ITEM 1. BUSINESS
Overview
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” and, collectively with its subsidiaries, the
“Company,” “we”, “us” or “our”) is a specialty finance company that operates in two business segments: investing in mortgage-backed securities (“MBS”) in our own portfolio, and serving as the external manager of Orchid Island Capital, Inc.
(“Orchid”) which also invests in MBS. In both cases, the principal and interest payments of these MBS are guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation, (“Freddie Mac”) or the
Government National Mortgage Association (“Ginnie Mae” and, collectively with Fannie Mae and Freddie Mac, “GSEs”) and are backed primarily by single-family residential mortgage loans. We refer to these types of MBS as Agency MBS. The investment
strategy focuses on, and the portfolios consist of, two categories of Agency MBS: (i) traditional pass-through Agency MBS and (ii) structured Agency MBS, such as collateralized mortgage obligations (“CMOs”), interest only securities (“IOs”),
inverse interest only securities (“IIOs”) and principal only securities (“POs”), among other types of structured Agency MBS. The Company’s operations are classified into two principal reportable segments: the asset management segment and the
investment portfolio segment.
The investment portfolio segment includes the investment activities conducted at Bimini Capital’s wholly-owned subsidiary,
Royal Palm Capital, LLC (“Royal Palm”). The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.
The
investment portfolio is internally managed by Bimini Capital’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC (“Bimini Advisors) pursuant to the terms of a management agreement. References to the general management of the Company’s
portfolio of MBS refer to the operations of Royal Palm.
The Company, through Bimini Advisors, serves as the external manager of Orchid and from this arrangement the Company
receives management fees and expense reimbursements. The asset management segment includes these investment advisory services provided by Bimini Advisors to Orchid.
Orchid is externally managed and advised by our wholly-owned subsidiary, Bimini Advisors, and its MBS investment team
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, of which a majority of the members are
independent, and is only permitted to perform such functions delegated by Orchid’s Board.
Bimini Advisors receives a monthly management fee in the amount of:
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One-twelfth of 1.5% of the first $250 million of the Orchid’s equity, as defined in the management agreement,
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One-twelfth of 1.25% of the Orchid’s equity that is greater than $250 million and less than or equal to $500 million, and
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One-twelfth of 1.00% of the Orchid’s equity that is greater than $500 million.
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Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf. In addition, Bimini
Advisors allocates to Orchid its pro rata portion of certain overhead costs as set forth in the management agreement. Should Orchid terminate the management agreement without cause, it shall pay to Bimini Advisors a termination fee equal to
three times the average annual management fee, as defined in the management agreement, before or on the last day of the initial term or automatic renewal term.
The Investment and Capital Allocation Strategy
Investment Strategy
With respect to our own portfolio, the business objective is to provide attractive risk-adjusted total returns to our
investors over the long term through a combination of capital appreciation and interest income. We intend to achieve this objective by investing in and strategically allocating capital between pass-through Agency MBS and structured Agency MBS. We
seek to generate income from (i) the net interest margin on the leveraged pass-through Agency MBS portfolio and the leveraged portion of the structured Agency MBS portfolio, and (ii) the interest income we generate from the unleveraged portion of
the structured Agency MBS portfolio. We also seek to minimize the volatility of both the net asset value of, and income from, the portfolio through a process which emphasizes capital allocation, asset selection, liquidity and active interest rate
risk management.
We fund the pass-through Agency MBS and certain of the structured Agency MBS, such as fixed and floating rate tranches of
CMOs and POs, through repurchase agreements. However, we generally do not employ leverage on the structured Agency MBS that have no principal balance, such as IOs and IIOs, because those securities contain structured leverage. We may pledge a
portion of these assets to increase the cash balance, but we do not intend to invest the cash derived from pledging the assets.
The target asset categories and principal assets in which we intend to invest are as follows:
Pass-through Agency MBS
We invest in pass-through securities, which are securities secured by residential real property in which payments of both
interest and principal on the securities are generally made monthly. In effect, these securities pass through the monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the loan
servicer and the guarantor of the securities. Pass-through certificates can be divided into various categories based on the characteristics of the underlying mortgages, such as the term or whether the interest rate is fixed or variable.
The payment of principal and interest on mortgage pass-through securities issued by Ginnie Mae, but not the market value,
is guaranteed by the full faith and credit of the federal government. Payment of principal and interest on mortgage pass-through certificates issued by Fannie Mae and Freddie Mac, but not the market value, is guaranteed by the respective agency
issuing the security.
A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than scheduled. This is
called a prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, foreclosure or accelerated amortization by the borrower. Prepayments result in a return of principal to pass-through certificate holders. This
may result in a lower or higher rate of return upon reinvestment of principal. This is generally referred to as prepayment uncertainty. If a security purchased at a premium prepays at a higher-than-expected rate, then the value of the premium
would be eroded at a faster-than-expected rate. Similarly, if a discount mortgage prepays at a lower-than-expected rate, the amortization towards par would be accumulated at a slower-than-expected rate. The possibility of these undesirable
effects is sometimes referred to as “prepayment risk.”
In general, declining interest rates tend to increase prepayments, and rising interest rates tend to slow prepayments. Like
other fixed-income securities, when interest rates rise, the value of Agency MBS generally declines. The rate of prepayments on underlying mortgages will affect the price and volatility of Agency MBS and may shorten or extend the effective
maturity of the security beyond what was anticipated at the time of purchase. If interest rates rise, our holdings of Agency MBS may experience reduced spreads over our funding costs if the borrowers of the underlying mortgages pay off their
mortgages later than anticipated. This is generally referred to as “extension” risk.
The mortgage loans underlying pass-through certificates can generally be classified into the following three categories:
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Fixed-Rate
Mortgages
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Fixed-rate mortgages are those where the borrower pays an interest rate that is constant throughout the term of
the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also referred to as “final maturity dates”) are also common. Because the interest rate on the loan never changes, even when
market interest rates change, there can be a divergence between the interest rate on the loan and current market interest rates over time. This in turn can make fixed-rate mortgages price-sensitive to market fluctuations in interest
rates. In general, the longer the remaining term on the mortgage loan, the greater the price sensitivity
to movements in interest rates and, therefore,
the likelihood for greater price variability.
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ARMs
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ARMs are mortgages for which the borrower pays an interest rate that varies over the term of the loan. The interest rate usually resets based on market interest rates, although the adjustment of such an interest rate may be subject to
certain limitations. Traditionally, interest rate resets occur at regular intervals (for example, once per year). We refer to such ARMs as “traditional” ARMs. Because the interest rates on ARMs fluctuate based on market conditions, ARMs
tend to have interest rates that do not deviate from current market rates by a large amount. This in turn can mean that ARMs have less price sensitivity to interest rates
and, consequently, are less likely to experience significant price volatility.
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Hybrid
Adjustable-Rate Mortgages
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Hybrid ARMs have a fixed-rate for the first few years of the loan, often three, five, seven or
ten years, and thereafter reset periodically like a traditional ARM. Effectively, such mortgages are hybrids, combining the features of a pure fixed-rate mortgage and a traditional ARM. Hybrid ARMs have price sensitivity to interest
rates similar to that of a fixed-rate mortgage during the period when the interest rate is fixed and similar to that of an ARM when the interest rate is in its periodic reset stage. However, because many hybrid ARMs are structured with
a relatively short initial time span during which the interest rate is fixed, even during that segment of its existence, the price sensitivity may be high.
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Structured Agency MBS
We also invest in structured Agency MBS, which include CMOs, IOs, IIOs and POs. The payment of principal and interest, as
appropriate, on structured Agency MBS issued by Ginnie Mae, but not the market value, is guaranteed by the full faith and credit of the federal government. Payment of principal and interest, as appropriate, on structured Agency MBS issued by
Fannie Mae and Freddie Mac, but not the market value, is guaranteed by the respective agency issuing the security. The types of structured Agency MBS in which we invest are described below.
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CMOs
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CMOs are a type of MBS the principal and interest of which are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through
securities issued directly by or under the auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. Generally, fixed-rate MBS are used to
collateralize CMOs. However, the CMO tranches need not all have fixed-rate coupons. Some CMO tranches have floating rate coupons that adjust based on market interest rates, subject to some limitations. Such tranches, often called “CMO
floaters,” can have relatively low price sensitivity to interest rates.
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IOs
. IOs
represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim to any principal payments. The value of IOs depends primarily on two factors, which are
prepayments and interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments going forward, hence IOs are highly sensitive to prepayment rates. IOs are also sensitive to changes in interest
rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected
absolute amount of future interest payments.
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IIOs
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IIOs represent the stream of interest payments on a pool of mortgages that underlie MBS, either fixed-rate mortgages or hybrid ARMs. Holders of IIOs have no claim to any principal payments. The value of IIOs depends primarily on three
factors, which are prepayments, London Interbank Offered Rate (“LIBOR”) and term interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments, making IIOs highly sensitive to prepayment rates.
The coupon on IIOs is derived from both the coupon interest rate on the underlying pool of mortgages and 30-day LIBOR. IIOs are typically created in conjunction with a floating rate CMO that has a principal balance and which is entitled
to receive all of the principal payments on the underlying pool of mortgages. The coupon on the floating rate CMO is also based on 30-day LIBOR. Typically, the coupon on the floating rate CMO and the IIO, when combined, equal the coupon
on the pool of underlying mortgages. The coupon on the pool of underlying mortgages typically represents a cap or ceiling on the combined coupons of the floating rate CMO and the IIO. Accordingly, when the value of 30-day LIBOR
increases, the coupon of the floating rate CMO will increase and the coupon on the IIO will decrease. When the value of 30-day LIBOR falls, the opposite is true. Accordingly, the value of IIOs are sensitive to the level of 30-day LIBOR
and expectations by market participants of future movements in the level of 30-day LIBOR. IIOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a
pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments.
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POs
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POs represent the stream of principal payments on a pool of mortgages. Holders of POs have no claim to any interest payments, although the ultimate amount of
principal to be received over time is known, equaling the principal balance of the underlying pool of mortgages. The timing of the receipt of the principal payments is not known. The value of POs depends primarily on two factors,
which are prepayments and interest rates.
Prepayments on the underlying pool of mortgages accelerate the stream of principal repayments, making POs highly sensitive to the rate at which the mortgages in the pool are prepaid.
POs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future principal payments on a pool of mortgages. Further, an increase in interest rates has a tendency to reduce
prepayments, which decelerates, or pushes further out in time, the ultimate receipt of the principal payments. The opposite is true when interest rates decline.
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Mortgage REIT Common Stock
We also maintain an investment in the common stock of Orchid. Because Orchid is a mortgage REIT that invests primarily in
similar assets of the Company, we consider this investment as a proxy for our overall investment strategy. We do not currently invest in other REIT common stock, but may do so in the future.
Our investment strategy consists of the following components:
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investing in pass-through Agency MBS and certain structured Agency MBS, such as fixed and floating rate tranches of CMOs and POs, on
a leveraged basis to increase returns on the capital allocated to this portfolio;
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investing in certain structured Agency MBS, such as IOs and IIOs, generally on an unleveraged basis in order to (i) increase returns
due to the structural leverage contained in such securities, (ii) enhance liquidity due to the fact that these securities will be unencumbered or, when encumbered, the cash from such borrowings may be retained and (iii) diversify
portfolio interest rate risk due to the different interest rate sensitivity these securities have compared to pass-through Agency MBS;
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investing in Agency MBS in order to minimize credit risk;
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investing in REIT common stock;
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investing in assets that will cause us to maintain our exclusion from regulation as an investment company under the Investment
Company Act.
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Our management makes investment decisions based on various factors, including, but not limited to, relative value, expected
cash yield, supply and demand, costs of hedging, costs of financing, liquidity requirements, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves. We do not attribute any
particular quantitative significance to any of these factors, and the weight we give to these factors depends on market conditions and economic trends.
Over time, we will modify our investment strategy as market conditions change to seek to maximize the returns from our
investment portfolio. We believe that this strategy will enable us to provide attractive long-term returns to our stockholders.
Capital Allocation Strategy
The percentage of capital invested in our two asset categories will vary and will be managed in an effort to maintain the
level of income generated by the combined portfolios, the stability of that income stream and the stability of the value of the combined portfolios. Typically, pass-through Agency MBS and structured Agency MBS exhibit materially different
sensitivities to movements in interest rates. Declines in the value of one portfolio may be offset by appreciation in the other, although we cannot assure you that this will be the case. Additionally, we will seek to maintain adequate liquidity
as we allocate capital.
We allocate our capital to assist our interest rate risk management efforts. The unleveraged portfolio does not require
unencumbered cash or cash equivalents to be maintained in anticipation of possible margin calls. To the extent more capital is deployed in the unleveraged portfolio, our liquidity needs will generally be less.
During periods of rising interest rates, refinancing opportunities available to borrowers typically decrease because
borrowers are not able to refinance their current mortgage loans with new mortgage loans at lower interest rates. In such instances, securities that are highly sensitive to refinancing activity, such as IOs and IIOs, typically increase in value.
Our capital allocation strategy allows us to redeploy our capital into such securities when and if we believe interest rates will be higher in the future, thereby allowing us to hold securities the value of which we believe is likely to increase
as interest rates rise. Also, by being able to re-allocate capital into structured Agency MBS, such as IOs, during periods of rising interest rates, we may be able to offset the likely decline in the value of our pass-through Agency MBS, which
are negatively impacted by rising interest rates.
Financing Strategy
We borrow against our Agency MBS and certain of our structured Agency MBS using short-term repurchase agreements. Our
borrowings currently consist of short-term repurchase agreements. We may use other sources of leverage, such as secured or unsecured debt or issuances of preferred stock. We do not have a policy limiting the amount of leverage we may incur.
However, we generally expect that the ratio of our total liabilities compared to our equity, which we refer to as our leverage ratio, will be less than 12 to 1. Our amount of leverage may vary depending on market conditions and other factors that
we deem relevant.
We allocate our capital between two sub-portfolios. The pass-through Agency MBS portfolio will be leveraged generally
through repurchase agreement funding. The structured Agency MBS portfolio generally will not be leveraged. The leverage ratio is calculated by dividing our total liabilities by total stockholders’ equity at the end of each period. The amount of
leverage typically will be a function of the capital allocated to the pass-through Agency MBS portfolio and the amount of haircuts required by our lenders on our borrowings. When the capital allocation to the pass-through Agency MBS portfolio is
high, we expect that the leverage ratio will be high because more capital is being explicitly leveraged and less capital is un-leveraged. If the haircuts required by our lenders on our borrowings are higher, all else being equal, our leverage
will be lower because our lenders will lend less against the value of the capital deployed to the pass-through Agency MBS portfolio. The allocation of capital between the two portfolios will be a function of several factors:
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The relative durations of the respective portfolios — We generally seek to have a combined duration at or near zero. If our
pass-through securities have a longer duration, we will allocate more capital to the structured security portfolio to achieve a combined duration close to zero.
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The relative attractiveness of pass-through securities versus structured securities — To the extent we believe the expected returns
of one type of security are higher than the other, we will allocate more capital to the more attractive securities, subject to the caveat that its combined duration remains at or near zero.
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Liquidity — We seek to maintain adequate cash and unencumbered securities relative to our repurchase agreement borrowings well in
excess of anticipated price or prepayment related margin calls from our lenders. To the extent we feel price or prepayment related margin calls will be higher/lower, we will typically allocate less/more capital to the pass-through
Agency MBS portfolio. Our pass-through Agency MBS portfolio likely will be our only source of price or prepayment related margin calls because we generally will not apply leverage to our structured Agency MBS portfolio. From time to
time we may pledge a portion of our structured securities and retain the cash derived so it can be used to enhance our liquidity.
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We invest in Agency MBS to mitigate credit risk. Additionally, our Agency MBS are backed by a diversified base of mortgage
loans to mitigate geographic, loan originator and other types of concentration risks.
Interest Rate Risk Management
We believe that the risk of adverse interest rate movements represents the most significant risk to the value of our
portfolio. This risk arises because (i) the interest rate indices used to calculate the interest rates on the mortgages underlying our assets may be different from the interest rate indices used to calculate the interest rates on the related
borrowings, and (ii) interest rate movements affecting our borrowings may not be reasonably correlated with interest rate movements affecting our assets. We attempt to mitigate our interest rate risk by using the techniques described below:
Agency MBS Backed by ARMs
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We seek to minimize the differences between interest rate indices and interest rate adjustment periods of our Agency MBS backed by ARMs and related borrowings. At the time of funding, we typically align (i) the underlying interest rate index used
to calculate interest rates for our Agency MBS backed by ARMs and the related borrowings and (ii) the interest rate adjustment periods for our Agency MBS backed by ARMs and the interest rate adjustment periods for our related borrowings. As our
borrowings mature or are renewed, we may adjust the index used to calculate interest expense, the duration of the reset periods and the maturities of our borrowings.
Agency MBS Backed by
Fixed-Rate Mortgages
. As interest rates rise, our borrowing costs increase; however, the income on our Agency MBS backed by fixed-rate mortgages remains unchanged. We may seek to limit increases to our borrowing costs through the use of
interest rate swap or cap agreements, options, put or call agreements, futures contracts, forward rate agreements or similar financial instruments to economically convert our floating-rate borrowings into fixed-rate borrowings.
Agency MBS Backed by
Hybrid ARMs
. During the fixed-rate period of our Agency MBS backed by hybrid ARMs, the security is similar to Agency MBS backed by fixed-rate mortgages. During this period, we may employ the same hedging strategy that we employ for our
Agency MBS backed by fixed-rate mortgages. Once our Agency MBS backed by hybrid ARMs convert to floating rate securities, we may employ the same hedging strategy as we employ for our Agency MBS backed by ARMs.
Derivative Instruments.
We
enter into derivative instruments to economically hedge against the possibility that rising rates may adversely impact the cost of our repurchase agreement liabilities. The principal instruments that the Company has used to date are Eurodollar
and Treasury Note (“T-Note”) futures contracts and options to enter into interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but we may enter into other derivatives in the future.
A futures contract is a legally binding agreement to buy or sell a financial instrument in a designated future month at a
price agreed upon at the initiation of the contract by the buyer and seller. A futures contract differs from an option in that an option gives one of the counterparties a right, but not the obligation, to buy or sell, while a futures contract
represents an obligation of both counterparties to buy or sell a financial instrument at a specified price.
Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional
amount, stated term and pay and receive interest rates in the future. We may enter into swaption agreements that provide us the option to enter into a pay fixed rate interest rate swap ("payer swaption"), or swaption agreements that provide us
the option to enter into a receive fixed interest rate swap ("receiver swaptions").
Additionally, our structured Agency MBS generally exhibit sensitivities to movements in interest rates different than our
pass-through Agency MBS. To the extent they do so, our structured Agency MBS may protect us against declines in the market value of our combined portfolio that result from adverse interest rate movements, although we cannot assure you that this
will be the case.
We account for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period
of time possible or if we cannot assert that it is probable at the inception of the TBA transaction, and throughout its term, that we will take physical delivery of the Agency MBS for a long position, or make delivery of the Agency MBS for a
short position, upon settlement of the trade. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.
Prepayment Risk Management
The risk of mortgage prepayments is another significant risk to our portfolio. When prevailing interest rates fall below
the coupon rate of a mortgage, mortgage prepayments are likely to increase. Conversely, when prevailing interest rates increase above the coupon rate of a mortgage, mortgage prepayments are likely to decrease.
When prepayment rates increase, we may not be able to reinvest the money received from prepayments at yields comparable to
those of the securities prepaid. Additionally, some of our structured Agency MBS, such as IOs and IIOs, may be negatively affected by an increase in prepayment rates because their value is wholly contingent on the underlying mortgage loans having
an outstanding principal balance.
A decrease in prepayment rates may also have an adverse effect on our portfolio. For example, if we invest in POs, the
purchase price of such securities will be based, in part, on an assumed level of prepayments on the underlying mortgage loan. Because the returns on POs decrease the longer it takes the principal payments on the underlying loans to be paid, a
decrease in prepayment rates could decrease our returns on these securities.
Prepayment risk also
affects our hedging activities
. When an Agency MBS backed by a fixed-rate mortgage or hybrid ARM is acquired with borrowings, we may cap or fix our borrowing costs for a period close to the anticipated average life of the fixed-rate
portion of the related Agency MBS. If prepayment rates are different than our projections, the term of the related hedging instrument may not match the fixed-rate portion of the security, which could cause us to incur losses.
Because our business may be adversely affected if prepayment rates are different than our projections, we seek to invest in
Agency MBS backed by mortgages with well-documented and predictable prepayment histories. To protect against increases in prepayment rates, we invest in Agency MBS backed by mortgages that we believe are less likely to be prepaid. For example, we
invest in Agency MBS backed by mortgages (i) with loan balances low enough such that a borrower would likely have little incentive to refinance, (ii) extended to borrowers with credit histories weak enough to not be eligible to refinance their
mortgage loans, (iii) that are newly originated fixed-rate or hybrid ARMs or (iv) that have interest rates low enough such that a borrower would likely have little incentive to refinance. To protect against decreases in prepayment rates, we may
also invest in Agency MBS backed by mortgages with characteristics opposite to those described above, which would typically be more likely to be refinanced. We may also invest in certain types of structured Agency MBS as a means of mitigating our
portfolio-wide prepayment risks. For example, certain tranches of CMOs are less sensitive to increases in prepayment rates, and we may invest in those tranches as a means of hedging against increases in prepayment rates.
Liquidity Management Strategy
Because of our use of leverage, we manage liquidity to meet our lenders’ margin calls by maintaining cash balances or
unencumbered assets well in excess of anticipated margin calls; and making margin calls on our lenders when we have an excess of collateral pledged against our borrowings.
We also attempt to minimize the number of margin calls we receive by:
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Deploying capital from our leveraged Agency MBS portfolio to our unleveraged Agency MBS portfolio;
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Investing in Agency MBS backed by mortgages that we believe are less likely to be prepaid to decrease the risk of excessive margin
calls when monthly prepayments are announced. Prepayments are declared, and the market value of the related security declines, before the receipt of the related cash flows. Prepayment declarations give rise to a temporary collateral
deficiency and generally result in margin calls by lenders;
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Investing in REIT common stock; and
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Reducing our overall amount of leverage.
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To the extent we are unable to adequately manage our interest rate exposure and are subjected to substantial margin calls,
we may be forced to sell assets at an inopportune time which in turn could impair our liquidity and reduce our borrowing capacity and book value.
Investment Company Act Exemption
We operate our business so that we are exempt from registration under the Investment Company Act. We rely on the exemption
provided by Section 3(c)(5)(C) of the Investment Company Act, which applies to companies in the business of purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. In order to rely on the exemption provided
by Section 3(c)(5)(C), we must maintain at least 55% of our assets in qualifying real estate assets. For the purposes of this test, structured Agency MBS are non-qualifying real estate assets. We monitor our portfolio periodically and prior to
each investment to confirm that we continue to qualify for the exemption. To qualify for the exemption, we make investments so that at least 55% of the assets we own consist of qualifying mortgages and other liens on and interests in real estate,
which we refer to as qualifying real estate assets, and so that at least 80% of the assets we own consist of real estate-related assets, including our qualifying real estate assets.
We treat whole-pool pass-through Agency MBS as qualifying real estate assets based on no-action letters issued by the staff
of the SEC. In August 2011, the SEC, through a concept release, requested comments on interpretations of Section 3(c)(5)(C). To the extent that the SEC or its staff publishes new or different guidance with respect to these matters, we may fail to
qualify for this exemption. We manage our pass-through Agency MBS portfolio such that we have sufficient whole-pool pass-through Agency MBS to ensure we maintain our exemption from registration under the Investment Company Act. At present, we
generally do not expect that our investments in structured Agency MBS will constitute qualifying real estate assets, but will constitute real estate-related assets for purposes of the Investment Company Act.
As of December 31, 2018, we had 7 full-time employees.
Our net income depends on our ability to acquire Agency MBS for our portfolio at favorable spreads over our borrowing
costs. Our net income also depends on our ability to execute the same investment strategy for the Orchid portfolio, for which we receive management fees and expense reimbursement payments. When we invest in Agency MBS and other investment assets,
we compete with a variety of institutional investors, including mortgage REITs, insurance companies, mutual funds, pension funds, investment banking firms, banks and other financial institutions that invest in the same types of assets, the
Federal Reserve Bank and other governmental entities or government sponsored entities. Many of these investors have greater financial resources and access to lower costs of capital than we do. The existence of these competitive entities, as well
as the possibility of additional entities forming in the future, may increase the competition for the acquisition of mortgage related securities, resulting in higher prices and lower yields on assets.
Our investor relations website is www.biminicapital.com. We make available on the website under "Financial Information/SEC
filings," free of charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any other reports (including any amendments to such reports) as soon as reasonably practicable after we
electronically file or furnish such materials to the SEC. Information on our website, however, is not part of this Annual Report on Form 10-K. All reports filed with the SEC may also be read and copied at the SEC’s public reference room at 100 F
Street, N.E., Washington, D.C. 20549. Further information regarding the operation of the public reference room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC’s website at www.sec.gov.
You should carefully consider the risks described below and all other information contained in this
Annual Report on Form 10-K, including our annual consolidated financial statements and related notes thereto, before making an investment decision regarding our common stock. Our business, financial condition or results of operations could be
harmed by any of these risks. Similarly, these risks could cause the market price of our common stock to decline and you might lose all or part of your investment. Our forward-looking statements in this annual report are subject to the following
risks and uncertainties. Our actual results could differ materially from those anticipated by our forward-looking statements as a result of the risk factors below.
Risks Related to Our Business
Increases in interest rates may negatively affect the value of our investments and increase the cost of
our borrowings, which could result in reduced earnings or losses.
Under a normal yield curve, an investment in Agency MBS will decline in value if interest rates increase. In addition, net
interest income could decrease if the yield curve becomes inverted or flat. While Fannie Mae, Freddie Mac or Ginnie Mae guarantee the principal and interest payments related to the Agency MBS we own, this guarantee does not protect us from
declines in market value caused by changes in interest rates. Declines in the market value of our investments may ultimately result in losses to us, which may reduce earnings and cash available to fund our operations.
Significant increases in both long-term and short-term interest rates pose a substantial risk associated with our
investment in Agency MBS. If long-term rates were to increase significantly, the market value of our Agency MBS would decline, and the duration and weighted average life of the investments would increase. We could realize a loss if the securities
were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on our repurchase agreements used to finance the purchase of Agency MBS, which would decrease cash. Using this business model, we are
particularly susceptible to the effects of an inverted yield curve, where short-term rates are higher than long-term rates. Although rare in a historical context, the U.S. and many countries in Europe have experienced inverted yield curves. Given
the volatile nature of the U.S. economy and the Fed’s recent increase and possible future increases in short-term interest rates, there can be no guarantee that the yield curve will not become and/or remain inverted. If this occurs, it could
result in a decline in the value of our Agency MBS, our business, financial position and results of operations.
An increase in interest rates may also cause a decrease in the volume of newly issued, or investor
demand for, Agency MBS, which could materially adversely affect our ability to acquire assets that satisfy our investment objectives and our business, financial condition and results of operations.
Rising interest rates generally reduce the demand for consumer credit, including mortgage loans, due to the higher cost of
borrowing. A reduction in the volume of mortgage loans may affect the volume of Agency MBS available to us, which could affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause Agency MBS
that were issued prior to an interest rate increase to provide yields that exceed prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of Agency MBS or Agency MBS with a yield that
exceeds our borrowing costs, our ability to satisfy our investment objectives and to generate income, our business, financial condition and results of operations.
Interest rate mismatches between our Agency MBS and our borrowings may reduce our net interest margin
during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations.
Our portfolio includes Agency MBS backed by ARMs, hybrid Arms and fixed-rate mortgages, and the mix of these securities in
the portfolio may be increased or decreased over time. Additionally, the interest rates on ARMs and hybrid ARMs may vary over time based on changes in a short-term interest rate index, of which there are many.
We finance our acquisitions of pass-through Agency MBS with short-term financing. During periods of rising short-term
interest rates, the income we earn on these securities will not change (with respect to Agency MBS backed by fixed-rate mortgage loans) or will not increase at the same rate (with respect to Agency MBS backed by ARMs and hybrid ARMs) as our
related financing costs, which may reduce our net interest margin or result in losses.
We invest in structured Agency MBS, including CMOs, IOs, IIOs and POs. Although structured Agency MBS
are generally subject to the same risks as our pass-through Agency MBS, certain types of risks may be enhanced depending on the type of structured Agency MBS in which we invest.
The structured Agency MBS in which we invest are securitizations (i) issued by Fannie Mae, Freddie Mac or Ginnie Mae, (ii)
collateralized by Agency MBS and (iii) divided into various tranches that have different characteristics (such as different maturities or different coupon payments). These securities may carry greater risk than an investment in pass-through
Agency MBS. For example, certain types of structured Agency MBS, such as IOs, IIOs and POs, are more sensitive to prepayment risks than pass-through Agency MBS. If we were to invest in structured Agency MBS that were more sensitive to prepayment
risks relative to other types of structured Agency MBS or pass-through Agency MBS, we may increase our portfolio-wide prepayment risk.
Differences in the stated maturity of our fixed rate assets, or in the timing of interest rate
adjustments on our adjustable-rate assets, and our borrowings may adversely affect our profitability.
We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with long-term maturities.
In addition, we may have adjustable rate assets with interest rates that vary over time based upon changes in an objective index, such as LIBOR or the U.S. Treasury rate. These indices generally reflect short-term interest rates but these assets
may not reset in a manner that matches our borrowings.
The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily,
short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidly
than the interest income earned on our assets. Because our investments generally bear interest at longer-term rates than we pay on our borrowings, a flattening of the yield curve would tend to decrease our net interest income and the market value
of our investment portfolio. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline,
which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve "inversion"), in which event, our borrowing costs may exceed our interest income and we could
incur operating losses.
We cannot predict the impact, if any, on our earnings of the proposed restructuring of the Federal
Housing Finance Agency (the “FHFA”) to Fannie Mae’s and Freddie Mac’s existing infrastructures to align the standards and practices of these entities.
On February 21, 2012, the FHFA released its
Strategic Plan for Enterprise Conservatorships
, which set forth three objectives for the next phase of the Fannie Mae and Freddie Mac conservatorships: (i) build a new infrastructure for the secondary mortgage
market, (ii) gradually contract Fannie Mae and Freddie Mac's presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced
mortgages. On October 4, 2012, the FHFA released its white paper entitled
Building a New Infrastructure for the Secondary Mortgage Market
,
which proposes a new Fannie Mae and Freddie Mac infrastructure built around two principles.
First, replace Fannie Mae and Freddie Mac's current infrastructures with a common infrastructure that efficiently aligns
the standards and practices of the two entities, beginning with overlapping core functions such as issuance, master servicing, bond administration, collateral management and data integration. The FHFA has taken steps to establish a common
securitization platform ("CSP") for residential mortgage-backed securities reflecting feedback from a broad cross-section of industry participants. In July 2016, the FHFA released an update on the CSP, detailing progress made in the development
of a new infrastructure for the securitization of single-family mortgages by Fannie Mae and Freddie Mac. Developing the CSP is a key goal of FHFA's 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, which details the
organizational structure of Common Securitization Solutions, LLC, a joint venture company that was established by Fannie Mae and Freddie Mac to lead the work on this project. In December 2016, the FHFA announced that Release 1 of the CSP was
successfully implemented on November 21, 2016. This means that Freddie Mac now uses the CSP for data acceptance, issuance support, and bond administration activities related to current single-class, fixed-rate, mortgage-backed securities.
Commencing June 3, 2019, Freddie Mac and Fannie Mae will commence use of a common, single mortgage-backed security, which
will be known as the Uniform Mortgage-Backed Security (“UMBS”). Once implemented, Fannie Mae and Freddie Mac pools will be eligible for conversion into UMBS pools. The conversion is not mandatory, and some pools will likely not be converted.
UMBS is intended to enhance liquidity in the TBA market as the two GSE’s floats are combined, eliminate or reduce the market pricing subsidy that Freddie Mac currently provides to lenders to pool their loans with Freddie Mac instead of Fannie
Mae, and pave the way for future GSE reform by allowing new participants to enter the MBS guarantee market. However, there are risks associated with the implementation of the UMBS as well.
The current float of Gold Participation Certificates (“Gold PCs”) issued by Freddie Mac is materially smaller than the
float of Fannie Mae securities. To the extent Gold PCs are converted into UMBS, the float would contract further. A further decline could impact the liquidity of Gold PCs not converted into UMBS. Secondly, the TBA deliverable could deteriorate
as the Fannie Mae and Freddie Mac pools with the worst prepayment characteristics are delivered into new TBA securities, concentrating the poorest pools into the TBA deliverable, which would negatively impact their performance. To the extent
investors recognize the relative performance of Fannie Mae or Freddie Mac pools over the other, they may stipulate that they only wish to be delivered TBA securities with pools from the better performing GSE. Bifurcating the TBA deliverable
could negativley impact, liquidity in the TBA market.
The second principle of the October 2012 white paper is to establish an operating framework for Fannie Mae and Freddie Mac
that is consistent with housing finance reform progress that encourages and accommodates increased participation of private capital in assuming credit risk associated with the secondary mortgage market.
The FHFA recognizes the challenges faced in these formative stages which may or may not be surmountable, such as the
absence of meaningful secondary mortgage market mechanisms beyond Fannie Mae, Freddie Mac and Ginnie Mae. In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and
expectations for announcing a framework for the development of a policy for comprehensive housing finance reform soon. At this time, however, no decisions have been made on any reform plan. As a result, it is uncertain if the proposals will be
enacted, what exactly will be enacted, and how they will be enacted. As a result, we cannot be certain what the effects of the enactment will have on our book value, earnings or cash available for distribution to stockholders.
Purchases and sales of Agency MBS by the Fed may adversely affect the price and return associated with
Agency MBS.
The Fed owned approximately $1.6 trillion of Agency MBS as of December 31, 2018. The Fed's former policy was to reinvest
principal payments from its holdings of Agency MBS into new Agency MBS purchases. During its meeting in September 2017, the FOMC directed the Open Market Trading Desk (the "Desk") at the Fed Bank of New York to initiate, in October 2017, the
program to gradually reduce the reinvestment of principal payments from the Fed’s securities holdings. Specifically, the FOMC directed the Desk to reinvest each month’s principal payments from Treasury securities, agency debt, and Agency MBS only
to the extent that such payments exceed gradually rising caps. The Fed also announced at the September 2017 meeting that it would be reducing its holdings of U.S. Treasury bonds and mortgage-backed securities, starting in October 2017. These
steps have been referred to as the Fed’s “balance sheet normalization”. Fed Chairman Jerome Powell made statements following the January 2019 meeting that the Fed is evaluating the appropriate timing for the end of the Fed’s balance sheet
normalization and will finalize its plan to do so at a later meeting. In its January 30, 2019 release, the Fed said that the FOMC is prepared to adjust any of the details for completing balance sheet normalization in light of economic and
financial developments.
While we cannot predict the impact of these actions by the Fed on the prices and liquidity of Agency MBS, we expect that
during periods in which the Fed purchases significant volumes of Agency MBS, yields on Agency MBS may be lower and refinancing volumes may be higher than they would have been absent their large scale purchases. As a result, returns on Agency MBS
may be adversely affected. There is also a risk that as the Fed reduces its purchases of Agency MBS or if it decides to sell some or all of its holdings of Agency MBS, the pricing of our Agency MBS portfolio may be adversely affected.
Increased levels of prepayments on the mortgages underlying our Agency MBS might decrease net interest
income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations.
In the case of residential mortgages, there are seldom any restrictions on borrowers’ ability to prepay their loans.
Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets,
governmental action, general economic conditions and the relative interest rates on ARMs, hybrid ARMs and fixed-rate mortgage loans. With respect to pass-through Agency MBS, faster-than-expected prepayments could also materially adversely affect
our business, financial condition and results of operations in various ways, including, if we are unable to quickly acquire new Agency MBS that generate comparable returns to replace the prepaid Agency MBS.
When we acquire structured Agency MBS, we anticipate that the underlying mortgages will prepay at a projected rate,
generating an expected yield. When the prepayment rates on the mortgages underlying our structured Agency MBS are higher than expected, our returns on those securities may be materially adversely affected. For example, the value of our IOs and
IIOs are extremely sensitive to prepayments because holders of these securities do not have the right to receive any principal payments on the underlying mortgages. Therefore, if the mortgage loans underlying our IOs and IIOs are prepaid, such
securities would cease to have any value, which, in turn, could materially adversely affect our business, financial condition and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of
each investment. No strategy can completely insulate us from prepayment or other such risks.
A decrease in prepayment rates on the mortgages underlying our Agency MBS might decrease net interest
income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations.
Certain of our structured Agency MBS may be adversely affected by a decrease in prepayment rates. For example, because POs
are similar to zero-coupon bonds, our expected returns on such securities will be contingent on our receiving the principal payments of the underlying mortgage loans at expected intervals that assume a certain prepayment rate. If prepayment rates
are lower than expected, we will not receive principal payments as quickly as we anticipated and, therefore, our expected returns on these securities will be adversely affected, which, in turn, could materially adversely affect our business,
financial condition and results of operations.
While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of
each investment. No strategy can completely insulate us from prepayment or other such risks.
Interest rate caps on the ARMs and hybrid ARMs backing our Agency MBS may reduce our net interest
margin during periods of rising interest rates, which could materially adversely affect our business, financial condition and results of operations.
ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit
the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan. Our borrowings typically are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing interest rates, our financing costs could increase without limitation while caps could limit the interest we earn on the ARMs and hybrid ARMs backing our Agency MBS. This problem is magnified for
ARMs and hybrid ARMs that are not fully indexed because such periodic interest rate caps prevent the coupon on the security from fully reaching the specified rate in one reset. Further, some ARMs and hybrid ARMs may be subject to periodic payment
caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on Agency MBS backed by ARMs and hybrid ARMs than necessary to pay interest on our related
borrowings. Interest rate caps on Agency MBS backed by ARMs and hybrid ARMs could reduce our net interest margin if interest rates were to increase beyond the level of the caps, which could materially adversely affect our business, financial
condition and results of operations.
Failure to procure adequate repurchase agreement financing, or to renew or replace existing repurchase
agreement financing as it matures, could materially adversely affect our business, financial condition and results of operations.
We intend to maintain master repurchase agreements with several counterparties. We cannot assure you that any, or
sufficient, repurchase agreement financing will be available to us in the future on terms that are acceptable to us. Any decline in the value of Agency MBS, or perceived market uncertainty about their value, would make it more difficult for us to
obtain financing on favorable terms or at all, or maintain our compliance with the terms of any financing arrangements already in place. We may be unable to diversify the credit risk associated with our lenders. In the event that we cannot obtain
sufficient funding on acceptable terms, our business, financial condition and results of operations may be adversely affected.
Furthermore, because we intend to rely primarily on short-term borrowings to fund our acquisition of Agency MBS, our
ability to achieve our investment objective will depend not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If
we are not able to renew or replace maturing borrowings, we will have to sell some or all of our assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be
required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among
other factors, the regulatory environment and their management of perceived risk.
Adverse market developments could cause our lenders to require us to pledge additional assets as
collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business,
financial condition and results of operations.
Adverse market developments, including a sharp or prolonged rise in interest rates, a change in prepayment rates or
increasing market concern about the value or liquidity of one or more types of Agency MBS, might reduce the market value of our portfolio, which might cause our lenders to initiate margin calls. A margin call means that the lender requires us to
pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements
and not determined until we engage in a repurchase transaction under these agreements. Our fixed-rate Agency MBS generally are more susceptible to margin calls as increases in interest rates tend to more negatively affect the market value of
fixed-rate securities. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat or occurrence of a margin call could force us to sell, either directly or through a foreclosure, our Agency MBS under adverse
market conditions. Because of the significant leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call, which could materially adversely affect our business, financial condition and results of
operations.
Hedging against interest rate exposure may not completely insulate us from interest rate risk and could
materially adversely affect our business, financial condition and results of operations.
We may enter into interest rate cap or swap agreements or pursue other hedging strategies, including the purchase of puts,
calls or other options and futures contracts in order to hedge the interest rate risk of our portfolio. In general, our hedging strategy depends on our view of our entire portfolio consisting of assets, liabilities and derivative instruments, in
light of prevailing market conditions. We could misjudge the condition of our investment portfolio or the market. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal prepayments, the type of
Agency MBS we hold and other changing market conditions. Hedging may fail to protect or could adversely affect us because, among other things:
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hedging can be expensive, particularly during periods of rising and volatile interest rates;
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available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the related liability;
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certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge;
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the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or
assign our side of the hedging transaction; and
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the counterparty in the hedging transaction may default on its obligation to pay.
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There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Alternatively, we may
fail to properly assess a risk to our investment portfolio or may fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedging activities. The derivative financial instruments we select may not
have the effect of reducing our interest rate risk. The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk
and losses. In addition, hedging activities could result in losses if the event against which we hedge does not occur.
Because of the foregoing risks, our hedging activity could materially adversely affect our business, financial condition
and results of operations.
Our use of certain hedging techniques may expose us to counterparty risks.
To the extent that our hedging instruments are not traded on regulated exchanges, guaranteed by an exchange or its
clearinghouse, or regulated by any U.S. or foreign governmental authorities, there may not be requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of
agreements underlying hedging transactions may depend on compliance with applicable statutory, exchange and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if
any of these issues causes a counterparty to fail to perform under a derivative agreement we could incur a significant loss.
For example, if a swap exchange utilized in an interest rate swap agreement that we enter into as part of our hedging
strategy cannot perform under the terms of the interest rate swap agreement, we may not receive payments due under that agreement, and, thus, we may lose any potential benefit associated with the interest rate swap. Additionally, we may also risk
the loss of any collateral we have pledged to secure our obligations under these swap agreements if the exchange becomes insolvent or files for bankruptcy. Similarly, if an interest rate swaption counterparty fails to perform under the terms of
the interest rate swaption agreement, in addition to not being able to exercise or otherwise cash settle the agreement, we could also incur a loss for the premium paid for that swaption.
It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin
calls on our TBA contracts, which could negatively affect our financial condition and results of operations.
We may utilize TBA dollar roll transactions as a means of investing in and financing Agency MBS securities. TBA contracts
enable us to purchase or sell, for future delivery, Agency MBS with certain principal and interest terms and certain types of collateral, but the particular Agency MBS to be delivered are not identified until shortly before the TBA settlement
date. Prior to settlement of the TBA contract we may choose to move the settlement of the securities out to a later date by entering into an offsetting position (referred to as a "pair off"), net settling the paired off positions for cash, and
simultaneously purchasing a similar TBA contract for a later settlement date, collectively referred to as a "dollar roll." The Agency MBS purchased for a forward settlement date under the TBA contract are typically priced at a discount to Agency
MBS for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest income earned from carrying the underlying Agency MBS over the roll period
(interest income less implied financing cost). Consequently, dollar roll transactions and such forward purchases of Agency MBS represent a form of off-balance sheet financing and increase our "at risk" leverage.
Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the Agency MBS
purchased for a forward settlement date under the TBA contract are priced at a premium to Agency MBS for settlement in the current month. Additionally, sales of some or all of the Fed's holdings of Agency MBS or declines in purchases of Agency
MBS by the Fed could adversely impact the dollar roll market. Under such conditions, it may be uneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle
our obligations for cash. We may not have sufficient funds or alternative financing sources available to settle such obligations. In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division ("MBSD") of
the Fixed Income Clearing Corporation, we are subject to margin calls on our TBA contracts. Further, our clearing and custody agreements may require us to post additional margin above the levels established by the MBSD. Negative carry income on
TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions and adversely affect
our financial condition and results of operations.
Our forward settling transactions, including TBA transactions, subject us to certain risks,
including price risks and counterparty risks.
We purchase some of our Agency MBS through forward settling transactions, including TBAs. In a forward settling
transaction, we enter into a forward purchase agreement with a counterparty to purchase either (i) an identified Agency MBS, or (ii) a TBA, or to-be-issued, Agency MBS with certain terms. As with any forward purchase contract, the value of the
underlying Agency MBS may decrease between the trade date and the settlement date. Furthermore, a transaction counterparty may fail to deliver the underlying Agency MBS at the settlement date. If any of these risks were to occur, our financial
condition and results of operations may be materially adversely affected.
We rely on analytical models and other data to analyze potential asset acquisition and disposition
opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line
with our strategy.
We rely on analytical models, and information and other data supplied by third parties. These models and data may be used
to value assets or potential asset acquisitions and dispositions and in connection with our asset management activities. If our models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon could expose
us to potential risks.
Our reliance on models and data may induce us to purchase certain assets at prices that are too high, to sell certain other
assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.
Some models, such as prepayment models, may be predictive in nature. The use of predictive models has inherent risks. For
example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the predictive models used by us may differ substantially from those models used by other market participants, resulting in valuations based
on these predictive models that may be substantially higher or lower for certain assets than actual market prices. Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of
relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in
home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation and are therefore more speculative and less reliable.
All valuation models rely on correct market data input. If incorrect market data is entered into even a well-founded
valuation model, the resulting valuations will be incorrect. However, even if market data is inputted correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose
values are particularly sensitive to various factors. If our market data inputs are incorrect or our model prices differ substantially from market prices, our business, financial condition and results of operations could be materially adversely
affected.
Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate
over short periods of time and may differ from the values that would have been used if a ready market for these assets existed. As a result, the values of some of our assets are uncertain.
While in many cases our determination of the fair value of our assets is based on valuations provided by third-party
dealers and pricing services, we can and do value assets based upon our judgment, and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are
unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all
liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset,
valuations of the same asset can vary substantially from one dealer or pricing service to another. The valuation process during times of market distress can be particularly difficult and unpredictable and during such time the disparity of
valuations provided by third-party dealers can widen.
Our business, financial condition and results of operations and our ability to make distributions to our stockholders could
be materially adversely affected if our fair value determinations of these assets were materially higher than the values that would exist if a ready market existed for these assets.
Because the assets that we acquire might experience periods of illiquidity, we might be prevented from
selling our Agency MBS at favorable times and prices, which could materially adversely affect our business, financial condition and results of operations.
Agency MBS generally experience periods of illiquidity. Such conditions are more likely to occur for structured Agency MBS
because such securities are generally traded in markets much less liquid than the pass-through Agency MBS market. As a result, we may be unable to dispose of our Agency MBS at advantageous times and prices or in a timely manner. The lack of
liquidity might result from the absence of a willing buyer or an established market for these assets as well as legal or contractual restrictions on resale. The illiquidity of Agency MBS could materially adversely affect our business, financial
condition and results of operations.
Our use of leverage could materially adversely affect our business, financial condition and results of
operations.
We calculate our leverage ratio by dividing our total liabilities by total equity at the end of each period. Under normal
market conditions, we generally expect our leverage ratio to be less than 12 to 1, although at times our borrowings may be above or below this level. We incur this indebtedness by borrowing against a substantial portion of the market value of our
pass-through Agency MBS and a portion of our structured Agency MBS. Our total indebtedness, however, is not expressly limited by our policies and will depend on our prospective lenders’ estimates of the stability of our portfolio’s cash flow. As
a result, there is no limit on the amount of leverage that we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender’s margin requirements from our income and, to the extent we cannot, we might be
forced to liquidate some of our Agency MBS at unfavorable prices. Our use of leverage could materially adversely affect our business, financial condition and results of operations. For example, our repurchase agreement borrowings are secured by
our pass-through Agency MBS and may be secured by a portion of our structured Agency MBS under repurchase agreements. A decline in the market value of the pass-through Agency MBS or structured Agency MBS used to secure these debt obligations
could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency MBS under adverse market conditions in order to obtain the
additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency MBS, we would experience losses.
If we experience losses as a result of our use of leverage, such losses could materially adversely affect our business,
results of operations and financial condition.
Our use of repurchase agreements may give our lenders greater rights in the event that either we or any
of our lenders file for bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.
Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders
the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of
repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any of our lenders files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the
event of a bankruptcy filing by either our lenders or us. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance
Act, our ability to exercise our rights to recover our investment under a repurchase agreement or to be compensated for any damages resulting from the lender’s insolvency may be further limited by those statutes.
If a repurchase agreement counterparty defaults on their obligations to resell the Agency MBS back to
us at the end ot the repurchase term, or if the value of the Agency MBS has declined by the end of the repurchase transaction term or if we default on our obligations under the repurchase transaction, we will lose money on these transactions,
which, in turn, may materially adversely affect our business, financial condition and results of operations.
When we engage in a repurchase transaction, we initially sell securities to the financial institution under one of our
master repurchase agreements in exchange for cash, and our counterparty is obligated to resell the securities to us at the end of the term of the transaction, which is typically from 24 to 90 days but may be up to 364 days or more. The cash we
receive when we initially sell the securities is less than the value of those securities, which is referred to as the haircut. Many financial institutions from which we may obtain repurchase agreement financing have increased their haircuts in
the past and may do so again in the future. If these haircuts are increased, we will be required to post additional cash or securities as collateral for our Agency MBS. If our counterparty defaults on its obligation to resell the securities to
us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities had
declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we incur on our repurchase transactions could materially
adversely affect our business, financial condition and results of operations.
If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and
cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our portfolio and carry out our
investment strategy. There is no assurance we would be able to establish a suitable replacement facility on acceptable terms or at all.
We have issued long-term debt to fund our operations which can increase the volatility of our earnings
and stockholders’ equity.
In October 2005, Bimini Capital completed a private offering of trust preferred securities of Bimini Capital Trust II, of
which $26.8 million are still outstanding. The Company must pay interest on these junior subordinated notes on a quarterly basis at a rate equal to current three month LIBOR rate plus 3.5%. To the extent the Company’s does not generate
sufficient earnings to cover the interest payments on the debt, our earnings and stockholders’ equity may be negatively impacted.
The Company considers the junior subordinated notes as part of its long-term capital base. Therefore, for purposes of all
disclosure in this report concerning our capital or leverage, the Company considers both stockholders’ equity and the $26.8 million of junior subordinated notes to constitute capital.
The Company has also elected to account for its investments in MBS under the fair value option and, therefore, will report
MBS on our financial statements at fair value with unrealized gains and losses included in earnings. Changes in the value of the MBS do not impact the outstanding balance of the junior subordinated notes but rather our stockholders’ equity.
Therefore, changes in the value of our MBS will be absorbed solely by our stockholders’ equity. Because our stockholders equity is small in relation to our total capital, such changes may result in significant changes in our stockholders’
equity.
Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase
margin requirements on our hedging instruments in the event of adverse economic developments.
In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing
facilities or exchanges upon which some of our hedging instruments, such as Eurodollar and Treasury Note futures contracts, are traded may require us to post additional collateral against our hedging instruments. In the event that future adverse
economic developments or market uncertainty result in increased margin requirements for our hedging instruments, it could materially adversely affect our liquidity position, business, financial condition and results of operations.
We may change our investment strategy, investment guidelines and asset allocation without notice or
stockholder consent, which may result in riskier investments.
Our Board of Directors has the authority to change our investment strategy or asset allocation at any time without notice
to or consent from our stockholders. To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this annual report. A change in our
investment strategy may increase our exposure to interest rate and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than as described in this annual report.
Competition might prevent us from acquiring Agency MBS at favorable yields, which could materially
adversely affect our business, financial condition and results of operations.
We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to
acquire Agency MBS at favorable spreads over our borrowing costs. In acquiring Agency MBS, we compete with a variety of institutional investors, including mortgage REITs, investment banking firms, savings and loan associations, banks, insurance
companies, mutual funds, other lenders, other entities that purchase Agency MBS, the Federal Reserve, other governmental entities and government-sponsored entities, many of which have greater financial, technical, marketing and other resources
than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the U.S. government. Additionally, many of our competitors are required to maintain an exemption from
the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments. Furthermore, competition for investments in Agency
MBS may lead the price of such investments to increase, which may further limit our ability to generate desired returns. As a result, we may not be able to acquire sufficient Agency MBS at favorable spreads over our borrowing costs, which would
materially adversely affect our business, financial condition and results of operations.
The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those of any of our third
party service providers could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our business relationships or reputation, all of which could
negatively impact our business and results of operations.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of
our information resources or the information resources of our third party service providers. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt
operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The primary risks that could directly result from the
occurrence of a cyber-incident include operational interruption and private data exposure. We have implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as our focus on mitigating the risk of a
cyber-incident, do not guarantee that our business and results of operations will not be negatively impacted by such an incident.
We are highly dependent on communications and information systems operated by third parties, and
systems failures could significantly disrupt our business, which may, in turn, adversely affect our business, financial condition and results of operations.
Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell,
finance and hedge our investments. These systems are operated by third parties and, as a result, we have limited ability to ensure their continued operation. In the event of a systems failure or interruption, we will have limited ability to
affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including Agency MBS trading activities, which could have a material
adverse effect on our business, financial condition and results of operations.
We depend primarily on two individuals to operate our business, and the loss of one or both of such
persons could materially adversely affect our business, financial condition and results of operations.
We depend substantially on two individuals, Robert E. Cauley, our Chairman and Chief Executive Officer, and G. Hunter Haas,
our President, Chief Investment Officer and Chief Financial Officer, to manage our business. We depend on the diligence, experience and skill of Mr. Cauley and Mr. Haas in managing all aspects of our business, including the selection,
acquisition, structuring and monitoring of securities portfolios and associated borrowings. Although we have entered into contracts and compensation arrangements with Mr. Cauley and Mr. Haas that encourage their continued employment, those
contracts may not prevent either Mr. Cauley or Mr. Haas from leaving our company. The loss of either of them could materially adversely affect our business, financial condition and results of operations.
If we issue debt securities, our operations may be restricted and we will be exposed to additional
risk.
If we decide to issue debt securities in the future, it is likely that such securities will be governed by an indenture or
other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A
Common Stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security
interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating restrictions could
have a material adverse effect on our business, financial condition and results of operations.
No assurance can be given that the actions taken by the U.S. government for the purpose of seeking to
stimulate the economy will achieve their intended effect or will benefit our business, and further, government or market developments could adversely affect us.
The current administration of the U.S. government has announced that it may implement initiatives intended to stimulate the
U.S. economy. No assurance can be given that these initiatives will beneficially impact the economy or our business. To the extent the markets respond favorably to these initiatives, if these initiatives do not function as intended or interest
rates increase as a result of these initiatives, the pricing, supply, liquidity and value of our assets and the availability of financing on attractive terms may be materially adversely affected.
The Basel III standards and other supplementary regulatory standards may negatively impact our
access to financing or affect the terms of our future financing arrangements.
In response to various financial crises and the volatility of financial markets, the Basel Committee on Banking
Supervision, an international body comprised of senior representatives of bank supervisory authorities and central banks from 27 countries, including the United States, adopted the Basel III standards several years ago. U.S. regulators have
elected to implement substantially all of the Basel III standards. These new standards, including the Supplementary Leverage Ratio imposed by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller
of the Currency, require banks to hold more capital, predominantly in the form of common equity, than under the prior capital framework. These increased bank capital requirements may constrain our ability to obtain attractive future financings
and increase the cost of such financings if they are obtained.
U.S. regulators adopted rules requiring enhanced supplementary leverage ratio standards that impose capital requirements
more stringent than those of the Basel III standards for the most systematically significant banking organizations in the U.S. Adoption and implementation of the Basel III standards and the supplemental regulatory standards adopted by U.S.
regulators may negatively impact our access to financing or affect the terms of our future financing arrangements.
Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is
determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.
LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other
regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past, or have other consequences which
cannot be predicted. In particular, regulators and law enforcement agencies in the U.K. and elsewhere are conducting criminal and civil investigations into whether the banks that contributed information to the British Bankers’ Association (“BBA”)
in connection with the daily calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement
agencies with respect to this alleged manipulation of LIBOR. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR), may result in changes to the manner in which LIBOR
is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.
At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference
rates or any other reforms to LIBOR that may be implemented in the U.K. or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any
securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations.
The development of alternative reference rates is complex. In the United States, a committee was formed in 2014 to study
the process and develop an alternative reference rate. The Alternative Reference Rate Committee (the “ARRC”) selected the Secured Overnight Financing Rate (“SOFR”), an overnight secured U.S. Treasury repo rate as the new rate and adopted a Paced
Transition Plan (“PTP”), which provides a framework for the transition from USD LIBOR to SOFR. SOFR is published daily at 8:00 a.m. EST by the NY Federal Reserve Bank for the previous business day’s trades. However, since SOFR is an overnight
rate and many forms of loans or instruments used for hedging have much longer terms, there is a need for a term structure for the new reference rate. Various central banks, including the Fed, and the ARRC, are in the process of developing term
rates to support cash markets that currently use LIBOR. Examples of the cash market would be floating rate notes, syndicated and bilateral corporate loans, securitizations, secured funding transactions and various mortgage and consumer loans –
including many of the securities the Company owns from time to time such as IIOs. The Company also uses derivative securities tied to LIBOR to hedge its funding costs. Development of term rates for derivatives is being conducted by the
International Swaps and Derivatives Association (“ISDA”). However, ARRC and ISDA may utilize different mechanisms to develop term rates which may cause potential mismatches between cash products or assets of the Company and hedge instruments.
The process for determining term rates by both ARRC and ISDA is not finalized at this time.
More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result
of international, national or other proposals for reform or other initiatives or investigations, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value
of and return on any securities based on or linked to a “benchmark.”
Our investment in Orchid Island Capital, Inc. or other mortgage REIT common stock may fluctuate in
value which materially adversely affect our business, financial condition and results of operations.
Investments in the securities of companies that own Agency MBS will be subject to all of the risks associated with the
direct ownership of Agency MBS discussed above that could adversely affect the market price of the investment and the ability of the REIT to pay dividends. In addition, the market value of the common stock could be affected by market conditions
beyond the Company’s control. A decrease in the dividend payment rate or the market value of the common stock could have a material adverse effect on our business, financial condition and results of operations.
The termination of our management agreement with Orchid could significantly reduce our revenues.
Orchid is externally managed and advised by Bimini Advisors. As Manager, Bimini Advisors is responsible for administering
Orchid’s business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel.
In exchange for these services, Bimini Advisors receives a monthly management fee. In addition, Orchid is obligated to
reimburse Bimini Advisors for any direct expenses incurred on its behalf and Bimini Advisors allocates to Orchid its pro rata portion of certain overhead costs. The significance of these management fees and overhead reimbursements has increased,
and is expected to continue to increase, as Orchid’s capital base continues to grow. If Orchid were to terminate the management agreement without cause, it would be obligated to pay to Bimini Advisors a termination fee equal to three times the
average annual management fee, as defined in the management agreement, before or on the last day of the initial term or automatic renewal term. The loss of these revenues, if it were to occur, would have a severe and immediate impact on the
Company.
We may be subject to adverse legislative or regulatory changes that could reduce the market price of
our common stock.
At any time, laws or regulations, or the administrative interpretations of those laws or regulations, which impact our
business and Maryland corporations may be amended. In addition, the markets for MBS and derivatives, including interest rate swaps, have been the subject of intense scrutiny in recent years. We cannot predict when or if any new law, regulation or
administrative interpretation, or any amendment to any existing law, regulation or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, revisions to these laws, regulations or administrative
interpretations could cause us to change our investments. We could be materially adversely affected by any such change to any existing, or any new, law, regulation or administrative interpretation, which could reduce the market price of our
common stock.
Risks Related to Our Organization and Structure
Loss of our exemption from regulation under the Investment Company Act would negatively affect the
value of shares of our common stock.
We have operated and intend to continue to operate our business so as to be exempt from registration under the Investment
Company Act, because we are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Specifically, we invest and intend to continue to invest so that at least 55% of the
assets that we own on an unconsolidated basis consist of qualifying mortgages and other liens and interests in real estate, which are collectively referred to as “qualifying real estate assets,” and so that at least 80% of the assets we own on an
unconsolidated basis consist of real estate-related assets (including our qualifying real estate assets). We treat Fannie Mae, Freddie Mac and Ginnie Mae whole-pool residential mortgage pass-through securities issued with respect to an underlying
pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets based on no-action letters issued by the SEC. To the extent that the SEC publishes new or different guidance with respect to these
matters, we may fail to qualify for this exemption.
If we fail to qualify for this exemption, we could be required to restructure our activities in a manner that, or at a time
when, we would not otherwise choose to do so, which could negatively affect the value of shares of our common stock and our ability to distribute dividends. For example, if the market value of our investments in CMOs or structured Agency MBS,
neither of which are qualifying real estate assets for Investment Company Act purposes, were to increase by an amount that resulted in less than 55% of our assets being invested in pass-through Agency MBS, we might have to sell CMOs or structured
Agency MBS in order to maintain our exemption from the Investment Company Act. The sale could occur during adverse market conditions, and we could be forced to accept a price below that which we believe is acceptable.
Alternatively, if we fail to qualify for this exemption, we may have to register under the Investment Company Act and we
could become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio
composition, including restrictions with respect to diversification and industry concentration, and other matters.
We may be required at times to adopt less efficient methods of financing certain of our securities, and we may be precluded
from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the
definition of an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described in this prospectus. Our business will be materially and adversely affected if we fail
to qualify for and maintain an exemption from regulation pursuant to the Investment Company Act.
Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could
subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition.
The Dodd-Frank Act established a comprehensive regulatory framework for derivative contracts commonly referred to as
“swaps.” As a result, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its operators (in some cases the fund’s directors) to be regulated as “commodity pool operators,” (“CPOs”). Under new rules
adopted by the U.S. Commodity Futures Trading Commission, (the “CFTC”), those funds that become commodity pools solely because of their use of swaps must register with the National Futures Association (the “NFA”). Registration requires compliance
with the CFTC’s regulations and the NFA’s rules with respect to capital raising, disclosure, reporting, recordkeeping and other business conduct.
We use hedging instruments in conjunction with our investment portfolio and related borrowings to reduce or mitigate risks
associated with changes in interest rates, mortgage spreads, yield curve shapes and market volatility. These hedging instruments may include interest rate swaps, interest rate futures and options on interest rate futures. We do not currently
engage in any speculative derivatives activities or other non-hedging transactions using swaps, futures or options on futures. We do not use these instruments for the purpose of trading in commodity interests, and we do not consider the Company
or its operations to be a commodity pool as to which CPO registration or compliance is required.
The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including
their anti-fraud and anti-manipulation provisions. For example, the CFTC may suspend or revoke the registration of or the no-action relief afforded to a person who fails to comply with commodities laws and regulations, prohibit such a person from
trading or doing business with registered entities, impose civil money penalties, require restitution and seek fines or imprisonment for criminal violations. In the event that the CFTC asserts that we are not entitled to the no-action letter
relief claimed, we may be obligated to furnish additional disclosures and reports, among other things. Further, a private right of action exists against those who violate the laws over which the CFTC has jurisdiction or who willfully aid, abet,
counsel, induce or procure a violation of those laws. In the event that we fail to comply with statutory requirements relating to derivatives or with the CFTC’s rules thereunder, including the no-action letter described above, we may be subject
to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial condition and results of operations.
Our Rights Plan could inhibit a change in our control that would otherwise be favorable to our
stockholders.
In December 2015, our Board of Directors adopted a Rights Agreement (the “Rights Plan”) in an effort to protect against a
possible limitation on our ability to use our net operating losses “(NOLs”) and net capital losses (“NCLs”) by discouraging investors from aggregating ownership of our Class A Common Stock and triggering an “ownership change” for purposes of
Sections 382 and 383 of the Code. Under the terms of the Rights Plan, in general, if a person or group acquires ownership of 4.9% or more of the outstanding shares of our Class A Common Stock without the consent of our Board of Directors (an
“Acquiring Person”), all of our other stockholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person. As a result, the Rights Plan
may have the effect of inhibiting or impeding a change in control not approved by our Board of Directors and, notwithstanding its purpose, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market price
for our common stock in connection with such a transaction. In addition, because our Board of Directors may consent to certain transactions, the Rights Plan gives our Board of Directors significant discretion over whether a potential acquirer’s
efforts to acquire a large interest in us will be successful. There can be no assurance that the Rights Plan will prevent an “ownership change” within the meaning of Sections 382 and 383 of the Code, in which case we may lose all or most of the
anticipated tax benefits associated with our prior losses.
Certain provisions of applicable law and our charter and bylaws may restrict business combination
opportunities that would otherwise be favorable to our stockholders.
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other
transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders, including business combination provisions, supermajority vote and cause requirements for removal of directors,
provisions that vacancies on our Board of Directors may be filled only by the remaining directors, for the full term of the directorship in which the vacancy occurred, the power of our Board of Directors to increase or decrease the aggregate
number of authorized shares of stock or the number of shares of any class or series of stock, to cause us to issue additional shares of stock of any class or series and to fix the terms of one or more classes or series of stock without
stockholder approval, the restrictions on ownership and transfer of our stock and advance notice requirements for director nominations and stockholder proposals. These provisions, along with the restrictions on ownership and transfer contained in
our charter and certain provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of us, which could adversely affect the market price of our
securities.
Our rights and the rights of our stockholders to take action against our directors and officers are
limited, which could limit your recourse in the event of actions not in your best interests.
Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for
liability resulting from:
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actual receipt of an improper benefit or profit in money, property or services; or
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a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause
of action adjudicated.
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We have entered into indemnification agreements with our directors and executive officers that obligate us to indemnify
them to the maximum extent permitted by Maryland law. In addition, our charter authorizes the Company to obligate itself to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the
maximum extent permitted by Maryland law. Our bylaws require us, to the maximum extent permitted by Maryland law, to indemnify each present and former director or officer in the defense of any proceeding to which he or she is made, or threatened
to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our
directors and officers than might otherwise exist absent the provisions in our charter, bylaws and indemnification agreements or that might exist with other companies.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law ( the “MGCL”), may have the effect of inhibiting a third party
from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:
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“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested
stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to
the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an
interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and
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“control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which,
when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to
exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,”
subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
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We have elected to opt-out of these provisions of the MGCL, in the case of the business combination provisions, by
resolution of our Board of Directors (provided that such business combination is first approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person), and in the case of the control
share provisions, pursuant to a provision in our bylaws. However, our Board of Directors may by resolution elect to repeal the foregoing opt-out from the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in
to the control share provisions of the MGCL in the future.
U.S. Federal Income Tax Risks
An investment in our common stock has various income tax risks.
This summary of certain tax risks is limited to the U.S. federal income tax risks addressed below. Additional risks or
issues may exist that are not addressed in this Form 10-K and that could affect the U.S. federal and state income tax treatment of us or our stockholders. This is not intended to be used and cannot be used by any stockholder to avoid penalties
that may be imposed on stockholders under the Code. Management strongly urges shareholders to seek advice based on their particular circumstances from their tax advisor concerning the effects of federal, state and local income tax law on an
investment in our common stock.
Our ability to use net operating loss (“NOL”) carryovers and net capital loss (“NCL”) carryovers to
reduce our taxable income may be limited.
We must have taxable income or net capital gains to benefit from our NOL and NCL, as well as certain other tax attributes.
Although we believe that a significant portion of our NOLs will be available to use to offset the future taxable income of Bimini Capital and Royal Palm, no assurance can be provided that we will have taxable income or gains in the future to
apply against our remaining NOLs and NCLs.
In addition, our NOL and NCL carryovers may be limited by Sections 382 and 383 of the Code if we undergo an “ownership
change.” Generally, an “ownership change” occurs if certain persons or groups increase their aggregate ownership in our company by more than 50 percentage points looking back over the relevant testing period. If an ownership change occurs, our
ability to use our NOLs and NCLs to reduce our taxable income in a future year would be limited to a Section 382 limitation equal to the fair market value of our stock immediately prior to the ownership change multiplied by the long-term
tax-exempt interest rate in effect for the month of the ownership change. In the event of an ownership change, NOLs and NCLs that exceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the
carryforward period and such losses can be used to offset taxable income for years within the carryforward period subject to the Section 382 limitation in each year. However, if the carryforward period for any NOL or NCL were to expire before
that loss had been fully utilized, the unused portion of that loss would be lost. The carryforward period for NOLs is 20 years from the year in which the losses giving rise to the NOLs were incurred, and the carryforward period for NCL is five
years from the year in which the losses giving rise to the NCL were incurred. Our use of new NOLs or NCLs arising after the date of an ownership change would not be affected by the Section 382 limitation (unless there were another ownership
change after those new losses arose).
Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses
were generated. Accordingly, we believe that at the current time there is no annual limitation imposed on our use of our NOLs and NCLs to reduce future taxable income. The determination of whether an ownership change has occurred or will occur is
complicated and depends on changes in percentage stock ownership among stockholders. We adopted the Rights Plan described above in order to discourage or prevent an ownership change. However, there can be no assurance that the Rights Plan will
prevent an ownership change. In addition, we have not obtained, and currently do not plan to obtain, a ruling from the Internal Revenue Service, or IRS, regarding our conclusion as to whether our losses are subject to any such limitations.
Furthermore, we may decide in the future that it is necessary or in our interest to take certain actions that could result in an ownership change. Therefore, no assurance can be provided as to whether an ownership change has occurred or will
occur in the future.
Preserving the ability to use our NOLs and NCLs may cause us to forgo otherwise attractive
opportunities.
Limitations imposed by Sections 382 and 383 of the Internal Revenue Code may discourage us from, among other things,
redeeming our stock or issuing additional stock to raise capital or to acquire businesses or assets. Accordingly, our desire to preserve our NOLs and NCLs may cause us to forgo otherwise attractive opportunities.
Changes in tax laws could adversely affect our future results.
We have recorded a deferred tax asset in the consolidated balance sheet based on the differences between the financial
statement and income tax bases of assets using enacted tax rates. When U.S. corporate income tax rates change, we are required to reevaluate our deferred tax assets using the new tax rate. Changes in enacted tax rates require an adjustment to
the carrying value of our deferred tax assets with a corresponding charge or benefit to earnings in the period of the tax rate change. Based on the size of our deferred tax assets, any such adjustment could be significant.
We adjusted the carrying value of our deferred tax assets in connection with the U.S. Tax Cuts and Jobs Act (the “Tax
Reform Act”), which was signed into law on December 22, 2017. The Tax Reform Act significantly revised the U.S. corporate income tax code by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018.
U.S. Generally Accepted Accounting Principles require that the impact of tax legislation be recognized in the period in which the law was enacted. As a result, we recorded an income tax provision of $19.4 million for the year ended December 31,
2017, including a charge of $25.9 million during the fourth quarter due to a re-measurement of deferred tax assets and liabilities to reflect the lower corporate tax rate.
Bimini Capital may recognize excess inclusion income that would increase the tax liability of its
stockholders.
If Bimini Capital recognizes excess inclusion income and that is allocated to its stockholders, this income cannot be
offset by net operating losses of its stockholders. If the stockholder is a tax-exempt entity, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a foreign person,
such income would be subject to federal income tax withholding without reduction or exemption pursuant to any otherwise applicable income tax treaty. In addition, to the extent Bimini Capital’s stock is owned by tax-exempt "disqualified
organizations," such as government-related entities that are not subject to tax on unrelated business taxable income, although Treasury regulations have not yet been drafted to clarify the law, it may incur a corporate level tax at the highest
applicable corporate tax rate on the portion of our excess inclusion income that is allocable to such disqualified organizations.
Excess inclusion income could result if Bimini Capital holds a residual interest in a real estate mortgage investment
conduit, or REMIC. Excess inclusion income also could be generated if Bimini Capital were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments received on its
mortgage-related securities securing those debt obligations (i.e., if Bimini Capital were to own an interest in a taxable mortgage pool). Bimini Capital does not expect to acquire significant amounts of residual interests in REMICs, other than
interests already owned by its subsidiary, which is treated as a separate taxable entity for these purposes. Bimini Capital intends to structure borrowing arrangements in a manner designed to avoid generating significant amounts of excess
inclusion income. Bimini Capital does, however, expect to enter into various repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgaged securities if Bimini Capital should default on its
obligations.
Risks Related to Conflicts of Interest in Our Relationship with Orchid
Bimini Capital and Orchid may compete for opportunities to acquire assets, which are allocated in
accordance with the Investment Allocation Agreement by and among Orchid and Bimini Advisors.
From time to time we may seek to purchase for Bimini Capital the same or similar assets that we seek to purchase for
Orchid. In such an instance, we may allocate such opportunities in a manner that preferentially favors Orchid. We will make available to either Bimini Capital or Orchid opportunities to acquire assets that we determine, in our reasonable and good
faith judgment, based on the objectives, policies and strategies, and other relevant factors, are appropriate for either entity in accordance with the Investment Allocation Agreement among Bimini Capital, Orchid and Bimini Advisors.
Because many of Bimini Capital’s targeted assets are typically available only in specified quantities and because many of
our targeted assets are also targeted assets for Orchid, we may not be able to buy as much of any given asset as required to satisfy the needs of both Bimini Capital and Orchid. In these cases, the Investment Allocation Agreement will require the
allocation of such assets to both accounts in proportion to their needs and available capital. The Investment Allocation Agreement will permit departure from such proportional allocation when (i) allocating purchases of whole-pool Agency MBS,
because those securities cannot be divided into multiple parts to be allocated among various accounts, and (ii) such allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the
Investment Allocation Agreement allows for a protocol of allocating assets so that, on an overall basis, each account is treated equitably.
There are conflicts of interest in our relationships with Orchid, which could result in decisions that
are not in the best interests of Bimini Capital’s stockholders.
We are subject to conflicts of interest arising out of Bimini Advisors relationship as Manager of Orchid. All of our
executive officers may have conflicts between their duties to Bimini Capital and their duties to Orchid as its Manager.
Bimini Capital may acquire or sell assets in which Orchid may have an interest. Similarly, Orchid may acquire or sell
assets in which Bimini Capital has or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, Bimini Capital may engage in
transactions directly with Orchid, including the purchase and sale of all or a portion of a portfolio asset.
Our officers devote as much time to Bimini Capital and to Orchid as they deem appropriate. However, these officers may have
conflicts in allocating their time and services among Bimini Capital and Orchid. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from employees,
Orchid and other entities for which we may act as manager in the future will likewise require greater focus and attention, placing personnel resources in high demand. In such situations, Bimini Capital may not receive the necessary support and
assistance it requires or would otherwise receive if it were not acting as manager of one or more other entities.
Mr. Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the future. Mr. Haas, our Chief Financial Officer, Chief Investment Officer and President, is a
member of the Board of Directors of Orchid, serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Orchid and owns shares of common stock of Orchid at the time of this filing and may continue to hold shares in the
future. Mr. Dwyer and Mr. Jaumot, the two independent members of our Board of Directors, own shares of common stock of Orchid at the time of this filing and may continue to own shares in the future. Accordingly, Messrs. Cauley, Haas, Dwyer and
Jaumot may have a conflict of interest with respect to actions by Bimini Capital or Bimini Advisors that relate to Orchid as its Manager.
Bimini continues to hold an investment in the common stock of Orchid. In evaluating opportunities for ourselves and Orchid,
this may lead us to emphasize certain asset acquisition, disposition or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks or decrease the returns
of your investment in our common stock.
Orchid may elect not to renew the management agreement without cause which may adversely affect our
business, financial condition and results of operations.
Orchid may elect not to renew the management agreement, even without cause. The management agreement is automatically
renewed in accordance with the terms of the agreement, each year, on February 20. However, with the consent of the majority of their independent directors, and upon providing 180-days’ prior written notice, Orchid may elect not to renew the
management agreement. If Orchid elects to not renew the agreement because of a decision by its Board of Directors that the management fee is unfair, Bimini Advisors will have the right to renegotiate a mutually agreeable management fee. If Orchid
elects to not renew the management agreement without cause, it is required to pay Bimini Advisors a termination fee equal to three times the average annual management fee incurred during the prior 24-month period immediately preceding the most
recently completed calendar quarter prior to the effective date of termination. Notwithstanding the termination fee, nonrenewal of the management agreement may adversely affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to
alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our common stock may not be suitable for someone with lower risk tolerance.
There is a limited market for our Class A Common Stock.
Our Class A Common Stock
trades on the OTCQB under the symbol “BMNM”. We may apply to list our Class A Common Stock on a national securities market if, in the future, we qualify for such a listing. However, even if listed on a national securities market, the ability
to buy and sell our Class A Common Stock may be limited due to our small public float, and significant sales may depress or result in a decline in the market price of our Class A Common Stock. Additionally, until such time that our Class A
Common Stock is approved for listing on a national securities market, our ability to raise capital through the sale of additional securities may be limited.
Accordingly, no assurance can be given as to:
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the likelihood that an actual market for our common stock will develop, or be continued once developed;
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the liquidity of any such market;
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the ability of any holder to sell shares of our common stock; or
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the prices that may be obtained for our common stock.
We have not made distributions to our stockholders since 2011.
Our Board of Directors has not authorized the payment of any cash dividends to our stockholders since 2011. All
distributions will be made at the discretion of our Board of Directors out of funds legally available therefor and will depend on our earnings, our financial condition and such other factors as our Board of Directors may deem relevant from time
to time. As a result of the termination of our REIT status effective as of January 1, 2015, we are planning to retain any available funds and future earnings to fund the development and growth of our business. As a result, for the foreseeable
future, we do not expect to make distributions.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or
equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity
securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, as well as warrants to purchase shares of common stock or convertible preferred stock. Upon the liquidation of
the Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us
may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Furthermore, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares
or the number of shares of any class or series that we have the authority to issue, and to classify or reclassify any unissued shares of common stock or preferred stock. Because our decision to issue securities in any future offering will depend
on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Our stockholders are therefore subject to the risk of our future securities offerings reducing the
market price of our common stock and diluting their common stock.
The market value of our common stock may be volatile.
The market value of shares of our common stock may be highly volatile and subject to wide price fluctuations. In addition,
the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the share price or trading volume of our common stock include:
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actual or anticipated variations in our operating results or distributions;
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changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;
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increases in market interest rates that affect the value of our MBS portfolios;
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changes in our book value;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we incur in the future;
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departures of key management personnel;
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actions by institutional stockholders;
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speculation in the press or investment community; and
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general market and economic conditions.
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We cannot make any assurances that the market price of our common stock will not fluctuate or decline significantly in the
future.
Shares of our common stock eligible for future sale may harm our share price.
We cannot predict the effect, if any, of future sales of shares of our common stock, or the availability of shares for
future sales, on the market price of our common stock. Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, may harm prevailing market prices for our common stock. The 2011 Long Term
Incentive Compensation Plan provides for grants of up to an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the award, subject to a maximum aggregate number of shares of common
stock that may be issued under the 2011 Long Term Incentive Compensation Plan of 4,000,000 shares of common stock.