includes gains or losses on all contracts in effect during the reporting period,
 
covering the current period as well as
periods in the future.
We believe that economic interest expense and economic net interest income provide
 
meaningful information to consider, in
addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its
financial position and performance without the effects of certain transactions and GAAP
 
adjustments that are not necessarily indicative
of our current investment portfolio or operations. The unrealized gains or losses
 
on derivative instruments presented in our
consolidated statements of operations are not necessarily representative
 
of the total interest expense that we will ultimately realize.
This is because as interest rates move up or down in the future, the gains
 
or losses we ultimately realize, and which will affect our total
interest expense in future periods, may differ from the unrealized gains or losses recognized
 
as of the reporting date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 23 -
Our presentation of the economic value of our hedging strategy has important
 
limitations. First, other market participants may
calculate economic interest expense and economic net interest income
 
differently than the way we calculate them. Second, while we
believe that the calculation of the economic value of our hedging strategy described
 
above helps to present our financial position and
performance, it may be of limited usefulness as an analytical tool. Therefore, the
 
economic value of our investment strategy should not
be viewed in isolation and is not a substitute for interest expense and net
 
interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments discussed
 
above to interest expense shown for each period relative
to our derivative instruments, and the consolidated statements of operations
 
line item, gains (losses) on derivative instruments,
calculated in accordance with GAAP for each quarter in 2022 and 2021.
Gains (Losses) on Futures Contracts
(in thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Repurchase
Long-Term
Repurchase
Long-Term
Statement of
Agreements
Debt
Total
Agreements
Debt
Total
Operations
Three Months Ended
March 31, 2022
$
(185)
$
(48)
$
(233)
$
185
$
48
$
233
$
-
December 31, 2021
(707)
(60)
(767)
707
60
767
-
September 30, 2021
(709)
(57)
(766)
709
57
766
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
Economic Net Portfolio Interest Income
(in thousands)
Interest Expense on Repurchase Agreements
Net Portfolio
Effect of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
Three Months Ended
March 31, 2022
$
491
$
31
$
(185)
$
216
$
460
$
275
December 31, 2021
511
21
(707)
728
490
(217)
September 30, 2021
537
24
(709)
733
513
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 24 -
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
Three Months Ended
March 31, 2022
$
460
$
275
$
256
$
(48)
$
304
$
204
$
(29)
December 31, 2021
490
(217)
249
(60)
309
241
(526)
September 30, 2021
513
(196)
248
(57)
305
265
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
571
(137)
250
(58)
308
321
(445)
(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 three months ended March 31, 2022 and 2021
 
is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2022
Advisory services, external customers
$
3,075
$
-
$
-
$
-
$
3,075
Advisory services, other operating segments
(1)
30
-
-
(30)
-
Interest and dividend income
-
894
-
-
894
Interest expense
-
(31)
 
(256)
(2)
-
(287)
Net revenues
3,105
863
(256)
(30)
3,682
Other expenses
-
(6,358)
-
-
(6,358)
Operating expenses
(4)
(1,543)
(483)
-
-
(2,026)
Intercompany expenses
(1)
-
(30)
-
30
-
Income (loss) before income taxes
$
1,562
$
(6,008)
$
(256)
$
-
$
(4,702)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
2,025
$
-
$
-
$
-
$
2,025
Advisory services, other operating segments
(1)
36
-
-
(36)
-
Interest and dividend income
-
1,117
-
-
1,117
Interest expense
-
(40)
 
(250)
(2)
-
(290)
Net revenues
2,061
1,077
(250)
(36)
2,852
Other income
-
658
 
1
(3)
-
659
Operating expenses
(4)
(1,103)
(653)
-
-
(1,756)
Intercompany expenses
(1)
-
(36)
-
36
-
Income (loss) before income taxes
$
958
$
1,046
$
(249)
$
-
$
1,755
(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes gains 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 25 -
Assets in each reportable segment were as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Total
March 31, 2022
$
2,063
101,412
$
8,536
$
112,011
December 31, 2021
1,901
111,022
9,162
122,085
Asset Management
 
Segment
Advisory Services
 
Revenue
Advisory services
 
revenue
 
consists
 
of management
 
fees and
 
overhead
 
reimbursements
 
charged
 
to Orchid
 
for the management
 
of its
portfolio
 
pursuant
 
to the terms
 
of a management
 
agreement.
 
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.50% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
 
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses
 
incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management
 
agreement. The management agreement has been
renewed through February 2023 and provides for automatic one-year extension
 
options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee
 
equal to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic renewal
 
term.
The following table summarizes the advisory services revenue received from
 
Orchid in each quarter during 2022 and 2021.
(in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
March 31, 2022
$
5,545,844
$
853,576
$
2,634
$
441
$
3,075
December 31, 2021
6,056,259
806,382
2,587
443
3,030
September 30, 2021
5,136,331
672,384
2,157
390
2,547
June 30, 2021
4,504,887
542,679
1,791
395
2,186
March 31, 2021
4,032,716
456,687
1,621
404
2,025
Investment Portfolio Segment
Net Portfolio Interest Income
We define
 
net portfolio
 
interest
 
income as
 
interest
 
income on
 
MBS less
 
interest
 
expense on
 
repurchase
 
agreement
 
funding.
 
During
the three
 
months ended
 
March 31,
 
2022, we
 
generated
 
$0.5 million
 
of net portfolio
 
interest
 
income, consisting
 
of $0.5 million
 
of interest
income from
 
MBS assets
 
offset by
 
$31,000 of
 
interest
 
expense on
 
repurchase
 
liabilities.
 
For the
 
comparable
 
period ended
 
March 31,
2021, we
 
generated
 
$0.6 million
 
of net portfolio
 
interest
 
income, consisting
 
of $0.6 million
 
of interest
 
income from
 
MBS assets
 
offset by
$40,000 of
 
interest
 
expense on
 
repurchase
 
liabilities.
 
The $0.1
 
million decrease
 
in interest
 
income for
 
the three
 
months ended
 
March 31,
2022 was
 
due to a
 
14 basis point
 
("bp") decrease
 
in yields
 
earned on
 
the portfolio,
 
combined with
 
a $11.3 million
 
decrease
 
in average
MBS balances.
 
The decrease
 
in interest
 
expense for
 
the three
 
months ended
 
March 31,
 
2022 was
 
due to a
 
$12.3 million
 
decrease
 
in
average repurchase
 
liabilities,
 
combined with
 
a 1 bp decrease
 
in cost of
 
funds.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 26 -
Our economic
 
interest
 
expense
 
on repurchase
 
liabilities
 
for the
 
three months
 
ended March
 
31, 2022
 
and 2021
 
was $0.2
 
million and
$0.7 million,
 
respectively, resulting
 
in $0.3 million
 
and ($0.1)
 
million of
 
economic net
 
portfolio
 
interest
 
income, 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 three
 
months ended
 
March
31, 2022
 
and for each
 
quarter in
 
2021 on both
 
a GAAP and
 
economic basis.
($ in thousands)
Average
Yield on
Average
Interest Expense
Average Cost of Funds
MBS
Interest
Average
Repurchase
GAAP
Economic
GAAP
Economic
Held
(1)
Income
(2)
MBS
Agreements
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
March 31, 2022
$
57,741
$
491
3.40%
$
56,846
$
31
$
216
0.22%
1.52%
December 31, 2021
62,597
511
3.27%
61,019
21
728
0.14%
4.77%
September 30, 2021
66,692
537
3.22%
67,253
24
733
0.14%
4.35%
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%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
March 31, 2022
$
460
$
275
3.18%
1.88%
December 31, 2021
490
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.13)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
(1)
Portfolio yields and costs of borrowings presented in the table above and the
 
tables on page 27 are calculated based on the average balances
of the underlying investment portfolio/repurchase agreement balances and
 
are annualized for the quarterly periods presented. Average
balances for quarterly periods are calculated using two data points, the beginning
 
and ending balances.
 
(2)
Economic interest expense and economic net interest income presented
 
in the table above and the tables on page 27 include the effect
 
of
derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
 
instrument hedges attributed to the period related to hedging activities
divided by average MBS held.
(4)
Economic Net Interest Spread is calculated by subtracting average economic cost
 
of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest income was $0.5 million for the three months ended March 31, 2022
 
and $0.6 million for the three months ended
March 31, 2021.
 
Average MBS holdings were $57.7 million and $69.0 million for the three months ended
 
March 31, 2022 and 2021,
respectively. The $0.1 million decrease in interest income was due to the $11.3 million decrease in average MBS holdings, combined
with a 14 basis point ("bp") decrease in yields.
 
The table below presents the average portfolio size, income and yields of our respective
 
sub-portfolios, consisting of structured
MBS and pass-through MBS (“PT MBS”) for the three months ended March 31,
 
2022 and for each quarter in 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 27 -
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
Three Months Ended
March 31, 2022
$
54,836
$
2,905
$
57,741
$
472
$
19
$
491
3.45%
2.61%
3.40%
December 31, 2021
59,701
2,896
62,597
500
11
511
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
533
4
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
 
outstanding
 
balances
 
under repurchase
 
agreements
 
were $56.8
 
million and
 
$69.1 million,
 
generating
 
interest
 
expense of
$31,000 and
 
$40,000 for
 
the three
 
months ended
 
March 31,
 
2022 and
 
2021, respectively.
 
Our average
 
cost of funds
 
was 0.22%
 
and
0.23% for
 
three months
 
ended March
 
31, 2022
 
and 2021,
 
respectively.
 
There was
 
a 1 bp decrease
 
in the average
 
cost of funds
 
and a
$12.3 million
 
decrease
 
in average
 
outstanding
 
balances under
 
repurchase
 
agreements
 
during the
 
three months
 
ended March
 
31, 2022
 
as
compared
 
to the three
 
months ended
 
March 31,
 
2021.
 
 
Our economic
 
interest expense
 
was $0.2 million
 
and $0.7 million
 
for the three months
 
ended March
 
31, 2022 and 2021,
 
respectively.
There was a
 
281 bp decrease
 
in the average
 
economic cost
 
of funds to
 
1.52% for the
 
three months
 
ended March
 
31, 2022 from
 
4.33% for
the three
 
months ended
 
March 31,
 
2021.
 
Because all
 
of our repurchase
 
agreements
 
are short-term,
 
changes in
 
market rates
 
have a more
 
immediate
 
impact on
 
our interest
expense.
 
The Company’s
 
average
 
cost of funds
 
calculated
 
on a GAAP
 
basis was
 
3 bps below
 
the average
 
one-month
 
LIBOR and
 
54 bps
below to
 
the average
 
six-month LIBOR
 
for the quarter
 
ended March
 
31, 2022.
 
The Company’s
 
average economic
 
cost of funds
 
was 127
bps above
 
the average
 
one-month
 
LIBOR and
 
76 bps above
 
the average
 
six-month LIBOR
 
for the quarter
 
ended March
 
31, 2022.
 
The
average term
 
to maturity
 
of the outstanding
 
repurchase
 
agreements
 
increased
 
from 16 days
 
at December
 
31, 2021
 
to 26 days
 
at March
31, 2022.
The tables
 
below present
 
the average
 
outstanding
 
balances under
 
all repurchase
 
agreements,
 
interest
 
expense and
 
average
economic cost
 
of funds,
 
and average
 
one-month
 
and six-month
 
LIBOR rates
 
for the three
 
months ended
 
March 31,
 
2022 and
 
for each
quarter in
 
2021 on both
 
a GAAP and
 
economic basis.
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Agreements
Basis
Basis
Basis
Basis
Three Months Ended
March 31, 2022
$
56,846
$
31
$
216
0.22%
1.52%
December 31, 2021
61,019
21
728
0.14%
4.77%
September 30, 2021
67,253
24
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 28 -
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
March 31, 2022
0.25%
0.76%
(0.03)%
(0.54)%
1.27%
0.76%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
Dividend Income
At both March
 
31, 2022
 
and December
 
31, 2021,
 
we owned
 
2,595,357
 
shares of
 
Orchid common
 
stock.
 
Orchid paid
 
total dividends
 
of
$0.155 and
 
$0.195 and
 
per share
 
during the
 
three months
 
ended March
 
31, 2022
 
and 2021,
 
respectively.
 
During the
 
three months
 
ended
March 31,
 
2022 and
 
2021, we
 
received dividends
 
on this common
 
stock investment
 
of approximately
 
$0.4
 
million and
 
$0.5
 
million,
respectively.
Long-Term Debt
Junior Subordinated Debt
Interest
 
expense on
 
our junior
 
subordinated
 
debt securities
 
was approximately
 
$0.25 million
 
for the three-month
 
period ended
 
March
31, 2022,
 
compared
 
to approximately
 
$0.24 million
 
for the same
 
period in
 
2021.
 
The average
 
rate of interest
 
paid for
 
the three
 
months
ended March
 
31, 2022
 
was 3.82%
 
compared
 
to 3.71%
 
for the comparable
 
period in
 
2021. The
 
junior subordinated
 
debt securities
 
pay
interest
 
at a floating
 
rate.
 
The rate is
 
adjusted quarterly
 
and set
 
at a spread
 
of 3.50%
 
over the
 
prevailing
 
three-month
 
LIBOR rate
 
on the
determination
 
date.
 
As of March
 
31, 2022,
 
the interest
 
rate was 4.33%.
Secured Note Payable
On October 30, 2019, the Company borrowed $680,000 from a bank. The note
 
is payable in equal monthly principal and interest
installments of approximately $5,000 through October 30, 2039. Interest accrues
 
at 4.89% through October 30, 2024. Thereafter,
interest accrues based on the weekly average yield to the United States Treasury securities adjusted to
 
a constant maturity of 5 years,
plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Gains or Losses and Other Income
The table
 
below presents
 
our gains
 
or losses
 
and other
 
income for
 
the three
 
months ended
 
March 31,
 
2022 and
 
2021.
(in thousands)
2022
2021
Change
Unrealized losses on MBS
$
(3,114)
$
(1,392)
$
(1,722)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(3,244)
2,050
(5,294)
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.
 
We did not
 
sell any MBS
 
during the
 
three months
 
ended March
 
31, 2022
 
and 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 29 -
The fair
 
value of our
 
MBS portfolio
 
and derivative
 
instruments,
 
and the gains
 
(losses) reported
 
on those
 
financial
 
instruments,
 
are
sensitive
 
to changes
 
in interest
 
rates. The
 
table below
 
presents
 
historical
 
interest
 
rate data
 
as of each
 
quarter end
 
during 2022
 
and
 
2021.
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)
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
(1)
Historical 5 Year and 10
 
U.S. Year Treasury
 
Rates are obtained from quoted end of day prices on the Chicago Board Options
 
Exchange.
(2)
Historical 15 Year and
 
30 Year Fixed
 
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
 
Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
 
Administration Ltd.
Operating Expenses
For the three
 
months ended
 
March 31,
 
2022, our
 
total operating
 
expenses were
 
approximately
 
$2.0 million
 
compared
 
to
approximately
 
$1.8 million
 
for the three
 
months ended
 
March 31,
 
2021. The
 
table below
 
presents
 
a breakdown
 
of operating
 
expenses for
the three
 
months ended
 
March 31,
 
2022 and
 
2021.
(in thousands)
2022
2021
Change
Compensation and benefits
$
1,344
$
1,124
$
220
Legal fees
35
44
(9)
Accounting, auditing and other professional fees
109
93
16
Directors’ fees and liability insurance
196
188
8
Other G&A expenses
341
308
33
$
2,025
$
1,757
$
268
Income Tax Provision
We recorded
 
an income
 
tax benefit
 
for the three
 
months ended
 
March 31,
 
2022 of approximately
 
$1.2 million
 
on a consolidated
 
pre-
tax book loss
 
of $4.7 million
 
We recorded
 
an income
 
tax provision
 
for the three
 
months ended
 
March 31,
 
2021 of approximately
 
$0.5
million on
 
consolidated
 
pre-tax book
 
income of
 
$1.8 million.
Financial
 
Condition:
Mortgage-Backed Securities
As of March
 
31, 2022,
 
our MBS
 
portfolio
 
consisted
 
of $54.7 million
 
of agency
 
or government
 
MBS at fair
 
value and
 
had a weighted
average coupon
 
of 3.41%.
 
During the
 
three months
 
ended March
 
31, 2022,
 
we received
 
principal
 
repayments
 
of $3.0 million
 
compared
 
to
$3.3 million
 
for the comparable
 
period ended
 
March 31,
 
2021.
 
The average
 
prepayment
 
speeds for
 
the quarters
 
ended March
 
31, 2022
and 2021
 
were 20.9%
 
and 18.3%,
 
respectively.
The following
 
table presents
 
the three-month
 
constant prepayment
 
rate (“CPR”)
 
experienced
 
on our structured
 
and PT MBS
 
sub-
portfolios,
 
on an annualized
 
basis, for
 
the quarterly
 
periods presented.
 
CPR is a
 
method of
 
expressing
 
the prepayment
 
rate for
 
a mortgage
pool that
 
assumes that
 
a constant
 
fraction
 
of the remaining
 
principal
 
is prepaid
 
each month
 
or year. Specifically,
 
the CPR
 
in the chart
below represents
 
the three-month
 
prepayment
 
rate of the
 
securities
 
in the respective
 
asset category.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 30 -
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
March 31, 2022
18.5
25.6
20.9
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
The following
 
tables summarize
 
certain characteristics
 
of our PT
 
MBS and structured
 
MBS as of
 
March 31,
 
2022 and
 
December
 
31,
2021:
 
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31, 2022
Fixed Rate MBS
$
51,644
94.4%
3.69%
327
1-Sep-51
Interest-Only MBS
3,019
5.6%
2.84%
304
15-May-51
Inverse Interest-Only MBS
16
0.0%
5.60%
206
15-May-51
Total MBS Portfolio
$
54,679
100.0%
3.41%
326
1-Sep-51
December 31, 2021
Fixed Rate MBS
$
58,029
95.4%
3.69%
330
1-Sep-51
Interest-Only MBS
2,759
4.6%
2.86%
306
15-May-51
Inverse Interest-Only MBS
15
0.0%
5.90%
209
15-May-39
Total MBS Portfolio
$
60,803
100.0%
3.41%
329
1-Sep-51
($ in thousands)
March 31, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
34,936
63.9%
$
39,703
65.3%
Freddie Mac
19,743
36.1%
21,100
34.7%
Total Portfolio
$
54,679
100.0%
$
60,803
100.0%
March 31, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
109.33
$
109.33
Weighted Average Structured Purchase Price
$
4.81
$
4.81
Weighted Average Pass-through Current Price
$
102.78
$
109.30
Weighted Average Structured Current Price
$
11.92
$
9.87
Effective Duration
(1)
1.720
2.103
(1)
Effective duration is the approximate percentage change in price
 
for a 100 basis point change in rates.
 
An effective duration of 1.720 indicates
that an interest rate increase of 1.0% would be expected to cause a 1.720% decrease in the
 
value of the MBS in our investment portfolio at
March 31, 2022.
 
An effective duration of 2.103 indicates that an interest rate increase
 
of 1.0% would be expected to cause a 2.103% decrease
in the value of the MBS in our investment portfolio at December 31, 2021.
 
These figures include the structured securities in the portfolio but
 
do
include the effect of our hedges. Effective duration quotes for
 
individual investments are obtained from The Yield
 
Book, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 31 -
The following
 
table presents
 
a summary
 
of our portfolio
 
assets acquired
 
during the
 
three months
 
ended March
 
31, 2022
 
and 2021.
($ in thousands)
Three Months Ended March 31,
2022
2021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
-
$
-
-
$
12,368
$
104.84
1.19%
Our portfolio
 
of PT MBS
 
is typically
 
comprised
 
of adjustable-rate
 
MBS, fixed-rate
 
MBS and hybrid
 
adjustable-rate
 
MBS. We generally
seek to acquire
 
low duration
 
assets that
 
offer high
 
levels of
 
protection
 
from mortgage
 
prepayments
 
provided
 
that they
 
are reasonably
priced by
 
the market.
 
The stated
 
contractual
 
final maturity
 
of the mortgage
 
loans underlying
 
our portfolio
 
of PT MBS
 
generally ranges
 
up
to 30 years.
 
However, the
 
effect of prepayments
 
of the underlying
 
mortgage
 
loans tends
 
to shorten
 
the resulting
 
cash flows
 
from our
investments
 
substantially.
 
Prepayments
 
occur for
 
various reasons,
 
including
 
refinancing
 
of underlying
 
mortgages,
 
loan payoffs
 
in
connection
 
with home
 
sales, and
 
borrowers
 
paying more
 
than their
 
scheduled
 
loan payments,
 
which accelerates
 
the amortization
 
of the
loans.
 
The duration
 
of our IO
 
and IIO portfolio
 
will vary
 
greatly depending
 
on the structural
 
features
 
of the securities.
 
While prepayment
activity will
 
always affect
 
the cash
 
flows associated
 
with the
 
securities,
 
the interest
 
only nature
 
of IO’s may
 
cause their
 
durations
 
to become
extremely
 
negative when
 
prepayments
 
are high,
 
and less negative
 
when prepayments
 
are low. Prepayments
 
affect the
 
duration
 
of IIO’s
similarly, but the
 
floating rate
 
nature of
 
the coupon
 
of IIOs (which
 
is inversely
 
related to
 
the level
 
of one month
 
LIBOR) causes
 
their price
movements
 
- and model
 
duration
 
- to be affected
 
by changes
 
in both
 
prepayments
 
and one month
 
LIBOR - both
 
current and
 
anticipated
levels.
 
As a result,
 
the duration
 
of IIO securities
 
will also
 
vary greatly.
Prepayments
 
on the loans
 
underlying
 
our MBS
 
can alter
 
the timing
 
of the cash
 
flows received
 
by us. As
 
a result,
 
we gauge
 
the interest
rate sensitivity
 
of its assets
 
by measuring
 
their effective
 
duration.
 
While modified
 
duration
 
measures
 
the price
 
sensitivity
 
of a bond
 
to
movements
 
in interest
 
rates, effective
 
duration
 
captures
 
both the
 
movement in
 
interest
 
rates and
 
the fact
 
that cash
 
flows to a
 
mortgage
related security
 
are altered
 
when interest
 
rates move.
 
Accordingly, when
 
the contract
 
interest
 
rate on a
 
mortgage
 
loan is substantially
above prevailing
 
interest
 
rates in
 
the market,
 
the effective
 
duration
 
of securities
 
collateralized
 
by such loans
 
can be quite
 
low because
 
of
expected prepayments.
 
We face
 
the risk that
 
the market
 
value of our
 
PT MBS assets
 
will increase
 
or decrease
 
at different
 
rates than
 
that of our
 
structured
MBS or liabilities,
 
including
 
our hedging
 
instruments.
 
Accordingly, we
 
assess our
 
interest
 
rate risk
 
by estimating
 
the duration
 
of our assets
and the duration
 
of our liabilities.
 
We generally
 
calculate
 
duration
 
and effective
 
duration
 
using various
 
third-party
 
models or
 
obtain these
quotes from
 
third parties.
 
However, empirical
 
results and
 
various third-party
 
models may
 
produce
 
different duration
 
numbers for
 
the same
securities.
 
The following
 
sensitivity
 
analysis
 
shows the
 
estimated
 
impact on
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments
 
and hedge
positions
 
as of March
 
31, 2022,
 
assuming rates
 
instantaneously
 
fall 100 bps,
 
rise 100
 
bps and
 
rise 200
 
bps, adjusted
 
to reflect
 
the impact
of convexity, which
 
is the measure
 
of the sensitivity
 
of our hedge
 
positions
 
and Agency
 
MBS’ effective
 
duration
 
to movements
 
in interest
rates.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 32 -
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
51,644
$
1,625
$
(2,302)
$
(5,017)
3.15%
(4.46)%
(9.72)%
Interest-Only MBS
3,019
(891)
716
1,100
(29.51)%
23.70%
36.44%
Inverse Interest-Only MBS
16
1
(2)
(5)
5.51%
(14.75)%
(29.76)%
Total MBS
 
Portfolio
$
54,679
$
735
$
(1,588)
$
(3,922)
1.34%
(2.91)%
(7.17)%
(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 March
 
31, 2022,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number
 
of commercial
banks and
 
other financial
 
institutions
 
and had borrowings
 
in place with
 
five of these
 
counterparties.
 
We believe
 
these facilities
 
provide
borrowing
 
capacity in
 
excess of
 
our needs.
 
None of these
 
lenders are
 
affiliated
 
with us.
 
These borrowings
 
are secured
 
by our MBS.
 
As of March
 
31, 2022,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$54.8 million
 
with a net
weighted
 
average borrowing
 
cost of 0.34%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
 
14
to 46 days,
 
with a weighted
 
average maturity
 
of 26 days.
 
Securing
 
the repurchase
 
agreement
 
obligation
 
as of March
 
31, 2022
 
are MBS
with an estimated
 
fair value,
 
including
 
accrued interest,
 
of $54.9 million
 
and a weighted
 
average maturity
 
of 326 months.
 
Through May
 
12,
2022, we
 
have been
 
able to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to
 
those that
 
existed at
 
March 31,
 
2022 with
maturities
 
through May
 
25, 2022.
The table below presents information about our period-end, maximum and average
 
repurchase agreement obligations for each
quarter in 2022 and 2021.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
March 31, 2022
$
54,815
$
58,772
$
56,846
$
(2,031)
(3.57)%
December 31, 2021
58,878
62,139
61,019
(2,141)
(3.51)%
September 30, 2021
63,160
72,047
67,253
(4,093)
(6.09)%
June 30, 2021
71,346
72,372
72,241
(895)
(1.24)%
March 31, 2021
73,136
76,004
69,104
4,032
5.83%
Liquidity and Capital Resources
Liquidity
 
is our ability
 
to turn non-cash
 
assets into
 
cash, purchase
 
additional
 
investments,
 
repay principal
 
and interest
 
on borrowings,
fund overhead
 
and fulfill
 
margin calls.
 
We have both
 
internal
 
and external
 
sources of
 
liquidity. However,
 
our material
 
unused sources
 
of
liquidity
 
include cash
 
balances,
 
unencumbered
 
assets and
 
our ability
 
to sell encumbered
 
assets to
 
raise cash.
 
Our balance
 
sheet also
generates
 
liquidity
 
on an on-going
 
basis through
 
payments of
 
principal
 
and interest
 
we receive
 
on our MBS
 
portfolio
 
and dividends
 
we
receive on
 
our investment
 
in Orchid
 
common stock.
 
- 33 -
Internal
 
Sources of
 
Liquidity
Our internal
 
sources of
 
liquidity
 
include our
 
cash balances,
 
unencumbered
 
assets and
 
our ability
 
to liquidate
 
our encumbered
 
security
holdings.
 
Our balance
 
sheet also
 
generated
 
liquidity
 
on an ongoing
 
basis through
 
payments
 
of principal
 
and interest
 
we receive
 
on our
MBS portfolio
 
and dividends
 
we receive
 
on our investment
 
in Orchid
 
common stock.
 
We have previously,
 
and may
 
again in the
 
future, employ
 
a hedging
 
strategy
 
that typically
 
involves
 
taking short
 
positions
 
in Eurodollar
futures,
 
T-Note futures,
 
TBAs or other
 
instruments.
 
When the
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
 
move in price
 
in such a
 
way
that we do
 
not receive
 
enough cash
 
through margin
 
calls to offset
 
the Eurodollar
 
related margin
 
calls. If
 
this were
 
to occur in
 
sufficient
magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size
 
of the levered
 
portfolio,
 
pledge additional
 
structured
 
securities
 
to raise
funds or
 
risk operating
 
the portfolio
 
with less
 
liquidity.
External
 
Sources of
 
Liquidity
Our primary
 
external
 
sources of
 
liquidity
 
are our ability
 
to (i) borrow
 
under master
 
repurchase
 
agreements
 
and (ii)
 
use the TBA
 
security
market. Our
 
borrowing
 
capacity will
 
vary over
 
time as the
 
market value
 
of our interest
 
earning assets
 
varies. Our
 
master repurchase
agreements
 
have no stated
 
expiration,
 
but can be
 
terminated
 
at any time
 
at our option
 
or at the
 
option of
 
the counterparty.
 
However, once
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase
 
agreement
 
has been
 
entered into,
 
it generally
 
may not be
 
terminated
 
by
either party.
 
A negotiated
 
termination
 
can occur, but
 
may involve
 
a fee to
 
be paid by
 
the party
 
seeking to
 
terminate
 
the repurchase
agreement
 
transaction.
 
Under our
 
repurchase
 
agreement
 
funding arrangements,
 
we are required
 
to post margin
 
at the initiation
 
of the borrowing.
 
The margin
posted represents
 
the haircut,
 
which is a
 
percentage
 
of the market
 
value of the
 
collateral
 
pledged.
 
To the extent the
 
market value
 
of the
asset collateralizing
 
the financing
 
transaction
 
declines,
 
the market
 
value of our
 
posted margin
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases
 
in value,
 
we would
 
be over collateralized
 
and we
would be
 
entitled to
 
have excess
 
margin returned
 
to us by the
 
counterparty.
 
Our lenders
 
typically
 
value our
 
pledged securities
 
daily to
ensure the
 
adequacy of
 
our margin
 
and make margin
 
calls as
 
needed, as
 
do we.
 
Typically, but not
 
always, the
 
parties agree
 
to a minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis. Our
 
master repurchase
 
agreements
do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis.
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 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 March
 
31, 2022,
 
we had cash
and cash equivalents
 
of $4.6 million.
 
We generated
 
cash flows
 
of $3.5 million
 
from principal
 
and interest
 
payments on
 
our MBS
 
portfolio
and had average
 
repurchase
 
agreements
 
outstanding
 
of $56.8
 
million during
 
the three
 
months ended
 
March 31,
 
2022.
 
In addition,
 
during
the three
 
months ended
 
March 31,
 
2022, we
 
received approximately
 
$3.1 million
 
in management
 
fees and
 
expense reimbursements
 
as
manager of
 
Orchid and
 
approximately
 
$0.4 million
 
in dividends
 
from our investment
 
in Orchid
 
common stock.
- 34 -
Outlook
Orchid Island
 
Capital Inc.
Orchid Island
 
Capital reported
 
a first quarter
 
2022 loss
 
of $148.7
 
million and
 
its shareholders
 
equity declined
 
from $768.1
 
million to
$592.4 million.
 
The market
 
conditions
 
described
 
below led
 
to the loss
 
as agency
 
MBS underperformed
 
comparable
 
duration
 
treasuries
and the Orchid’s
 
hedge positions.
 
The decline
 
in shareholders
 
equity is
 
likely to
 
lead to reduced
 
management
 
fees at Bimini
 
Advisors
going forward
 
if Orchid
 
is unable
 
to rebuild
 
its shareholders
 
equity since
 
the amount
 
of the management
 
fees paid
 
to the Company
 
are a
function of
 
Orchid’s equity.
 
Orchid also
 
reduced its
 
monthly dividend
 
twice during
 
the first
 
quarter from
 
$0.065 per
 
month to $0.045
 
per
month.
 
The reduction
 
in the dividend
 
decreased
 
the monthly
 
dividend revenues
 
to the Company.
Orchid is
 
obligated
 
to reimburse
 
us for direct
 
expenses paid
 
on its behalf
 
and to pay
 
to us Orchid’s
 
pro rata
 
share of
 
overhead as
defined in
 
the management
 
agreement.
 
As a stockholder
 
of Orchid,
 
we will also
 
continue to
 
share in
 
distributions,
 
if any, paid by
 
Orchid to
its stockholders.
 
Our operating
 
results are
 
also impacted
 
by changes
 
in the market
 
value of our
 
holdings of
 
Orchid common
 
shares,
although
 
these market
 
value changes
 
do not impact
 
our cash
 
flows from
 
Orchid.
Economic Summary
The first
 
quarter of
 
2022 was
 
a transition
 
period whereby
 
the Fed migrated
 
from reluctantly
 
acknowledging
 
they needed
 
to start
removing the
 
emergency
 
monetary
 
policy regime
 
in place
 
since the
 
COVID-19
 
pandemic emerged
 
in the U.S.
 
during the
 
first quarter
 
of
2020 towards
 
a more aggressive
 
tightening
 
cycle.
 
The Fed announced
 
a 25 basis
 
point rate
 
hike at their
 
March 2022
 
meeting
 
and a 50
basis point
 
rate hike
 
at the May
 
4, 2022 meetings.
 
The Fed also
 
announced
 
the details
 
of the run-off
 
of their
 
balance sheet
 
which will
 
begin
June 1, 2022.
 
The Fed announced
 
$30 billion
 
and $17.5
 
billion monthly
 
caps on the
 
run-off of
 
their treasury
 
and MBS holdings,
respectively, for
 
June through
 
August 2022
 
and that
 
the caps would
 
increase to
 
$60 billion
 
and $35
 
billion per
 
month respectively
beginning
 
in September
 
2022.
 
The acceleration
 
in the rate
 
of inflation
 
that first
 
emerged during
 
the second
 
quarter of
 
2021, and
 
was
deemed “transitory”
 
by the Fed
 
at the time,
 
accelerated
 
even further
 
into 2022
 
and has continued
 
to do so
 
in the second
 
quarter of
 
2022 to
date. All
 
measures of
 
inflation
 
– personal
 
consumption
 
expenditures,
 
the consumer
 
price index
 
and the producer
 
price index
 
– are the
highest levels
 
seen since
 
the early
 
1980s.
 
Inflation
 
has been
 
exacerbated,
 
both in the
 
U.S. and
 
globally, by the
 
war in Ukraine
 
and COVID
related lock-downs
 
in China.
 
The war
 
in Ukraine
 
in particular
 
has caused
 
global inflationary
 
pressures
 
that may
 
have yet to
 
peak.
 
As the
war in Ukraine
 
began in
 
late February
 
2022, western
 
nations began
 
to impose
 
progressively
 
more severe
 
sanctions
 
on Russia.
 
These
sanctions,
 
and related
 
boycotts
 
of Russian
 
goods, have
 
created
 
shortages
 
of many commodities.
 
Ukraine is
 
also a major
 
global supplier
 
of
many commodities
 
as well,
 
particularly
 
food.
 
As cases of
 
COVID-19
 
increased
 
in many population
 
centers in
 
China, authorities
 
imposed
lock-downs
 
aggressively
 
which led
 
to the closure
 
of many manufacturing
 
operations,
 
further exacerbating
 
the many
 
supply chain
constraints
 
across the
 
world.
 
In the U.S.,
 
the economy
 
continues
 
to grow
 
and, in particular,
 
the labor
 
market continues
 
to tighten.
 
The
unemployment
 
rate appears
 
poised to
 
drop below
 
the pre-pandemic
 
lows, unemployment
 
claims are
 
at the lowest
 
levels since
 
the 1950s
and wages
 
are growing
 
rapidly, although
 
still less
 
than the
 
rate of
 
inflation.
All of these
 
factors have
 
led the Fed,
 
and most
 
market participants,
 
to anticipate
 
that inflation,
 
particularly
 
food and
 
energy inflation,
will not
 
recede in
 
the near
 
term and
 
may even accelerate
 
further.
 
Inflation
 
for goods
 
other than
 
food and
 
energy may
 
moderate,
 
as the
necessities
 
of life cannot
 
be ignored
 
and other
 
goods can,
 
potentially
 
lessening
 
price pressures
 
for these
 
goods.
 
The cost
 
of housing
 
and
rents are
 
expected to
 
remain elevated
 
as affordability
 
continues
 
to deteriorate
 
due to higher
 
mortgage
 
rates and
 
inflated home
 
prices.
 
In
sum, inflation
 
is very far
 
above the
 
Fed’s target
 
level of 2%
 
and not likely
 
to recede
 
in the near-term.
- 35 -
Given the
 
outlook for
 
inflation
 
and the
 
Fed’s anticipated
 
response,
 
interest
 
rate volatility
 
has become
 
very elevated
 
and is not
 
far
below the
 
extreme peak
 
seen in March
 
of 2020 when
 
the COVID-19
 
pandemic first
 
emerged in
 
the U.S.
 
Given the
 
magnitude
 
of the forces
driving the
 
market and
 
the uncertainty
 
that exists
 
with respect
 
to the war
 
in Ukraine,
 
COVID related
 
lockdowns
 
in China
 
and the uncertain
capacity of
 
the U.S.
 
economy to
 
weather
 
these forces,
 
it is likely
 
that volatility
 
will remain
 
very elevated
 
until these
 
forces subside.
 
The
outlook for
 
the remainder
 
of 2022 hinges
 
on how these
 
developments
 
unfold, the
 
extent to
 
which the
 
Fed has to
 
raise rates
 
and possibly
sell assets
 
from their
 
portfolio,
 
and the impact
 
these factors
 
have on
 
the growth
 
rate of the
 
U.S. economy
 
and the unemployment
 
rate.
 
Interest
 
Rates
As the outlook
 
for inflation
 
changed materially
 
to the upside
 
and the
 
resulting
 
change in
 
monetary
 
policy by
 
the Fed unfolded
 
over the
course of
 
the
 
first quarter
 
of 2022,
 
interest
 
rates moved
 
much higher
 
and the curve
 
flattened.
 
During the
 
first quarter
 
of 2022, the
 
yield on
the 2-year
 
U.S. Treasury
 
Note increased
 
by over 160
 
basis points,
 
the yield
 
on the 5-year
 
U.S. Treasury
 
Note increased
 
by almost
 
120
basis points
 
and the yield
 
on the 10-year
 
U.S. Treasury
 
Note increased
 
by 82.8 basis
 
points.
 
The spread
 
between the
 
2-year and
 
10-year
points thus
 
declined,
 
or flattened,
 
by almost
 
80 basis points.
 
In early
 
April of
 
2022 the
 
yield curve
 
actually inverted
 
by approximately
 
7.5
basis points,
 
albeit for
 
only a brief
 
period.
 
Since then,
 
the yield
 
curve has
 
re-steepened
 
and this spread
 
has ranged
 
from 20 to
 
40 basis
points.
 
The market
 
expects this
 
may occur
 
as early as
 
the third
 
quarter of
 
2022.
 
As of May
 
12, 2022,
 
market pricing,
 
as reflected
 
in the
Fed Funds
 
futures market,
 
anticipates
 
between 175
 
and 200 basis
 
points of
 
additional
 
hikes by
 
the end of
 
the year.
 
The Agency
 
RMBS Market
The sharp
 
increase in
 
interest
 
rates, the
 
end of net
 
Agency RMBS
 
purchases
 
by the Fed
 
and the pending
 
run-off of
 
the Fed’s Agency
RMBS portfolio,
 
with the
 
potential for
 
outright
 
sales in addition
 
to the prepayment
 
related run-off,
 
resulted
 
in poor returns
 
for the sector.
 
The
poor performance
 
has continued
 
into the
 
second quarter
 
as all of
 
these factors
 
remain.
 
The Agency
 
RMBS market
 
is transitioning
 
away
from a prolonged
 
period of
 
support.
 
The market
 
benefited
 
from not
 
only daily
 
purchases
 
by the Fed
 
- $40 billion
 
per month
 
in addition
 
to
the reinvestment
 
of all paydowns
 
on their
 
existing holdings
 
– but also
 
by the bank
 
community. Demand
 
from the
 
bank community
 
is a
byproduct
 
of their
 
deposit base
 
growth resulting
 
from the
 
Fed’s asset
 
purchases.
 
Going forward
 
the RMBS
 
market faces
 
meaningful
headwinds
 
as the Fed
 
is only
 
purchasing
 
enough RMBS
 
to replace
 
a decreasing
 
portion of
 
their monthly
 
pay-downs
 
and eventually
 
may
consider outright
 
sales, and
 
the banking
 
community
 
will likely
 
buy fewer
 
RMBS assets
 
as their deposit
 
base shrinks
 
as the Fed
 
removes
reserves from
 
the system.
 
The total
 
return for
 
Agency RMBS
 
for the first
 
quarter of
 
2022 was -5.0%
 
and the excess
 
return versus
 
U.S. Treasuries
 
was -1.2%.
 
Longer duration/lower
 
coupon mortgages
 
underperformed
 
higher coupon/lower
 
duration
 
as 30-year
 
underperformed
 
15-year maturities
and lower
 
coupons of
 
each maturity
 
tenor underperformed
 
higher coupons.
 
The same
 
pattern held
 
for excess
 
returns versus
 
comparable
duration
 
U.S. Treasuries.
 
The trend
 
has also continued
 
into the
 
second quarter
 
as interest
 
rates continue
 
to rise and
 
volatility
 
remains at
 
or
near multi-year
 
highs.
 
Recent Legislative
 
and Regulatory
 
Developments
In response
 
to the sharp
 
deterioration
 
in the markets
 
for U.S.
 
Treasuries,
 
Agency RMBS
 
and other
 
mortgage
 
and fixed
 
income
markets that
 
resulted
 
from the
 
economic crisis
 
caused by
 
the COVID-19
 
pandemic,
 
on the morning
 
of Monday, March
 
23, 2020,
 
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.
 
Through
 
November
 
of 2021,
 
the Fed was
 
committed
 
to purchasing
 
$80 billion
of U.S.
 
Treasuries and
 
$40 billion
 
of Agency
 
RMBS each
 
month. In
 
November
 
of 2021, it
 
began tapering
 
its net asset
 
purchases
 
each
month and
 
ended net
 
asset purchases
 
entirely by
 
early March
 
of 2022.
 
The Fed began
 
to wind-down
 
these asset
 
purchases
 
in November
of 2021 and
 
ended additional
 
asset purchases
 
in March of
 
2022. On
 
May 4, 2022,
 
the Fed announced
 
they would
 
begin reducing
 
its
balance sheet
 
by a maximum
 
of $30 billion
 
of U.S.
 
Treasuries and
 
$17.5 billion
 
of Agency
 
RMBS each
 
month commencing
 
June 1,
 
2022.
These caps
 
would remain
 
in place
 
for three
 
months, from
 
June through
 
August of
 
2022.The caps
 
would increase
 
to $60 billion
 
and $35
billion, respectively,
 
in September
 
of 2022.
 
- 36 -
On December
 
27, 2020,
 
President
 
Trump signed
 
into law
 
an additional
 
$900 billion
 
coronavirus
 
aid package
 
as part of
 
the
Consolidated
 
Appropriations
 
Act, 2021,
 
providing
 
for extensions
 
of many of
 
the CARES
 
Act policies
 
and programs
 
passed in
 
March of
2020 as well
 
as additional
 
relief.
 
On January
 
29, 2021,
 
the CDC issued
 
guidance extending
 
eviction
 
moratoriums
 
for covered
 
persons
through March
 
31, 2021.
 
The FHFA subsequently
 
extended
 
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 until
 
July 31,
 
2021 and
September
 
30, 2021,
 
respectively. The
 
U.S. Housing
 
and Urban
 
Development
 
Department
 
subsequently
 
extended
 
the FHA
 
foreclosure
and eviction
 
moratoria
 
to July 31,
 
2021 and
 
September
 
30, 2021,
 
respectively.
 
Despite the
 
expirations
 
of these
 
foreclosure
 
moratoria,
 
a
final rule
 
adopted by
 
the CFPB
 
on June 28,
 
2021 effectively
 
prohibited
 
servicers
 
from initiating
 
a foreclosure
 
before January
 
1, 2022 in
most instances.
 
Following
 
the end
 
of this limitation,
 
foreclosure
 
starts for
 
January and
 
February
 
of 2022 were
 
up 29% and
 
40% month-
over-month and
 
126% and
 
176% year-over-year,
 
respectively, although
 
they remain
 
below pre-pandemic
 
levels.
In January
 
2019, the
 
Trump administration
 
made statements
 
of its plans
 
to work with
 
Congress to
 
overhaul
 
Fannie Mae
 
and Freddie
Mac and expectations
 
to announce
 
a framework
 
for the development
 
of a policy
 
for comprehensive
 
housing finance
 
reform soon.
 
On
September
 
30, 2019,
 
the FHFA announced
 
that Fannie
 
Mae and Freddie
 
Mac were
 
allowed to
 
increase their
 
capital buffers
 
to $25 billion
and $20 billion,
 
respectively, from
 
the prior
 
limit of $3
 
billion each.
 
This step
 
could ultimately
 
lead to
 
Fannie Mae
 
and Freddie
 
Mac being
privatized
 
and represents
 
the first
 
concrete
 
step on the
 
road to GSE
 
reform.
 
On June 30,
 
2020, the
 
FHFA released
 
a proposed
 
rule on a
new regulatory
 
framework
 
for the GSEs
 
which seeks
 
to implement
 
both a risk-based
 
capital framework
 
and minimum
 
leverage
 
capital
requirements.
 
The final
 
rule on the
 
new capital
 
framework
 
for the GSEs
 
was published
 
in the federal
 
register
 
in December
 
2020.
 
On
January 14,
 
2021, the
 
U.S. Treasury
 
and the FHFA
 
executed letter
 
agreements
 
allowing
 
the GSEs
 
to continue
 
to retain
 
capital up
 
to their
regulatory
 
minimums,
 
including
 
buffers, as
 
prescribed
 
in the December
 
rule.
 
These letter
 
agreements
 
provide, in
 
part, (i)
 
there will
 
be no
exit from
 
conservatorship
 
until all
 
material litigation
 
is settled
 
and the GSE
 
has common
 
equity Tier
 
1 capital
 
of at least
 
3% of its
 
assets, (ii)
the GSEs
 
will comply
 
with the
 
FHFA’s regulatory capital
 
framework,
 
(iii)
 
higher-risk
 
single-family
 
mortgage
 
acquisitions
 
will be
 
restricted
 
to
current levels,
 
and (iv)
 
the U.S.
 
Treasury and
 
the FHFA will
 
establish
 
a timeline
 
and process
 
for future
 
GSE reform.
 
However, no definitive
proposals
 
or legislation
 
have been
 
released or
 
enacted with
 
respect to
 
ending the
 
conservatorship,
 
unwinding
 
the GSEs,
 
or materially
reducing
 
the roles
 
of the GSEs
 
in the U.S.
 
mortgage
 
market. On
 
September
 
14, 2021,
 
the U.S.
 
Treasury and
 
the FHFA suspended
 
certain
policy provisions
 
in the January
 
agreement,
 
including
 
limits on
 
loans acquired
 
for cash
 
consideration,
 
multifamily
 
loans, loans
 
with higher
risk characteristics
 
and second
 
homes and
 
investment
 
properties.
 
On February
 
25, 2022,
 
the FHFA published
 
a final rule,
 
effective as
 
of
April 26,
 
2022, amending
 
the GSE capital
 
framework
 
established
 
in December
 
2020 by, among
 
other things,
 
replacing
 
the fixed
 
leverage
buffer equal
 
to 1.5% of
 
a GSE’s adjusted
 
total assets
 
with a dynamic
 
leverage
 
buffer equal
 
to 50% of
 
a GSE’s stability
 
capital buffer,
reducing
 
the risk weight
 
floor from
 
10% to 5%,
 
and removing
 
the requirement
 
that the
 
GSEs must
 
apply an overall
 
effectiveness
adjustment
 
to their
 
credit risk
 
transfer
 
exposures.
In 2017,
 
policymakers
 
announced
 
that LIBOR
 
will be replaced
 
by December
 
31, 2021.
 
The directive
 
was spurred
 
by the fact
 
that
banks are
 
uncomfortable
 
contributing
 
to the LIBOR
 
panel given
 
the shortage
 
of underlying
 
transactions
 
on which
 
to base levels
 
and the
liability
 
associated
 
with submitting
 
an unfounded
 
level. However,
 
the ICE Benchmark
 
Administration,
 
in its capacity
 
as administrator
 
of
USD LIBOR,
 
has announced
 
that it intends
 
to extend
 
publication
 
of USD LIBOR
 
(other than
 
one-week and
 
two-month
 
tenors) by
 
18
months to
 
June 2023.
 
Notwithstanding
 
this possible
 
extension,
 
a joint statement
 
by key regulatory
 
authorities
 
calls on banks
 
to cease
entering
 
into new
 
contracts
 
that use
 
USD LIBOR
 
as a reference
 
rate by no
 
later than
 
December
 
31, 2021.
 
The ARRC,
 
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.
 
We will monitor
 
the emergence
 
of SOFR
 
carefully
 
as it appears
 
likely to
 
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.
- 37 -
On December
 
7, 2021,
 
the CFPB
 
released
 
a final rule
 
that amends
 
Regulation
 
Z, which
 
implemented
 
the Truth in
 
Lending Act,
 
aimed
at addressing
 
cessation
 
of LIBOR
 
for both
 
closed-end (e.g.,
 
home mortgage)
 
and open-end
 
(e.g., home
 
equity line
 
of credit)
 
products.
 
The
rule, which
 
mostly becomes
 
effective
 
in April
 
of 2022,
 
establishes
 
requirements
 
for the selection
 
of replacement
 
indices for
 
existing
 
LIBOR-
linked consumer
 
loans. Although
 
the rule
 
does not
 
mandate the
 
use of SOFR
 
as the alternative
 
rate, it
 
identifies
 
SOFR as a
 
comparable
rate for
 
closed-end
 
products
 
and states
 
that for
 
open-end products,
 
the CFPB
 
has determined
 
that ARRC’s
 
recommended
 
spread-adjusted
indices based
 
on SOFR
 
for consumer
 
products
 
to replace
 
the one-month,
 
three-month,
 
or six-month
 
USD LIBOR
 
index “have
 
historical
fluctuations
 
that are
 
substantially
 
similar to
 
those of
 
the LIBOR
 
indices that
 
they are
 
intended
 
to replace.”
 
The CFPB
 
reserved judgment,
however, on a SOFR-based
 
spread-adjusted
 
replacement
 
index to
 
replace the
 
one-year USD
 
LIBOR until
 
it obtained
 
additional
information.
 
On December
 
8, 2021,
 
the House
 
of Representatives
 
passed the
 
Adjustable
 
Interest
 
Rate (LIBOR)
 
Act of 2021
 
(H.R. 4616)
 
(the
“LIBOR Act”),
 
which provides
 
for a statutory
 
replacement
 
benchmark
 
rate for
 
contracts
 
that use
 
LIBOR as
 
a benchmark
 
and do not
 
contain
any fallback
 
mechanism
 
independent
 
of LIBOR.
 
Pursuant
 
to the LIBOR
 
Act, SOFR
 
becomes the
 
new benchmark
 
rate by operation
 
of law
for any such
 
contract.
 
The LIBOR
 
Act establishes
 
a safe harbor
 
from litigation
 
for claims
 
arising out
 
of or related
 
to the use
 
of SOFR
 
as the
recommended
 
benchmark
 
replacement.
 
The LIBOR
 
Act makes
 
clear that
 
it should
 
not be construed
 
to disfavor
 
the use of
 
any benchmark
on a prospective
 
basis.
The LIBOR
 
Act also
 
attempts
 
to forestall
 
challenges
 
that it is
 
impairing
 
contracts.
 
It provides
 
that the
 
discontinuance
 
of LIBOR
 
and
the automatic
 
statutory
 
transition
 
to a replacement
 
rate neither
 
impairs or
 
affects the
 
rights of
 
a party to
 
receive payment
 
under such
contracts,
 
nor allows
 
a party to
 
discharge
 
their performance
 
obligations
 
or to declare
 
a breach
 
of contract.
 
It amends
 
the Trust Indenture
Act of 1939
 
to state
 
that the
 
“the right
 
of any holder
 
of any indenture
 
security to
 
receive payment
 
of the principal
 
of and interest
 
on such
indenture
 
security shall
 
not be deemed
 
to be impaired
 
or affected”
 
by application
 
of the LIBOR
 
Act to any
 
indenture
 
security.
 
On
December
 
9, 2021,
 
the United
 
States Senate
 
referred
 
the LIBOR Act
 
to the Committee
 
on Banking,
 
Housing and
 
Urban Affairs.
One-week and
 
two-month
 
U.S. dollar
 
LIBOR rates
 
phased out
 
on December
 
31, 2021,
 
but other
 
U.S. dollar
 
tenors may
 
continue until
June 30,
 
2023. We will
 
monitor the
 
emergence
 
of SOFR
 
carefully
 
as it appears
 
likely to
 
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, extended
 
the timeframe
 
for its delinquent
 
loan buyout
 
policy
for Single-Family
 
Uniform Mortgage-Backed
 
Securities
 
(UMBS) and
 
Mortgage-Backed
 
Securities
 
(MBS) from
 
four consecutively
 
missed
monthly payments
 
to twenty-four
 
consecutively
 
missed monthly
 
payments (i.e.,
 
24 months
 
past due).
 
This new
 
timeframe
 
applied to
outstanding
 
single-family
 
pools and
 
newly issued
 
single-family
 
pools and
 
was first
 
reflected
 
when January
 
2021 factors
 
were released
 
on
the fourth
 
business day
 
in February
 
2021.
 
For Agency
 
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 anticipated,
 
however, that
 
delinquent
 
loans will
 
be repurchased
 
in
most cases
 
before the
 
24-month
 
deadline under
 
one of the
 
following
 
exceptions
 
listed below.
•
 
a loan that
 
is paid in
 
full, or
 
where the
 
related lien
 
is released
 
and/or the
 
note debt
 
is satisfied
 
or forgiven;
•
 
a loan repurchased
 
by a seller/servicer
 
under applicable
 
selling
 
and servicing
 
requirements;
•
 
a loan entering
 
a permanent
 
modification,
 
which generally
 
requires
 
it to be
 
removed from
 
the MBS.
 
During any
 
modification
 
trial
period, the
 
loan will
 
remain in
 
the MBS until
 
the trial
 
period ends;
•
 
a loan subject
 
to a short
 
sale or
 
deed-in-lieu
 
of foreclosure;
 
or
•
 
a loan referred
 
to foreclosure.
- 38 -
Because of
 
these exceptions,
 
the GSEs
 
believe based
 
on prevailing
 
assumptions
 
and market
 
conditions
 
this change
 
will have
 
only a
marginal impact
 
on prepayment
 
speeds, in
 
aggregate.
 
Cohort level
 
impacts may
 
vary. For example,
 
more than
 
half of loans
 
referred to
foreclosure
 
are historically
 
referred
 
within six
 
months of
 
delinquency. The
 
degree to
 
which speeds
 
are affected
 
depends on
 
delinquency
levels, borrower
 
response,
 
and referral
 
to foreclosure
 
timelines.
The scope
 
and nature
 
of the actions
 
the U.S.
 
government
 
or the Fed
 
will ultimately
 
undertake
 
are unknown
 
and will
 
continue to
evolve
Effect on Us
Regulatory
 
developments,
 
movements
 
in interest
 
rates and
 
prepayment
 
rates affect
 
us in many
 
ways, including
 
the following:
Effects on
 
our Assets
A change
 
in or elimination
 
of the guarantee
 
structure
 
of Agency
 
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
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.
 
- 39 -
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.
 
On March 23,
 
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, but
 
ended these
 
purchases
 
in March 2022
 
and announced
 
plans to reduce
 
its balance
 
sheet. The
 
Fed’s planned
 
reduction
 
of its
balance sheet
 
could negatively
 
impact our
 
investment
 
portfolio.
 
Further, the
 
moratoriums
 
on foreclosures
 
and evictions
 
described
 
above
will likely
 
delay potential
 
defaults
 
on loans that
 
would otherwise
 
be bought
 
out of Agency
 
RMBS pools
 
as described
 
above.
 
Depending
 
on
the ultimate
 
resolution
 
of the foreclosure
 
or evictions,
 
when and
 
if it occurs,
 
these loans
 
may be removed
 
from the
 
pool into
 
which they
were securitized.
 
If this were
 
to occur, it would
 
have the
 
effect of delaying
 
a prepayment
 
on the Company’s
 
securities
 
until such
 
time. 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.
 
Increases
in the Fed
 
Funds rate
 
or LIBOR
 
typically
 
increase our
 
borrowing
 
costs, which
 
could affect
 
our interest
 
rate spread
 
if there
 
is no
corresponding
 
increase in
 
the interest
 
we earn
 
on our assets.
 
This would
 
be most prevalent
 
with respect
 
to our Agency
 
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
The first
 
quarter of
 
2022 was
 
extremely volatile
 
as the Fed
 
pivoted
 
quickly from
 
unprecedented
 
monetary
 
policy accommodation
 
to
the rapid
 
removal of
 
the accommodation.
 
Current
 
market pricing
 
in the futures
 
markets implies
 
the Fed will
 
raise the
 
target for
 
the Fed
Funds rate
 
to approximately
 
2.70% by
 
then end
 
of the year.
 
The U.S.
 
economy has
 
recovered
 
quickly from
 
the COVID-19
 
induced
downturn
 
with the
 
help of the
 
Fed’s monetary
 
policy and
 
equally
 
unprecedented
 
fiscal stimulus
 
from the
 
government.
 
As the economy
recovered
 
rapidly, inflationary
 
pressures
 
emerged and
 
were exacerbated
 
by numerous
 
supply constraints,
 
including
 
the supply
 
of labor,
resulting
 
in a sub-4%
 
unemployment
 
rate which
 
continues
 
to fall and
 
wage growth
 
above 5%.
 
The war
 
in Ukraine
 
has further
 
stimulated
inflationary
 
pressures
 
as Russia
 
and Ukraine
 
are leading
 
suppliers
 
of food,
 
energy and
 
many other
 
commodities.
 
COVID-19
 
induced
shutdowns
 
in China
 
have also
 
increased
 
supply constraints,
 
another source
 
of inflationary
 
pressure.
 
As the second
 
quarter of
 
2022
unfolds, these
 
trends have
 
intensified
 
and the Fed
 
appears even
 
more intent
 
on removing
 
their accommodation
 
as quickly
 
as possible.
 
The Fed may
 
even begin
 
outright
 
sales of U.S.
 
Treasury and
 
Agency RMBS
 
assets later
 
this year.
 
For the Company,
 
this means
 
our funding
 
costs are
 
likely to
 
continue
 
to rise over
 
the balance
 
of 2022 and
 
possibly into
 
2023.
 
While
longer-term
 
maturities
 
have not
 
risen as much
 
as short
 
and intermediate
 
term rates,
 
they have
 
risen and
 
refinancing
 
and purchase
 
activity
in the residential
 
housing market
 
is likely to
 
slow. If this
 
occurs, it
 
would slow
 
premium amortization
 
or discount
 
accretion,
 
as the case
 
may
be, on the
 
Company’s Agency
 
MBS securities.
 
The net effect
 
of higher
 
funding costs
 
and slower
 
amortization
 
will depend
 
on the extent
and timing
 
of both,
 
but may reduce
 
the Company’s
 
net interest
 
income, and
 
perhaps materially
 
so, over
 
this period.
 
- 40 -
These developments
 
may continue
 
to impact
 
Orchid Island
 
Capital
 
in a similar
 
manner. In particular,
 
Orchid’s ability
 
to maintain
 
its
capital base
 
at its current
 
level could
 
be adversely
 
affected if
 
these developments
 
continue
 
to pressure
 
Orchid’s MBS
 
assets.
 
This could
reduce the
 
Company’s advisory
 
service revenues
 
if there
 
are further
 
declines in
 
Orchid’s shareholders’
 
equity and
 
could further
 
reduce the
dividends
 
paid by Orchid
 
on its common
 
stock.
Critical Accounting Estimates
Our consolidated
 
financial
 
statements
 
are prepared
 
in accordance
 
with GAAP.
 
GAAP requires
 
our management
 
to make some
complex and
 
subjective
 
decisions
 
and assessments.
 
Our most
 
critical accounting
 
policies involve
 
decisions
 
and assessments
 
which could
significantly
 
affect reported
 
assets,
 
liabilities,
 
revenues
 
and expenses,
and these
 
decisions
 
and assessments
 
can change
 
significantly
each reporting
 
period.
 
There have
 
been no changes
 
to the processes
 
used to determine
 
our critical
 
accounting
 
estimates
 
as discussed
 
in
our annual
 
report on
 
Form 10-K
 
for the year
 
ended December
 
31, 2021.
Capital Expenditures
At March 31, 2022, we had no material commitments for capital expenditures.
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES
 
ABOUT MARKET
 
RISK.
 
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we
 
carried out an evaluation, under the supervision and
with the participation of our management, including our Chief Executive Officer (the “CEO”)
 
and Chief Financial Officer (the “CFO”), of
the effectiveness of the design and operation of our disclosure controls and procedures,
 
as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation,
 
the CEO and CFO concluded our disclosure controls
and procedures, as designed and implemented, were effective as of the evaluation date (1)
 
in ensuring that information regarding the
Company and its subsidiaries is accumulated and communicated to our management,
 
including our CEO and CFO, by our employees,
as appropriate to allow timely decisions regarding required disclosure and (2)
 
in providing reasonable assurance that information we
must disclose in our periodic reports under the Exchange Act is recorded,
 
processed, summarized and reported within the time periods
prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no material changes in the Company’s internal controls 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.
 
 
 
 
 
- 41 -
PART II.
 
OTHER INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc. in
 
the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of additional
 
indemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the related MLPA’s.
 
The Company
believes the demands are without merit and intends to defend against the demands
 
vigorously. No provision or accrual has been
recorded related to the Citigroup demands.
We are not party to any other material pending legal proceedings as described
 
in Item 103 of Regulation S-K.
ITEM 1A.
 
RISK FACTORS.
There have been no material changes to the risk factors disclosed in our Annual Report
 
on Form 10-K for the year ended
December 31, 2021,
 
filed with the SEC on March 11, 2022.
ITEM 2. UNREGISTERED
 
SALES OF
 
EQUITY SECURITIES
 
AND USE
 
OF PROCEEDS
On September 16, 2021, the Board authorized a share repurchase plan
 
pursuant to Rule 10b5-1 of the Securities Exchange Act of
1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company
 
may purchase shares of its Class A
Common Stock from time to time for an aggregate purchase price not to exceed
 
$2.5 million.
 
The table below presents the Company’s share repurchase activity for the three months
 
ended March 31, 2022.
Approximate Dollar
Shares Purchased
Amount of Shares
Total Number
Weighted-Average
as Part of Publicly
That May Yet be
of Shares
Price Paid
Announced
Repurchased Under
Repurchased
Per Share
Programs
the Authorization
January 1, 2022 - January 31, 2022
42,839
$
2.22
42,839
$
2,211,791
February 1, 2022 - February 28, 2022
38,812
2.07
38,812
2,131,363
March 1, 2022 - March 31, 2022
106,629
1.89
106,629
1,929,797
Totals / Weighted Average
188,280
$
2.00
188,280
$
1,929,797
The Company did not have any unregistered sales of its equity securities during
 
the three months ended March 31, 2022.
 
ITEM 3.
 
DEFAULTS UPON SENIOR
 
SECURITIES
None.
ITEM 4.
 
MINE SAFETY
 
DISCLOSURES.
 
Not Applicable.
ITEM 5.
 
OTHER INFORMATION
None.
 
- 42 -
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.
 
 
- 43 -
Signatures
Pursuant to the requirements
 
of Section 13 or 15(d) of
 
the Securities Exchange Act
 
of 1934, as amended, the
 
registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BIMINI CAPITAL MANAGEMENT,
 
INC.
Date:
 
May 13, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date:
 
May 13, 2022
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas,
 
IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)
Bimini Capital Management (QB) (USOTC:BMNM)
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