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bmnm10k2021p1i0.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION
 
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __ to __
Commission File Number
:
 
001-32171
Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
72-1571637
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of Each Class
Class A Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
☐
 
No
☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes
☐
 
No
☒
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
☒
 
No
☐
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
☒
 
No
☐
Indicate by check mark
 
whether the registrant is a
 
large accelerated filer,
 
an accelerated filer, a
 
non-accelerated filer, a
 
smaller reporting company or
an emerging growth company.
 
See the definitions of “large
 
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
 
Smaller reporting company
☒
 
 
Emerging growth company
☐
 
 
 
 
 
 
 
If an emerging growth company,
 
indicate by check mark if the registrant has
 
elected not to use the extended transition period
 
for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
 
Indicate by check
 
mark whether the
 
registrant has filed
 
a report on and
 
attestation to its
 
management's assessment of
 
the effectiveness of
 
its internal
control over
 
financial reporting
 
under Section
 
404(b) of
 
the Sarbanes-Oxley
 
Act (15
 
U.S.C. 7262(b))
 
by the
 
registered public
 
accounting firm
 
that
prepared or issued its audit report.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes
☐
 
No
☒
 
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2021:
Title of each Class
Shares held by non-affiliates
Aggregate market value held
by non-affiliates
Class A Common Stock, $0.001 par value
7,457,553
$
13,000,000
 
(a)
Class B Common Stock, $0.001 par value
20,760
$
1,000
 
(b)
Class C Common Stock, $0.001 par value
31,938
$
1,500
 
(b)
(a) The aggregate market value was calculated by using the last sale price of the Class A Common Stock as of June 30, 2021.
(b)
The market value of the Class B and Class C Common Stock is an estimate based on their initial purchase price.
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
Title of each Class
Latest Practicable Date
Shares Outstanding
Class A Common Stock, $0.001 par value
March 11, 2022
10,531,772
Class B Common Stock, $0.001 par value
March 11, 2022
31,938
Class C Common Stock, $0.001 par value
March 11, 2022
31,938
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
 
Registrant’s definitive
 
Proxy Statement for
 
its 2022 Annual
 
Meeting of Stockholders
 
of the Registrant
 
are incorporated by
 
reference
into Part III of this Annual Report on Form 10-K (this “Report”).
BIMINI CAPITAL MANAGEMENT, INC.
 
INDEX
PART I
ITEM 1. Business
1
ITEM 1A.
 
Risk Factors
10
ITEM 1B.
 
Unresolved
 
Staff Comments
33
ITEM 2. Properties
33
ITEM 3. Legal
 
Proceedings
33
ITEM 4. Mine
 
Safety Disclosures
34
PART II
ITEM 5. Market
 
for Registrant's
 
Common Equity,
 
Related Stockholder
 
Matters and
 
Issuer Purchases
 
of Equity
Securities
35
ITEM 6. [Reserved]
36
ITEM 7. Management's
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
37
ITEM 7A.
 
Quantitative
 
and Qualitative
 
Disclosures
 
About Market
 
Risk
61
ITEM 8. Financial
 
Statements
 
and Supplementary
 
Data
62
ITEM 9. Changes
 
in and Disagreements
 
With Accountants
 
on Accounting
 
and Financial
 
Disclosure
89
ITEM 9A.
 
Controls
 
and Procedures
89
ITEM 9B.
 
Other Information
90
ITEM 9C.
 
Disclosure
 
Regarding
 
Foreign Jurisdictions
 
the Prevent
 
Inspections
90
PART III
ITEM 10.
 
Directors,
 
Executive
 
Officers and
 
Corporate
 
Governance
91
ITEM 11. Executive
 
Compensation
91
ITEM 12.
 
Security
 
Ownership
 
of Certain
 
Beneficial
 
Owners and
 
Management
 
and Related
 
Stockholder
 
Matters
91
ITEM 13.
 
Certain Relationships
 
and Related
 
Transactions,
 
and Director
 
Independence
91
ITEM 14.
 
Principal
 
Accountant
 
Fees and
 
Services
91
PART IV
ITEM 15.
 
Exhibits and
 
Financial
 
Statement
 
Schedules
92
ITEM 16.
 
Form 10-K
 
Summary
93
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report that are subject to risks and
 
uncertainties. These forward-looking statements
include information about possible or assumed future results of our business, financial
 
condition, liquidity, results of operations, plans
and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,”
 
“intend,” “should,” “may,” “plans,” “projects,” “will,”
or similar expressions, or the negative of these words, we intend to identify
 
forward-looking statements. Statements regarding the
following subjects are forward-looking by their nature:
 
●
our business and investment strategy;
●
our expected operating results;
●
our ability to acquire investments on attractive terms;
●
the effect of changing interest rates on inflation, unemployment and mortgage supply
 
and demand;
●
the effect of prepayment rates on the value of our assets;
●
our ability to access the capital markets;
●
our ability to obtain future financing arrangements;
●
our ability to successfully hedge the interest rate risk and prepayment risk associated
 
with our portfolio;
●
the federal conservatorship of the Federal National Mortgage Association
 
(“Fannie Mae”) and the Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in
 
laws and regulations affecting the
relationship between Fannie Mae and Freddie Mac and the U.S. government;
●
the impact of inflation on general economic conditions and monetary
 
policy;
●
market trends;
●
our understanding of our competition and our ability to compete effectively;
●
our ability to quantify risk based on historical experience;
●
our ability to forecast our tax attributes, which are based upon various facts
 
and assumptions, and our ability to protect and
use our NOLs to offset future taxable income, including whether our shareholder rights plan
 
will be effective in preventing an
ownership change that would significantly limit our ability to utilize such NOLs;
●
the impact of possible future changes in tax laws or tax rates;
●
our ability to maintain our exemption from the obligation to register under the Investment
 
Company Act of 1940, as amended
(the “Investment Company Act”);
●
the effect of actual or proposed actions of the U.S. Federal Reserve (the “Fed”), the Federal
 
Housing Finance Agency (the
“FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury with respect to monetary policy or interest
rates;
●
the ongoing effect of the coronavirus (COVID-19) pandemic and the potential future outbreak
 
of other highly infectious or
contagious diseases on the Agency MBS market and on our results of future
 
operations, financial position, and liquidity;
●
geo-political events, such as the crisis in Ukraine, government responses
 
to such events and the related impact on the
economy both nationally and internationally;
●
expected capital expenditures;
●
the impact of technology on our operations and business, and
●
the eventual phase-out of the London Interbank Offered Rate (“LIBOR”) index, transition from
 
LIBOR to an alternative
reference rate and the impact on our LIBOR sensitive assets, liabilities and
 
funding hedges
The forward-looking statements are based on our beliefs, assumptions
 
and expectations of our future performance, taking into
account all information currently available to us. You should not place undue reliance on these forward-looking statements.
 
These
beliefs, assumptions and expectations can change as a result of many possible
 
events or factors, not all of which are known to us.
Some of these factors are described under the caption ‘‘Risk Factors’’ in this Report and any subsequent
 
Quarterly Reports on Form
10-Q.
 
If a change occurs, our business, financial condition, liquidity and results
 
of operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statement
 
speaks only as of the date on which it is made. New risks
and uncertainties arise from time to time, and it is impossible for us to predict
 
those events or how they may affect us. Except as
required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as
 
a result of
new information, future events or otherwise.
- 1 -
PART I
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”) and Orchid Island Capital, Inc. (“Orchid”) common stock in our own
 
portfolio, and serving as the external manager of Orchid
which also invests in MBS.
 
In both cases, the principal and interest payments of these MBS
 
are guaranteed by Fannie Mae, 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, such as
mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”)
 
issued by the GSEs and (ii) structured Agency
MBS, such as interest only securities (“IOs”), inverse interest only securities
 
(“IIOs”) and principal only securities (“POs”), among other
types of structured Agency MBS. 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.
References to the general management of the Company’s portfolio of MBS refer
 
to the operations of Royal Palm.
The Company, through Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC (“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.
 
Management of 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:
●
One-twelfth of 1.5% of the first $250 million of the Orchid’s equity, as defined in the management agreement,
●
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
●
One-twelfth of 1.00% of the Orchid’s equity that is greater than $500 million.
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
- 2 -
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. In addition,
 
we also hold an investment, and earn
dividends, on Orchid common stock.
We fund the pass-through Agency MBS and certain of the structured Agency MBS 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 structural 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 categories:
- 3 -
●
Fixed-Rate Mortgages
.
 
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.
●
ARMs
. 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.
●
Hybrid Adjustable-Rate Mortgages
.
 
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.
Collateralized Mortgage Obligation MBS
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 pools 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.
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.
 
●
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.
●
IIOs
. 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,
- 4 -
which are prepayments, coupon interest rate (i.e. “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.
●
POs
. 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.
 
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 assets
similar to those in which the Company invests,
 
we consider this investment as a proxy for our overall investment strategy.
 
We do not
currently invest in other REIT common stock, but subject to certain limitations we
 
are not prohibited from doing so in the future.
Our investment strategy consists of the following components:
 
●
investing in pass-through Agency MBS and certain structured Agency MBS on a
 
leveraged basis to increase returns on the
capital allocated to this portfolio;
 
●
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;
 
●
investing in Agency MBS in order to minimize credit risk;
 
●
investing in REIT common stock, including Orchid;
●
investing in assets that will cause us to maintain our exclusion from regulation
 
as an investment company under the
Investment Company Act.
Our management team 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.
- 5 -
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 each of our 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. The value of our investment in Orchid
common stock typically fluctuates with Orchid’s book value, which is affected by the same
 
factors that affect our MBS investments,
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 pass-through Agency MBS and certain of our structured Agency
 
MBS using short-term repurchase agreements.
A repurchase (or "repo") agreement transaction acts as a financing arrangement under
 
which we effectively pledge our investment
securities as collateral to secure a loan. Our borrowings through repurchase transactions
 
are generally short-term and have maturities
ranging from one day to one year but may have maturities up to five or more
 
years. Our financing rates are typically impacted by the
U.S. Federal Funds rate and other short-term benchmark rates and liquidity
 
in the Agency MBS repo and other short-term funding
markets.
 
The terms of our master repurchase agreements generally conform to
 
the terms in the standard master repurchase
agreement as published by the Securities Industry and Financial Markets Association
 
("SIFMA") as to repayment, margin requirements
and the segregation of all securities sold under the repurchase transaction. In
 
addition, each lender may require that we include
supplemental terms and conditions to the standard master repurchase agreement
 
to address such matters as additional margin
maintenance requirements, cross default and other provisions. The specific provisions
 
may differ for each lender and certain terms may
not be determined until we engage in individual repurchase transactions.
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 not exceed 12 to 1 and will generally be
 
less than 10 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
- 6 -
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:
●
The relative durations of the respective portfolios — We generally seek to have a combined
 
hedged duration at or near zero. If
our pass-through securities have a longer duration, we will allocate more
 
capital to the structured security portfolio or hedges
to achieve a combined duration close to zero.
●
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 and subject to
 
maintaining our qualification for exemption
under the Investment Company Act.
●
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.
Risk Management
 
We invest in Agency MBS and Orchid common stock to mitigate credit risk. Additionally, our Agency MBS, as well as Orchid’s, 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
. 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.
 
- 7 -
Derivative Instruments.
We may 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,
 
Fed Funds
 
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. 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)
- 8 -
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:
 
●
Deploying capital from our leveraged Agency MBS portfolio to our unleveraged
 
Agency MBS portfolio;
 
●
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;
 
●
Investing in REIT common stock; and
 
●
Reducing our overall amount of leverage.
 
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.
 
Employees and Human Capital Resources
 
- 9 -
As of December 31, 2021, we had 8 full-time salaried employees,
 
none of whom are subject to a collective bargaining agreement. We
provide a variety of benefit programs including a 401(k) plan and health, dental
 
and other insurance. We believe our relationship with
our employees is excellent.
Competition
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.
Available Information
Our investor relations website is
https://ir.biminicapital.com
.
 
We make available on the website under "Financials/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 Report.
 
In addition, all of our filed reports can be obtained at the
SEC’s website at http://www.sec.gov.
 
- 10 -
ITEM 1A.
 
RISK FACTORS.
Summary of Risk Factors
 
Below is a summary of the principal factors that make an investment in our common
 
stock speculative or risky. This summary does
not address all of the risks that we face. Additional discussion of the risks summarized
 
in this risk factor summary, and other risks that
we face, can be found below under the heading “Risk Factors” and should
 
be carefully considered, together with other information in
this Report and our other filings with the SEC, before making an investment
 
decision regarding our common stock.
●
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.
●
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.
 
●
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.
 
●
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.
●
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.
●
New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac,
 
on the one hand, and the federal
government, on the other, which could adversely affect the price of, or our ability to invest in and finance Agency MBS.
●
Purchases and sales of Agency MBS by the Fed may adversely affect the price and return
 
associated with Agency MBS
●
Changes in the 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.
●
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.
●
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.
●
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 and our
ability to pay distributions to our stockholders.
●
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.
●
Our use of leverage could materially adversely affect our business, financial condition
 
and results of operations.
●
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.
●
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.
●
If our lenders default on their obligations to resell the Agency MBS back to us at the
 
end of the repurchase transaction 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.
●
We have issued long-term debt to fund our operations which can increase the volatility of
 
our earnings and stockholders’ equity.
 
- 11 -
●
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.
●
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 may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which
may result in riskier investments.
 
●
Loss of our exemption from regulation under the Investment Company Act would
 
negatively affect the value of shares of our
common stock.
●
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.
●
Our ownership limitations and certain other provisions of applicable law
 
and our charter and bylaws may restrict business
combination opportunities that would otherwise be favorable to our stockholders.
●
The termination of our management agreement with Orchid could significantly
 
reduce our revenues.
●
We cannot predict the effect that government policies, laws and plans adopted in response
 
to the COVID-19 pandemic and the
global recessionary economic conditions will have on us.
●
Our investment in Orchid Island Capital, Inc. or other mortgage REIT common
 
stock may fluctuate in value which may materially
adversely affect our business, financial condition and results of operations.
Risk Factors
You should carefully consider the risks described below and all other information contained in this Report, 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
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 normal market conditions,
 
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 potential 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.
 
- 12 -
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 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, the U.S. Treasury rate or the Secured Overnight Financing Rate (“SOFR”).
 
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
- 13 -
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 result in operating losses.
The implementation of the Single Security Initiative may adversely affect our results and financial
 
condition.
The Single Security Initiative is a joint initiative of Fannie Mae and Freddie
 
Mac (the “Enterprises”), under the direction of the
FHFA, the Enterprises’ regulator and conservator, to develop a common, single mortgage-backed security issued by the Enterprises.
On June 3, 2019, with the implementation of Release 2 of the common
 
securitization platform, Freddie Mac and Fannie Mae
commenced use of a common, single mortgage-backed security,
 
known as the Uniform Mortgage-Backed Security (“UMBS”).
 
Fannie
Mae pools are now eligible for conversion into UMBS pools and Freddie Mac
 
pools can be exchanged for UMBS pools. The conversion
is not mandatory. UMBS is intended to enhance liquidity in the TBA market as the two GSEs’ floats are combined, eliminating or
reducing 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 entrants
 
to enter the MBS guarantee market.
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 will contract further. A further decline could impact
the liquidity of Gold PCs not converted into UMBS.
 
Secondly, the TBA deliverable has appeared to 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 has negatively impacted 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.
 
By bifurcating the TBA deliverable, liquidity in the TBA market could be negatively
 
impacted.
Our liquidity is typically reduced each month when we receive margin calls related
 
to factor changes, and typically increased
each month when we receive payment of principal and interest on Fannie
 
Mae and Freddie Mac securities. Legacy Freddie Mac
securities pay principal and interest earlier in the month than Fannie Mae and UMBS,
 
meaning that legacy Freddie Mac positions
reduce the period of time between meeting factor-related margin calls and receiving
 
principal and interest. The percentage of legacy
Freddie Mac positions in the market and in our portfolio will likely decrease over
 
time as those securities are converted to UMBS or
paid off.
Purchases and sales of Agency MBS by the Fed may adversely affect the price and return
 
associated with Agency MBS.
The Fed owned approximately $2.6 trillion of Agency MBS as of December 31,
 
2021. Although the Fed’s Agency RMBS holdings
nearly doubled as a result of its COVID-19 policy response, growing from $1.4 trillion
 
in March of 2020 to $2.6 trillion in December of
2021, the minutes of the FOMC meeting in December of 2021 indicate that the Fed likely
 
intends to begin reducing its Agency RMBS
holdings shortly after it begins to raise the federal funds rate.
 
On January 26, 2022, the FOMC reaffirmed its intention to phase out its
net asset purchases by early March of 2022 and indicated that it would soon be
 
appropriate to begin raising the federal funds rate.
While it is very difficult to predict the impact of the Fed portfolio runoff on the prices and liquidity
 
of Agency MBS, returns on Agency
MBS 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,
- 14 -
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
- 15 -
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 objectives
 
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. This risk is magnified given that the Company’s equity
 
capital, particularly its tangible equity, is
relatively small.
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:
●
hedging can be expensive, particularly during periods of rising and volatile interest
 
rates;
●
available interest rate hedging may not correspond directly with the interest rate risk
 
for which protection is sought;
●
the duration of the hedge may not match the duration of the related liability;
●
certain types of hedges may expose us to risk of loss beyond the fee
 
paid to initiate the hedge;
●
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
●
the counterparty in the hedging transaction may default on its obligation to pay.
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
- 16 -
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. These risks are magnified given that the Company’s equity capital,
particularly its tangible equity, is relatively small.
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.
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 10 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 borrowings are
secured by our pass-through Agency MBS and 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.
 
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
- 17 -
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, TBA 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.
Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial markets
 
can result in a
significant contraction in liquidity for mortgages and mortgage-related assets, which
 
may adversely affect the value of the assets in
which we invest.
Our results of operations are materially affected by conditions in the markets for mortgages
 
and mortgage-related assets,
including Agency RMBS, as well as the broader financial markets and the
 
economy generally.
Significant adverse changes in financial market conditions can result in a
 
deleveraging of the global financial system and the
forced sale of large quantities of mortgage-related and other financial assets.
 
Concerns over economic recession, geopolitical issues
including events such as the COVID-19 pandemic, the military conflict between Ukraine
 
and Russia, policy priorities of a new U.S.
presidential administration, trade wars, unemployment, the availability and cost
 
of financing, the mortgage market and a declining real
estate market or prolonged government shutdown may contribute to increased
 
volatility and diminished expectations for the economy
and markets.
Increased volatility and deterioration in the markets for mortgages and mortgage-related
 
assets as well as the broader financial
markets may adversely affect the performance and market value of our Agency RMBS and
 
our investment in Orchid common stock.
 
If
these conditions exist, institutions from which we seek financing for our investments
 
may tighten their lending standards, increase
margin calls or become insolvent, which could make it more difficult for us to obtain
 
financing on favorable terms or at all.
 
Our
profitability and financial condition may be adversely affected if we are unable to obtain cost-effective financing
 
for our investments.
The Russian invasion of Ukraine has created market volatility and economic uncertainty
 
that may have an adverse effect on our
results of operations, financial condition and the value of our stock.
A significant geo-political development is unfolding in the Ukraine.
 
Russia invaded Ukraine on February 24, 2022, and since then
Russian military activity has escalated rapidly.
 
The United States and several NATO allies have imposed significant economic
sanctions that are likely to cripple the Russian economy and currency, the Ruble. These events have created significant
 
market
volatility and growing economic uncertainty.
 
Should the situation deteriorate further and military action lead to
 
a protracted war, there
would likely be a material adverse economic impact on Europe and therefore
 
indirectly in the U.S., potentially slowing economic activity
and possibly lessening the need for the Fed to remove monetary policy
 
as aggressively as expected otherwise.
 
The risk of Russian
cyber-attacks may also create market volatility and economic uncertainty.
 
It is believed that Russian cyber-attacks of the Ukrainian
- 18 -
government infrastructure have already occurred, and cyber-attacks could potentially spread
 
to a broader network of countries and
networks.
 
These events may have an adverse effect on our results of operations, financial condition and
 
the value of our common
stock.
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
- 19 -
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 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 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 of 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
- 20 -
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
 
T-Note, Fed Funds and Eurodollar 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 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 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
- 21 -
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.
Computer malware, ransomware, viruses, and computer hacking and
 
phishing attacks have become more prevalent in the
financial services industry and may occur on our or certain of our third party service
 
providers' systems in the future. We rely heavily on
our financial, accounting and other data processing systems. Although we have
 
not detected a breach to date, financial services
institutions have reported breaches of their systems, some of which have
 
been significant. During the COVID-19 pandemic, a portion of
our employees worked remotely until June 2021,
 
which has caused us to rely more on virtual communication and may
 
increase our
exposure to cybersecurity risks. Even with all reasonable security efforts, not every breach
 
can be prevented or even detected. It is
possible that we, or certain of our third-party service providers have experienced
 
an undetected breach, and it is likely that other
financial institutions have experienced more breaches than have been detected
 
and reported. There is no assurance that we, or certain
of the third parties that facilitate our business activities, have not or will not experience
 
a breach. It is difficult to determine what, if any,
negative impact may directly result from any specific interruption or cyber-attacks or
 
security breaches of our networks or systems (or
the networks or systems of certain third parties that facilitate our business activities)
 
or any failure to maintain performance, reliability
and security of our or our certain third-party service providers' technical infrastructure,
 
but such computer malware, ransomware,
viruses, and computer hacking and phishing attacks may negatively affect our 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
- 22 -
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.
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 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.
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 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 LIBOR to SOFR. SOFR is published daily at 8:00 a.m. Eastern Time 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.
On December 31, 2021 the one week and two month USD LIBOR
 
tenors phased out, and on June 30, 2023 all other USD LIBOR
tenors will phase out. On November 30, 2020. the United States Federal Reserve
 
concurrently issued a statement advising banks to
stop new USD LIBOR issuances by the end of 2021,
 
and on October 20, 2021, the Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System, Federal Deposit Insurance Corporation,
 
Consumer Financial Protection Bureau (the
“CFPB”) and National Credit Union Administration advised banks that entering
 
into new contracts that use LIBOR as a reference rate
after December 31, 2021 would create safety and soundness risks.
 
In light of these recent announcements, the future of LIBOR at this
time is uncertain and any changes in the methods by which LIBOR is determined
 
or regulatory activity related to LIBOR’s phaseout
could cause LIBOR to perform differently than in the past or cease to exist. Although regulators
 
and IBA have clarified that the recent
- 23 -
announcements should not be read to say that LIBOR has ceased or
 
will cease, in the event LIBOR does cease to exist, the risks
associated with the transition to an alternative reference rate will be accelerated
 
and magnified.
As of December 31, 2020, Fannie Mae and Freddie Mac stopped issuing most LIBOR-indexed
 
products and stopped purchasing
LIBOR-based loans. On August 3, 2020, Fannie Mae started accepting whole loan and
 
MBS deliveries of ARMs indexed to SOFR, and
Freddie Mac announced that it priced its first SOFR linked offering on October 16, 2020. On
 
October 19, 2021, Fannie Mae priced its
first credit risk transfer transaction linked to SOFR, and on January 19, 2022
 
it priced its first multifamily real estate mortgage
investment conduit using SOFR.
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.”
New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac,
 
on the one hand, and the federal
government, on the other, which could adversely affect the price of, or our ability to invest in and finance, Agency RMBS.
The interest and principal payments we expect to receive on the Agency MBS
 
in which we invest are guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Mae
 
certificates are directly guaranteed by the U.S.
government. Principal and interest payments relating to the securities issued by
 
Fannie Mae and Freddie Mac are only guaranteed by
each respective GSE.
In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship
 
of the FHFA, their federal regulator,
pursuant to its powers under The Federal Housing Finance Regulatory Reform
 
Act of 2008, a part of the Housing and Economic
Recovery Act of 2008 (the “Recovery Act”). In addition to the FHFA becoming the conservator of Fannie Mae
 
and Freddie Mac, the
U.S. Treasury entered into Preferred Stock Purchase Agreements (“PSPAs”) with the FHFA and have taken various actions intended to
provide Fannie Mae and Freddie Mac with additional liquidity in an effort to ensure their
 
financial stability. In September 2019, the
FHFA and the U.S. Treasury agreed to modifications to the PSPAs that will permit Fannie Mae and Freddie Mac to maintain capital
reserves of $25 billion and $20 billion, respectively. As of September 30, 2020, Fannie Mae and Freddie Mac had retained
 
equity
capital of approximately $21 billion and $14 billion, respectively.
 
In December 2020, a final rule was published in the federal register
regarding GSE capital framework (the “December rule”), which requires Tier 1 capital in
 
excess of 4% (approximately $265 billion) and
a risk-weight floor of 20% for residential mortgages.
 
On January 14, 2021, the U.S. Treasury and the FHFA executed letter
agreements (the “January agreement”) allowing the GSEs to continue to retain
 
capital up to their regulatory minimums, including
buffers, as prescribed in the December rule.
 
These letter agreements provide, in part, (i) there will be no exit from
 
conservatorship until
all material litigation is settled and the GSEs have common equity Tier 1 capital of at least 3%
 
of their assets, (ii) the GSEs will comply
with the FHFA’s
 
regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions
 
will be restricted to current levels, and
(iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform.
 
On September 14, 2021, the U.S.
Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired
 
for cash
consideration, multifamily loans, loans with higher risk characteristics and
 
second homes and investment properties.
 
On September
15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December rule to,
 
among other
things, reduce the Tier 1 capital and risk-weight floor requirements.
Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship,
 
the Secretary of the U.S. Treasury suggested
that the guarantee payment structure of Fannie Mae and Freddie Mac in
 
the U.S. housing finance market should be re-examined. The
future roles of Fannie Mae and Freddie Mac could be significantly reduced and
 
the nature of their guarantees could be eliminated or
considerably limited relative to historical measurements. The U.S. Treasury could also stop
 
providing credit support to Fannie Mae and
Freddie Mac in the future. Any changes to the nature of the guarantees provided
 
by Fannie Mae and Freddie Mac could redefine what
constitutes an Agency MBS and could have broad adverse market implications.
 
If Fannie Mae or Freddie Mac was eliminated, or their
- 24 -
structures were to change in a material manner that is not compatible with
 
our business model, we would not be able to acquire
Agency MBS from these entities, which could adversely affect our business operations.
 
Such changes would likely have a similar
impact on the business operations of Orchid, which could adversely affect the value and
 
performance of our investment in Orchid
common stock and the amount of management fees and expense reimbursements
 
we receive from Orchid.
On June 23, 2021, the Supreme Court ruled in Collins v. Mnuchin, a case presenting a question of the constitutionality
 
of the FHFA
and its director’s protection from being replaced at will by the
 
President.
 
The Supreme Court held that the FHFA did not exceed its
powers or functions as a conservator under the Recovery Act, and that the President
 
may replace the director at will. On June 23,
2021, President Biden appointed Sandra Thompson as acting director of the
 
FHFA.
 
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, such as limited liquidity in trading market for the common stock. 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.
In addition, the Company’s ability to dispose of the common stock investment because
 
selling investments in Orchid’s common
equity securities may be hindered due to its relationship as Orchid’s manager and the
 
possession of inside information. Also, if we or
other significant investors sell or are perceived as intending to sell a substantial
 
number of shares in a short period of time, the market
price of our remaining shares could be adversely affected.
 
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.
 
- 25 -
We may incur losses as a result of unforeseen or catastrophic events, including the emergence of
 
a pandemic and acts of
terrorism.
 
The occurrence of unforeseen or catastrophic events, including the emergence
 
of a pandemic, such as coronavirus, or other
widespread health emergency (or concerns over the possibility of such an emergency)
 
terrorist attacks could create economic and
financial disruptions, and could lead to operational difficulties that could impair our
 
ability to manage our businesses.
We are subject to risks related to corporate social responsibility.
 
Our business faces public scrutiny related to environmental, social and governance
 
(“ESG”) activities. We risk damage to our
reputation if we fail to act responsibly in a number of areas, such as diversity
 
and inclusion, environmental stewardship, support for
local communities, corporate governance and transparency and considering ESG
 
factors in our investment processes. Adverse
incidents with respect to ESG activities could impact the cost of our operations and
 
relationships with investors, all of which could
adversely affect our business and results of operations. Additionally, new legislative or regulatory initiatives related to ESG could
adversely affect our business.
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 and for any other 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 and for any other 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
- 26 -
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. We have received a no-action letter from
 
the CFTC for relief from registration as a
commodity pool operator and commodity trading advisor.
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.
- 27 -
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 that may be considered to be 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:
●
actual receipt of an improper benefit or profit in money, property or services; or
●
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.
 
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:
 
●
“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
●
“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”
- 28 -
(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.
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 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
summary 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,
- 29 -
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.
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 may be considered as being 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.
 
- 30 -
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
Orchid’s 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
- 31 -
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:
●
the likelihood that an actual market for our common stock will develop, or
 
be continued once developed;
●
the liquidity of any such market;
●
the ability of any holder to sell shares of our common stock; or
●
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 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 securities 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:
●
actual or anticipated variations in our operating results;
●
changes in our earnings estimates or publication of research reports about us
 
or the real estate or specialty finance
industry;
●
increases in market interest rates that affect the value of our MBS portfolios;
●
changes in our book value;
●
changes in market valuations of similar companies;
●
adverse market reaction to any increased indebtedness we incur in the future;
●
departures of key management personnel;
●
actions by institutional stockholders;
●
speculation in the press or investment community; and
- 32 -
●
general market and economic conditions.
We cannot make any assurances that the market price of our common stock will not fluctuate
 
or decline significantly in the future.
 
Sales of our common stock may harm our share price.
 
There is very limited liquidity in the trading market for 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.
Risks Related to COVID-19
The market and economic disruptions caused by COVID-19 have negatively impacted
 
our business.
The COVID-19 pandemic has caused and continues to cause significant disruptions
 
to the U.S. and global economies and has
contributed to volatility, illiquidity and dislocations in the financial markets. The COVID-19 outbreak has led governments and other
authorities around the world to impose measures intended to control
 
its spread, including restrictions on freedom of movement and
business operations such as travel bans, border closings, closing non-essential
 
businesses, quarantines and shelter-in-place orders.
The market and economic disruptions caused by COVID-19 have negatively impacted
 
and could further negatively impact our
business.
Beginning in mid-March 2020, Agency MBS markets experienced significant volatility
 
and sharp declines in liquidity, which
negatively impacted our portfolio. Our portfolio was pledged as collateral under
 
daily mark-to-market repurchase agreements.
Fluctuations in the value of our Agency MBS resulted in margin calls, requiring us to post
 
additional collateral with our lenders under
these repurchase agreements. These fluctuations and requirements to post additional
 
collateral were material.
The Agency MBS market largely stabilized after the Fed announced on
 
March 23, 2020 that it would purchase Agency MBS and
U.S. Treasuries in the amounts needed to support smooth market functioning. The Fed continued to increase its
 
holdings of U.S.
Treasuries and Agency MBS throughout 2020 and 2021 however;
 
in response to growing inflation concerns in late 2021, the FOMC
began tapering its net asset purchases and announced on January 26,
 
2022 that it would completely phase them out by early March
2022. If the COVID-19 outbreak continues or worsens, or if the current policy response
 
changes or is ineffective, the Agency MBS
market may experience significant volatility, illiquidity and dislocations in the future, which may adversely affect our results of
operations and financial condition.
Our inability to access funding or the terms on which such funding is available
 
could have a material adverse effect on our financial
condition, particularly in light of ongoing market dislocations resulting from the COVID-19
 
pandemic.
Our ability to fund our operations, meet financial obligations and finance
 
asset acquisitions is dependent upon our ability to secure
and maintain our repurchase agreements with our counterparties. Because repurchase
 
agreements are short-term commitments of
capital, lenders may respond to market conditions in ways that make it
 
more difficult for us to renew or replace on a continuous basis
our maturing short-term borrowings and have imposed and may continue to impose
 
more onerous terms when rolling such financings.
If we are not able to renew our existing repurchase agreements or arrange for
 
new financing on terms acceptable to us, or if we are
required to post more collateral or face larger haircuts, we may have to curtail
 
our asset acquisition activities and/or dispose of assets.
Issues related to financing are exacerbated in times of significant dislocation
 
in the financial markets, such as those experienced
related to the COVID-19 pandemic. It is possible our lenders will become unwilling
 
or unable to provide us with financing, and we could
be forced to sell our assets at an inopportune time when prices are depressed.
 
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 have revised and may continue to revise the terms of such financings,
 
including haircuts and requiring additional collateral
in the form of cash, based on, among other factors, the regulatory environment
 
and their management of actual and perceived risk.
- 33 -
Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our
 
lenders’ valuation of our
assets that collateralize the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to re-
evaluate the fair market value of the assets that cover outstanding borrowings
 
at any time. If a lender determines in its sole discretion
that the value of the assets has decreased, the lender has the right to initiate a margin
 
call. These valuations may be different than the
values that we ascribe to these assets and may be influenced by recent asset sales at
 
distressed levels by forced sellers. A margin call
requires us to transfer additional assets to a lender without any advance of funds from
 
the lender for such transfer or to repay a portion
of the outstanding borrowings. Significant margin calls could have a
 
material adverse effect on our results of operations, financial
condition, business, and liquidity, and could cause the value of our common stock to decline. In addition, we experienced an increase
in haircuts on financings we have rolled. As haircuts are increased, we
 
are required to post additional collateral. We may also be forced
to sell assets at significantly depressed prices to meet such margin calls and to maintain
 
adequate liquidity. As a result of the ongoing
COVID-19 pandemic, we experienced margin calls in 2020 well beyond
 
historical norms. As of December 31, 2021, we had met all
margin call requirements, but a sufficiently deep and/or rapid increase in margin
 
calls or haircuts will have an adverse impact on our
liquidity.
We cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19
 
pandemic and the
global recessionary economic conditions will have on us.
Governments have adopted, and may continue to adopt, policies, laws and plans
 
intended to address the COVID-19 pandemic
and adverse developments in the economy and continued functioning of
 
the financial markets. We cannot assure you that these
programs will be effective, sufficient or will otherwise have a positive impact on our business.
There can be no assurance as to how, in the long term, these and other actions by the U.S. government will
 
affect the efficiency,
liquidity and stability of the financial and mortgage markets or prepayments
 
on Agency MBS. To the extent the financial or mortgage
markets do not respond favorably to any of these actions, such actions do not function
 
as intended, or prepayments increase materially
as a result of these actions, our business, results of operations and financial
 
condition may continue to be materially adversely affected.
Measures intended to prevent the spread of COVID-19 may disrupt our ability
 
to operate our business.
 
In response to the outbreak of COVID-19 and the federal and state mandates implemented
 
to control its spread, some of our
employees are worked remotely until June of 2021. If our employees are
 
unable to work effectively as a result of COVID-19, including
because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures
 
or limitations, our
operations could be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity
 
incidents, data
breaches or cyber-attacks, which could have a material adverse effect on our business and
 
results of operations, due to, among other
things, the loss of proprietary data, interruptions or delays in the operation of
 
our business and damage to our reputation.
ITEM 1B.
 
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Our executive offices and principal administrative offices are located at 3305 Flamingo Drive, Vero Beach, Florida, 32963, in an
office building which Bimini Capital owns. This facility is shared with our subsidiaries
 
and Orchid. This property is suitable and adequate
for our business as currently conducted.
ITEM 3.
 
LEGAL PROCEEDINGS.
On April 22, 2020, the Company received a demand for payment from Citigroup, Inc.
 
in the amount of $33.1 million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
- 34 -
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007.
 
In November 2021, Citigroup notified the Company of additional
 
indemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the related MLPA’s.
 
The Company
believes the demands are without merit and intends to defend against the demands
 
vigorously.
 
No provision or accrual has been
recorded as of December 31, 2021 related to the Citigroup demands.
We are not party to any other material pending legal proceedings as described in Item 103
 
of Regulation S-K.
ITEM 4.
 
MINE SAFETY
 
DISCLOSURES.
 
Not Applicable.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 35 -
PART II
ITEM 5. MARKET
 
FOR REGISTRANT'S
 
COMMON EQUITY, RELATED
 
STOCKHOLDER
 
MATTERS AND ISSUER
 
PURCHASES
 
OF
EQUITY SECURITIES.
Market Information
Our Class A Common Stock is traded over-the-counter under the symbol “BMNM”.
 
As of March 11, 2022, we had 10,531,772
shares of Class A Common Stock issued and outstanding, which were held
 
by 102 shareholders of record and
 
912 beneficial owners
whose shares were held in “street name” by brokers and depository institutions.
As of March 11, 2022, we had 31,938 shares of Class B Common Stock outstanding, which were held by 2 holders of record
 
and
31,938 shares of Class C Common Stock outstanding, which were held by one
 
holder of record. There is no established public trading
market for our Class B Common Stock or Class C Common Stock.
Dividend Distribution Policy
We have not made a distribution to stockholders since 2011. 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.
Preferred Stock
Our charter authorizes us to issue preferred stock that could have a
 
preference over our common stock with respect to
distributions. If we were to issue any preferred stock, the distribution preference
 
on the preferred stock could limit our ability to make
distributions to the holders of our common stock.
Securities Authorized For Issuance Under Equity Compensation
 
Plans
None.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On March 26,
 
2018, the
 
Board of
 
Directors
 
of the Company
 
(the “Board”)
 
approved
 
a Stock Repurchase
 
Plan (the
 
“2018 Repurchase
Plan”).
 
Pursuant
 
to the 2018
 
Repurchase
 
Plan, the
 
Company could
 
purchase
 
up to 500,000
 
shares of
 
its Class
 
A Common
 
Stock from
time to time,
 
subject to
 
certain limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange Act
 
of 1934.
 
The 2018
 
Repurchase
 
Plan
was terminated
 
on September
 
16, 2021.
 
On September
 
16, 2021,
 
the Board
 
authorized
 
a share repurchase
 
plan pursuant
 
to Rule 10b5-1
 
of the Securities
 
Exchange
 
Act of
1934 (the
 
“2021 Repurchase
 
Plan”). Pursuant
 
to the 2021
 
Repurchase
 
Plan, the
 
Company may
 
purchase
 
shares of
 
its Class
 
A Common
Stock from
 
time
 
to time for
 
an aggregate
 
purchase
 
price not
 
to exceed
 
$2.5 million.
 
The table
 
below presents
 
the Company’s
 
share repurchase
 
activity
 
for the three
 
months ended
 
December
 
31, 2021.
Approximate Dollar
Shares Purchased
Amount of Shares
Total Number
Weighted-Average
as Part of Publicly
That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
Per Share
Programs
the Authorization
October 1, 2021 - October 31, 2021
64,849
$
2.01
64,849
$
2,369,860
November 1, 2021 - November 30, 2021
21,089
2.34
21,089
2,320,610
December 1, 2021 - December 31, 2021
6,349
2.13
6,349
2,307,095
 
 
 
- 36 -
Totals / Weighted Average
92,287
$
2.09
92,287
$
2,307,095
ITEM 6.
 
[RESERVED]
- 37 -
ITEM 7. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS.
 
The following discussion of our financial condition and results of operations should
 
be read in conjunction with the financial
statements and notes to those statements included in Item 8 of this Form 10-K.
 
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements
 
are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in this Form 10-K,
 
our actual results may differ materially from those
anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding
 
company that was formed in September 2003.
The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital,
 
LLC. We operate in two business segments: the
asset management segment, which includes (a) the investment advisory services provided
 
by Royal Palm’s wholly-owned subsidiary,
Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which
 
includes the investment activities conducted
by Royal Palm.
 
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered
 
with the
Securities and Exchange Commission), are collectively referred to as
 
“Bimini Advisors.”
 
Bimini Advisors serves as the external
manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement,
 
the Company receives management fees and
expense reimbursements.
 
As manager, Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day
operations.
 
Pursuant to the terms of the management agreement, Bimini Advisors
 
provides Orchid with its management team,
including its officers, along with appropriate support personnel. Bimini Advisors is at all times
 
subject to the supervision and oversight of
Orchid's board of directors and has only such functions and authority as delegated to
 
it.
 
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries
 
referred to as “Royal Palm”) maintains an investment
portfolio, consisting primarily of residential mortgage-backed securities ("MBS")
 
issued and guaranteed by a federally chartered
corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our
 
investment strategy focuses on, and our
portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency
 
MBS, such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”)
 
and collateralized mortgage obligations (“CMOs”) issued
by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest
 
only securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types of
 
structured Agency MBS. In addition, Royal Palm receives dividends
from its investment in Orchid common shares.
Stock Repurchase
 
Plans
On March 26,
 
2018, the
 
Board of
 
Directors
 
of the Company
 
approved
 
a Stock Repurchase
 
Plan the
 
“2018 Repurchase
 
Plan”).
 
Pursuant
 
to the 2018
 
Repurchase
 
Plan, we
 
could purchase
 
up to 500,000
 
shares of
 
the Company’s
 
Class A Common
 
Stock from
 
time to
time, subject
 
to certain
 
limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange
 
Act of 1934.
 
The 2018
 
Repurchase
 
Plan was
terminated
 
on September
 
16, 2021.
 
During the
 
period beginning
 
January 1,
 
2021 through
 
September
 
16, 2021,
 
the Company
 
repurchased
 
a total of
 
1,195 shares
 
under
the 2018
 
Repurchase
 
Plan at an
 
aggregate
 
cost of approximately
 
$2,298, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of
$1.92 per
 
share. From
 
commencement
 
of the 2018
 
Repurchase
 
Plan, through
 
its termination,
 
the Company
 
repurchased
 
a total of
 
71,598
shares at
 
an aggregate
 
cost of approximately
 
$169,243,
 
including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of $2.36
 
per share.
 
On September
 
16, 2021,
 
the Board
 
authorized
 
a share repurchase
 
plan pursuant
 
to Rule 10b5-1
 
of the Securities
 
Exchange
 
Act of
1934 (the
 
“2021 Repurchase
 
Plan”). Pursuant
 
to the 2021
 
Repurchase
 
Plan, we
 
may purchase
 
shares of
 
our Class
 
A Common
 
Stock from
time to time
 
for an aggregate
 
purchase price
 
not to exceed
 
$2.5 million.
 
Share repurchases
 
may be executed
 
through various
 
means,
- 38 -
including,
 
without limitation,
 
open market
 
transactions.
 
The 2021
 
Repurchase
 
Plan does
 
not obligate
 
the Company
 
to purchase
 
any
shares, and
 
it expires
 
on September
 
16, 2023.
 
The authorization
 
for the 2021
 
Repurchase
 
Plan may be
 
terminated,
 
increased
 
or
decreased
 
by the Company’s
 
Board of
 
Directors
 
in its discretion
 
at any time.
 
From the
 
commencement
 
of the 2021
 
Repurchase
 
Plan,
through December
 
31, 2021,
 
we repurchased
 
a total of
 
92,287 shares
 
at an aggregate
 
cost of approximately
 
$192,905,
 
including
commissions
 
and fees,
 
for a weighted
 
average price
 
of $2.09
 
per share.
 
Subsequent
 
to December
 
31, 2021,
 
and through
 
March 10,
 
2022,
the Company
 
repurchased
 
a total of
 
170,422 shares
 
at an aggregate
 
cost of approximately
 
$343,732,
 
including
 
commissions
 
and fees,
 
for
a weighted
 
average price
 
of $2.02
 
per share.
Tender Offer
In July 2021,
 
we completed
 
a “modified
 
Dutch auction”
 
tender offer
 
and paid
 
$1.5 million,
 
excluding
 
fees and
 
related expenses,
 
to
repurchase
 
812,879 shares
 
of our Class
 
A common
 
stock, which
 
were retired,
 
at a price
 
of $1.85 per
 
share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors (in addition to those related to the COVID-19
 
pandemic) may impact our results of
operations and financial condition. These factors include:
●
interest rate trends;
●
increases in our cost of funds resulting from increases in the Federal Funds rate
 
that are controlled by the Fed and are likely
to occur in 2022;
●
the difference between Agency MBS yields and our funding and hedging costs;
●
competition for, and supply of, investments in Agency MBS;
●
actions taken by the U.S. government, including the presidential administration,
 
the U.S. Federal Reserve (the “Fed”), the
Federal Open Market Committee (the “FOMC”), The Federal Housing Finance
 
Agency (the “FHFA”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency MBS, and credit trends
 
insofar as they affect prepayment rates;
●
the equity markets and the ability of Orchid to raise additional capital;
●
geo-political events that affect the U.S. and international economies, such as the current crisis
 
in Ukraine; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
 
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments;
●
the requirements to qualify for a registration exemption under the Investment Company Act;
●
our ability to use net operating loss carryforwards and net capital loss carryforwards
 
to reduce our taxable income;
●
the impact of possible future changes in tax laws or tax rates; and
●
our ability to manage the portfolio of Orchid and maintain our role as manager.
Results
 
of Operations
Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the
 
year ended
 
December
 
31, 2021,
 
as compared
 
to the year
 
ended
December
 
31, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 39 -
Net Income
 
(Loss) Summary
Consolidated
 
net income
 
for the year
 
ended December
 
31, 2021
 
was $0.3
 
million, or
 
$0.02 basic
 
and diluted
 
income per
 
share of
Class A Common
 
Stock, as
 
compared
 
to consolidated
 
net loss
 
of $5.5 million,
 
or $0.47
 
basic and
 
diluted loss
 
per share
 
of Class A
Common Stock,
 
for the year
 
ended December
 
31, 2020.
 
The components
 
of net income
 
(loss) for
 
the years
 
ended December
 
31, 2021
 
and 2020,
 
along with
 
the changes
 
in those components
are presented
 
in the table
 
below:
(in thousands)
2021
2020
Change
Advisory services revenue
$
9,788
$
6,795
$
2,993
Interest and dividend income
4,262
5,517
(1,255)
Interest expense
(1,113)
(2,225)
1,112
Net revenues
12,937
10,087
2,850
Other expense
(4,744)
(10,279)
5,535
Expenses
(8,286)
(6,666)
(1,620)
Net loss before income tax benefit
(93)
(6,858)
6,765
Income tax benefit
(368)
(1,369)
1,001
Net income (loss)
$
275
$
(5,489)
$
5,764
GAAP and
 
Non-GAAP
 
Reconciliation
Economic Interest
 
Expense and
 
Economic Net
 
Interest
 
Income
We use derivative
 
instruments,
 
specifically
 
Eurodollar
 
and Treasury
 
Note (“T-Note”)
 
futures contracts
 
and TBA
 
short positions
 
to
hedge a portion
 
of the interest
 
rate risk
 
on repurchase
 
agreements
 
in a rising
 
rate environment.
We have not
 
designated
 
our derivative
 
financial
 
instruments
 
as hedge
 
accounting
 
relationships,
 
but rather
 
hold them
 
for economic
hedging purposes.
 
Changes in
 
fair value
 
of these
 
instruments
 
are presented
 
in a separate
 
line item
 
in our consolidated
 
statements
 
of
operations
 
and not included
 
in interest
 
expense. As
 
such, for
 
financial
 
reporting
 
purposes,
 
interest
 
expense and
 
cost of funds
 
are not
impacted by
 
the fluctuation
 
in value
 
of the derivative
 
instruments.
For the purpose
 
of computing
 
economic net
 
interest
 
income and
 
ratios relating
 
to cost of
 
funds measures,
 
GAAP interest
 
expense has
been adjusted
 
to reflect
 
the realized
 
and unrealized
 
gains or
 
losses on
 
certain derivative
 
instruments
 
the Company
 
uses that
 
pertain to
each period
 
presented.
 
We believe
 
that adjusting
 
our interest
 
expense for
 
the periods
 
presented
 
by the gains
 
or losses
 
on these
 
derivative
instruments
 
would not
 
accurately
 
reflect our
 
economic interest
 
expense for
 
these periods.
 
The reason
 
is that these
 
derivative
 
instruments
may cover
 
periods that
 
extend into
 
the future,
 
not just the
 
current period.
 
Any realized
 
or unrealized
 
gains or
 
losses on
 
the instruments
reflect the
 
change in
 
market value
 
of the instrument
 
caused by
 
changes in
 
underlying
 
interest
 
rates applicable
 
to the term
 
covered by
 
the
instrument,
 
not just the
 
current period.
For each
 
period presented,
 
we have combined
 
the effects
 
of the derivative
 
financial
 
instruments
 
in place for
 
the respective
 
period with
the actual
 
interest
 
expense incurred
 
on our borrowings
 
to reflect
 
total economic
 
interest
 
expense for
 
the applicable
 
period. Interest
expense, including
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
interest
 
expense. Net
 
interest income,
when calculated
 
to include
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
net interest
 
income.
 
We believe
 
that economic
 
interest
 
expense and
 
economic
 
net interest
 
income provide
 
meaningful
 
information
 
to consider, in
 
addition
to the respective
 
amounts prepared
 
in accordance
 
with GAAP. The non-GAAP
 
measures help
 
management
 
to evaluate
 
our financial
position and
 
performance
 
without the
 
effects of
 
certain transactions
 
and GAAP
 
adjustments
 
that are
 
not necessarily
 
indicative
 
of our
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 40 -
current investment
 
portfolio
 
or operations.
 
The gains
 
or losses
 
on derivative
 
instruments
 
presented
 
in our consolidated
 
statements
 
of
operations
 
are not necessarily
 
representative
 
of the total
 
interest
 
rate expense
 
that we will
 
ultimately
 
realize. This
 
is because
 
as interest
rates move
 
up or down
 
in the future,
 
the gains
 
or losses
 
we ultimately
 
realize, and
 
which will
 
affect our
 
total interest
 
rate expense
 
in future
periods,
 
may differ
 
from the
 
unrealized
 
gains or
 
losses recognized
 
as of the
 
reporting
 
date.
 
Our presentation
 
of the economic
 
value of our
 
hedging strategy
 
has important
 
limitations.
 
First, other
 
market participants
 
may
calculate
 
economic
 
interest
 
expense and
 
economic net
 
interest
 
income differently
 
than the
 
way we calculate
 
them. Second,
 
while we
believe that
 
the calculation
 
of the economic
 
value of our
 
hedging
 
strategy
 
described
 
above helps
 
to present
 
our financial
 
position
 
and
performance,
 
it may be
 
of limited
 
usefulness
 
as an analytical
 
tool. Therefore,
 
the economic
 
value of
 
our investment
 
strategy should
 
not be
viewed in
 
isolation
 
and is not
 
a substitute
 
for interest
 
expense and
 
net interest
 
income computed
 
in accordance
 
with GAAP.
The tables
 
below present
 
a reconciliation
 
of the adjustments
 
to interest
 
expense shown
 
for each
 
period relative
 
to our derivative
instruments,
 
and the consolidated
 
statements
 
of operations
 
line item,
 
gains (losses)
 
on derivative
 
instruments,
 
calculated
 
in accordance
with GAAP
 
for the years
 
ended December
 
31, 2021
 
and 2020
 
and for each
 
quarter during
 
2021 and
 
2020. As
 
a result
 
of the market
 
turmoil
during the
 
first quarter
 
of 2020 several
 
hedge positions
 
where closed.
 
However, the
 
hedges closed
 
were hedges
 
that covered
 
periods well
beyond the
 
first quarter
 
of 2020.
 
Accordingly, the
 
open equity
 
at the time
 
these hedges
 
were closed
 
will result
 
in adjustments
 
to economic
interest
 
expense through
 
the balance
 
of their respective
 
original
 
hedge periods.
 
Since the
 
Company’s portfolio
 
was significantly
 
reduced
during the
 
first quarter
 
of 2020, the
 
effect of applying
 
the open
 
equity at
 
the time
 
of closure
 
of these
 
hedge instruments
 
to the current,
 
and
much smaller,
 
repurchase
 
agreement
 
interest
 
expense amounts
 
has materially
 
impacted
 
the economic
 
interest
 
amounts reported
 
below.
Gains (Losses) on Derivative Instruments - Recognized in Consolidated Statement of Operations (GAAP)
(in thousands)
Recognized in
Statement of
TBA
Operations
Securities
Futures
Three Months Ended
(GAAP)
Income (Loss)
Contracts
December 31, 2021
$
-
$
-
$
-
September 30, 2021
-
-
-
June 30, 2021
-
-
-
March 31, 2021
-
-
-
December 31, 2020
-
-
-
September 30, 2020
-
-
-
June 30, 2020
(2)
-
(2)
March 31, 2020
(5,291)
(1,441)
(3,850)
Years Ended
December 31, 2021
$
-
$
-
$
-
December 31, 2020
(5,293)
$
(1,441)
(3,852)
Gains (Losses) on Futures Contracts
(in thousands)
Attributed to Current Period (Non-GAAP)
Attributed to Future Periods (Non-GAAP)
Junior
Junior
Statement
Repurchase
Subordinated
Repurchase
Subordinated
of
Three Months Ended
Agreements
Debt
Total
Agreements
Debt
Total
Operations
December 31, 2021
$
(707)
$
(60)
$
(767)
$
707
$
60
$
767
$
-
September 30, 2021
(709)
(57)
(766)
709
57
766
-
June 30, 2021
(708)
(58)
(766)
708
58
766
-
March 31, 2021
(708)
(58)
(766)
708
58
766
-
December 31, 2020
(615)
(40)
(655)
615
40
655
-
September 30, 2020
(1,065)
(40)
(1,105)
1,065
40
1,105
-
June 30, 2020
(456)
(40)
(496)
456
38
494
(2)
March 31, 2020
(456)
(40)
(496)
(2,879)
(475)
(3,354)
(3,850)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 41 -
Years Ended
December 31, 2021
$
(2,832)
$
(233)
$
(3,065)
$
2,832
$
233
$
3,065
$
-
December 31, 2020
(2,592)
(160)
(2,752)
(743)
(357)
(1,100)
(3,852)
Economic Net Portfolio Interest Income
(in thousands)
Interest Expense on Repurchase Agreements
Net Portfolio
Effect of
Interest Income
Interest
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Income
Basis
Hedges
(1)
Basis
(2)
Basis
Basis
(3)
December 31, 2021
$
511
$
21
$
(707)
$
728
$
490
$
(217)
September 30, 2021
537
24
(709)
733
513
(196)
June 30, 2021
578
31
(708)
739
547
(161)
March 31, 2021
611
40
(708)
748
571
(137)
December 31, 2020
597
43
(615)
658
554
(61)
September 30, 2020
604
43
(1,065)
1,108
561
(504)
June 30, 2020
523
60
(456)
516
463
7
March 31, 2020
2,040
928
(456)
1,384
1,112
656
Years Ended
December 31, 2021
$
2,237
$
116
$
(2,832)
$
2,948
$
2,121
$
(711)
December 31, 2020
3,764
1,074
(2,592)
3,666
2,690
98
(1)
Reflects the effect of derivative instrument hedges for only the period
 
presented.
(2)
Calculated by subtracting the effect of derivative instrument hedges
 
attributed to the period presented from GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net portfolio interest income.
Economic Net Interest Income
(in thousands)
Net Portfolio
Interest Expense on Long-Term Debt
Interest Income
Effect of
Net Interest Income
GAAP
Economic
GAAP
Non-GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(1)
Basis
Hedges
(2)
Basis
(3)
Basis
Basis
(4)
December 31, 2021
$
490
$
(217)
$
249
$
(60)
$
309
$
241
$
(526)
September 30, 2021
513
(196)
248
(57)
305
265
(501)
June 30, 2021
547
(161)
250
(58)
308
297
(469)
March 31, 2021
571
(137)
250
(58)
308
321
(445)
December 31, 2020
554
(61)
257
(40)
297
297
(358)
September 30, 2020
561
(504)
261
(40)
301
300
(805)
June 30, 2020
463
7
282
(40)
322
181
(315)
March 31, 2020
1,112
656
350
(40)
390
762
266
Years Ended
December 31, 2021
$
2,121
$
(711)
$
997
$
(233)
$
1,230
$
1,124
$
(1,941)
December 31, 2020
2,690
98
1,150
(160)
1,310
1,540
(1,212)
(1)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net portfolio interest income.
(2)
Reflects the effect of derivative instrument hedges for only the period
 
presented.
(3)
Calculated by subtracting the effect of derivative instrument hedges
 
attributed to the period presented from GAAP interest expense.
(4)
Calculated by adding the effect of derivative instrument hedges
 
attributed to the period presented to GAAP net interest income.
Segment Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 42 -
We have two operating segments. The asset management segment includes the investment
 
advisory services provided by Bimini
Advisors to Orchid and Royal Palm. The investment portfolio segment includes the
 
investment activities conducted by Royal Palm.
 
Segment information for the years ended December 31, 2021 and 2020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
147
-
-
(147)
-
Interest and dividend income
-
4,262
-
-
4,262
Interest expense
-
(116)
 
(997)
(2)
-
(1,113)
Net revenues
9,935
4,146
(997)
(147)
12,937
Other (expense) income
-
(4,898)
 
154
(3)
-
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
-
-
(8,285)
Intercompany expenses
(1)
-
(147)
-
147
-
Income (loss) before income taxes
$
4,259
$
(3,508)
$
(843)
$
-
$
(92)
Assets
$
1,901
$
111,022
$
9,162
$
-
$
122,085
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
Advisory services, other operating segments
(1)
152
-
-
(152)
-
Interest and dividend income
-
5,517
-
5,517
Interest expense
-
(1,074)
 
(1,151)
(2)
(2,225)
Net revenues
6,947
4,443
(1,151)
(152)
10,087
Other expense
-
(9,825)
 
(454)
(3)
(10,279)
Operating expenses
(4)
(3,653)
(3,014)
-
(6,667)
Intercompany expenses
(1)
-
(152)
-
152
-
Income (loss) before income taxes
$
3,294
$
(8,548)
$
(1,605)
$
-
$
(6,859)
Assets
$
1,469
$
113,764
$
13,468
$
-
$
128,701
(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)
 
on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportional
 
share of total revenues.
Asset Management
 
Segment
Advisory Services
 
Revenue
Advisory services
 
revenue
 
consists
 
of management
 
fees and
 
overhead
 
reimbursements
 
charged
 
to Orchid
 
for the management
 
of its
portfolio
 
pursuant
 
to the terms
 
of a management
 
agreement.
 
We receive a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million
 
and less than or equal to $500 million, and
●
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million.
In addition, Orchid is obligated to reimburse us for any direct expenses
 
incurred on its behalf and to pay to us an amount equal to
Orchid's pro rata portion of certain overhead costs set forth in the management
 
agreement. The management agreement has been
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 43 -
renewed through February 2023 and provides for automatic one-year extension
 
options. Should Orchid terminate the management
agreement without cause, it will be obligated to pay to us a termination fee equal
 
to three times the average annual management fee,
as defined in the management agreement, before or on the last day of the automatic
 
renewal term.
The following table summarizes the advisory services revenue received from
 
Orchid for the years ended December 31, 2021 and
2020 and each quarter during 2021 and 2020.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
December 31, 2021
$
6,056,259
$
806,382
$
2,587
$
443
$
3,030
September 30, 2021
5,136,331
672,384
2,157
390
2,547
June 30, 2021
4,504,887
542,679
1,791
395
2,186
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
347
1,615
March 31, 2020
3,269,859
376,673
1,377
348
1,725
Years Ended
December 31, 2021
$
4,932,548
$
619,533
$
8,156
$
1,632
$
9,788
December 31, 2020
3,363,208
373,464
5,281
1,514
6,795
Investment Portfolio Segment
Net Portfolio Interest Income
We define
 
net portfolio
 
interest
 
income as
 
interest
 
income on
 
MBS less
 
interest
 
expense on
 
repurchase
 
agreement
 
funding.
 
During
the year
 
ended December
 
31, 2021,
 
we generated
 
$2.1 million
 
of net portfolio
 
interest
 
income, consisting
 
of $2.2 million
 
of interest
 
income
from MBS
 
assets offset
 
by $0.1 million
 
of interest
 
expense on
 
repurchase
 
liabilities.
 
For the year
 
ended December
 
31, 2020,
 
we
generated
 
$2.7 million
 
of net portfolio
 
interest
 
income, consisting
 
of $3.8 million
 
of interest
 
income from
 
MBS assets
 
offset by
 
$1.1 million
of interest
 
expense on
 
repurchase
 
liabilities.
 
The $1.5
 
million
 
decrease
 
in interest
 
income for
 
the year
 
ended December
 
31, 2021
 
was due
to a $13.2
 
million decrease
 
in average
 
MBS balances,
 
combined
 
with a 136
 
basis point
 
("bp") decrease
 
in yields
 
earned on
 
the portfolio.
 
The $1.0
 
million decrease
 
in interest
 
expense for
 
the year
 
ended December
 
31, 2021
 
was due to
 
a 121 bp
 
decrease
 
in cost of
 
funds,
combined with
 
a $10.6 million
 
decrease
 
in average
 
repurchase
 
liabilities.
 
Our economic
 
interest
 
expense
 
on repurchase
 
liabilities
 
for the
 
years ended
 
December
 
31, 2021
 
and 2020
 
was $2.9
 
million and
 
$3.7
million, respectively,
 
resulting
 
in ($0.7)
 
million and
 
$0.1 million
 
of economic
 
net portfolio
 
interest
 
income, respectively.
 
The tables
 
below provide
 
information
 
on our portfolio
 
average balances,
 
interest
 
income, yield
 
on assets,
 
average repurchase
agreement
 
balances,
 
interest
 
expense,
 
cost of funds,
 
net interest
 
income and
 
net interest
 
rate spread
 
for each
 
quarter in
 
2021 and
 
2020
and for the
 
years ended
 
December
 
31, 2021
 
and 2020
 
on both a
 
GAAP and
 
economic basis.
($ in thousands)
Average
Yield on
Average
Interest Expense
Average Cost of Funds
MBS
Interest
Average
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Held
(1)
Income
(2)
MBS
Agreements
(1)
Basis
Basis
(2)
Basis
Basis
(3)
December 31, 2021
$
62,597
$
511
3.27%
$
61,019
$
21
$
728
0.14%
4.77%
September 30, 2021
66,692
537
3.22%
67,253
24
733
0.14%
4.36%
June 30, 2021
70,925
578
3.26%
72,241
31
739
0.17%
4.09%
March 31, 2021
69,017
611
3.54%
69,104
40
748
0.23%
4.33%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 44 -
December 31, 2020
69,161
597
3.45%
67,878
43
658
0.25%
3.88%
September 30, 2020
62,981
604
3.84%
61,151
43
1,108
0.28%
7.25%
June 30, 2020
53,630
523
3.90%
51,987
60
516
0.46%
3.97%
March 31, 2020
136,142
2,040
5.99%
131,156
928
1,384
2.83%
4.22%
Years Ended
December
 
31, 2021
$
67,308
$
2,237
3.32%
$
67,404
$
116
$
2,948
0.17%
4.37%
December 31, 2020
80,479
3,764
4.68%
78,043
1,074
3,666
1.38%
4.70%
($ in thousands)
Net Portfolio
Net Portfolio
Interest Income
Interest Spread
GAAP
Economic
GAAP
Economic
Three Months Ended
Basis
Basis
(2)
Basis
Basis
(4)
December 31, 2021
$
490
$
(217)
3.13%
(1.50)%
September 30, 2021
513
(196)
3.08%
(1.14)%
June 30, 2021
547
(161)
3.09%
(0.83)%
March 31, 2021
571
(137)
3.31%
(0.79)%
December 31, 2020
554
(61)
3.20%
(0.43)%
September 30, 2020
561
(504)
3.56%
(3.41)%
June 30, 2020
463
7
3.44%
(0.07)%
March 31, 2020
1,112
656
3.16%
1.77%
Years Ended
December 31, 2021
$
2,121
$
(711)
3.15%
(1.05)%
December 31, 2020
2,690
98
3.30%
(0.02)%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the
 
tables on pages 43 and 44 are calculated based on the
average balances of the underlying investment portfolio/repurchase
 
agreement balances and are annualized for the periods presented.
(2)
Economic interest expense and economic net interest income
presented in the tables above and the tables on page 44 include the
effect of derivative instrument hedges for only the period presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
 
instrument hedges attributed to the period related to hedging
activities divided by average MBS held.
(4)
Economic net interest spread is calculated by subtracting average economic
 
cost of funds from yield on average MBS.
Interest Income and Average Earning Asset Yield
Our interest
 
income was
 
$2.2 million
 
for the year
 
ended December
 
31, 2021
 
and $3.8
 
million for
 
year ended
 
December
 
31, 2020.
Average MBS
 
holdings were
 
$67.3 million
 
and $80.5
 
million for
 
the years
 
ended December
 
31, 2021
 
and 2020,
 
respectively. The
 
$1.5
million decrease
 
in interest
 
income was
 
due to a
 
$13.2 million
 
decrease
 
in average
 
MBS holdings,
 
combined with
 
a 136 bp
 
decrease
 
in
yields.
 
The table
 
below presents
 
the average
 
portfolio
 
size, income
 
and yields
 
of our respective
 
sub-portfolios,
 
consisting
 
of structured
 
MBS
and pass-through
 
MBS (“PT
 
MBS”) for
 
the years
 
ended December
 
31, 2021
 
and 2020
 
and each
 
quarter during
 
2021 and
 
2020.
($ in thousands)
Average MBS Held
Interest Income
Realized Yield on Average MBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
MBS
MBS
Total
MBS
MBS
Total
MBS
MBS
Total
December 31, 2021
$
59,701
$
2,896
$
62,597
$
500
$
11
$
511
3.35%
1.55%
3.27%
September 30, 2021
64,641
2,051
66,692
533
4
537
3.30%
0.91%
3.22%
June 30, 2021
70,207
718
70,925
579
(1)
578
3.30%
(0.11)%
3.26%
March 31, 2021
68,703
314
69,017
605
6
611
3.53%
6.54%
3.54%
December 31, 2020
68,842
319
69,161
598
(1)
597
3.47%
(1.20)%
3.45%
September 30, 2020
62,564
417
62,981
588
16
604
3.76%
15.35%
3.84%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 45 -
June 30, 2020
53,101
529
53,630
502
21
523
3.78%
16.12%
3.90%
March 31, 2020
135,044
1,098
136,142
2,029
11
2,040
6.01%
3.93%
5.99%
Years Ended
December 31, 2021
$
65,813
$
1,495
$
67,308
$
2,217
$
20
$
2,237
3.37%
1.39%
3.32%
December 31, 2020
79,888
591
80,479
3,717
47
3,764
4.65%
7.98%
4.68%
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average
 
outstanding
 
repurchase
 
agreements
 
were $67.4
 
million and
 
$78.0 million,
 
generating
 
interest
 
expense of
 
$0.1 million
 
and
$1.1 million
 
for the years
 
ended December
 
31, 2021
 
and 2020,
 
respectively.
 
Our average
 
cost of funds
 
was 0.17%
 
and 1.38%
 
for the
years ended
 
December
 
31, 2021 and
 
2020, respectively.
 
There was
 
a 121 bp
 
decrease
 
in the average
 
cost of funds
 
and a $10.6
 
million
decrease
 
in average
 
outstanding
 
repurchase
 
agreements
 
during the
 
year ended
 
December
 
31, 2021 as
 
compared
 
to the year
 
ended
December
 
31, 2020.
 
 
Our economic
 
interest
 
expense
 
was $2.9
 
million
 
and $3.7
 
million
 
for the
 
years ended
 
December
 
31, 2021
 
and 2020,
 
respectively.
 
There
was a 33 bp
 
decrease
 
in the average
 
economic cost
 
of funds to
 
4.37% for the
 
year ended
 
December
 
31, 2021 from
 
4.70% for
 
the previous
year. The $0.8 million
 
decrease
 
in economic
 
interest
 
expense was
 
due to the
 
decrease
 
in interest
 
expense on
 
the repurchase
 
agreements,
partially
 
offset by the
 
negative
 
performance
 
of our hedging
 
agreements
 
attributed
 
to the current
 
period.
Since all
 
of our repurchase
 
agreements
 
are short-term,
 
changes in
 
market rates
 
directly affect
 
our interest
 
expense.
 
Our average
 
cost
of funds
 
calculated
 
on a GAAP
 
basis was
 
5 bps above
 
average
 
one-month
 
LIBOR and
 
9 bps below
 
average six-month
 
LIBOR for
 
the
quarter ended
 
December
 
31, 2021.
 
Our average
 
economic cost
 
of funds
 
was 468 bps
 
above average
 
one-month
 
LIBOR and
 
454 bps
above average
 
six-month LIBOR
 
for the quarter
 
ended December
 
31, 2021.
 
The average
 
term to maturity
 
of the outstanding
 
repurchase
agreements
 
decreased
 
from 33
 
days at December
 
31, 2020
 
to 16 days
 
at December
 
31, 2021.
The tables
 
below present
 
the average
 
outstanding
 
balance under
 
all repurchase
 
agreements,
 
interest
 
expense and
 
average
 
economic
cost of funds,
 
and average
 
one-month
 
and six-month
 
LIBOR rates
 
for each
 
quarter in
 
2021 and
 
2020 and
 
for the years
 
ended December
31, 2021
 
and 2020
 
on both a
 
GAAP and
 
economic basis.
($ in thousands)
Average
Balance of
Interest Expense
Average Cost of Funds
Repurchase
GAAP
Economic
GAAP
Economic
Three Months Ended
Agreements
Basis
Basis
Basis
Basis
December 31, 2021
$
61,019
$
21
$
728
0.14%
4.77%
September 30, 2021
67,253
24
733
0.14%
4.36%
June 30, 2021
72,241
31
739
0.17%
4.09%
March 31, 2021
69,104
40
748
0.23%
4.33%
December 31, 2020
67,878
43
658
0.25%
3.88%
September 30, 2020
61,151
43
1,108
0.28%
7.25%
June 30, 2020
51,987
60
516
0.46%
3.97%
March 31, 2020
131,156
928
1,384
2.83%
4.22%
Years Ended
December 31, 2021
$
67,404
$
116
2,948
0.17%
4.37%
December 31, 2020
78,043
1,074
3,666
1.38%
4.70%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Three Months Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
4.68%
4.54%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 46 -
September 30, 2021
0.09%
0.16%
0.05%
(0.02)%
4.27%
4.20%
June 30, 2021
0.10%
0.18%
0.07%
(0.01)%
3.99%
3.91%
March 31, 2021
0.13%
0.23%
0.10%
0.00%
4.20%
4.10%
December 31, 2020
0.15%
0.27%
0.10%
(0.02)%
3.73%
3.61%
September 30, 2020
0.17%
0.35%
0.11%
(0.07)%
7.08%
6.90%
June 30, 2020
0.55%
0.70%
(0.09)%
(0.24)%
3.42%
3.27%
March 31, 2020
1.34%
1.43%
1.49%
1.40%
2.88%
2.79%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
Years Ended
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
December 31, 2021
0.10%
0.20%
0.07%
(0.03)%
4.27%
4.17%
December 31, 2020
0.55%
0.69%
0.83%
0.69%
4.15%
4.01%
Dividend Income
We owned 1,520,036 shares of Orchid common stock as of December 31, 2019. We acquired 1,075,321
 
additional shares during
the year ended December 31, 2020, bringing our total ownership to 2,595,357 shares
 
as of December 31, 2021 and 2020. Orchid paid
total dividends of $0.78 per share during 2021 and $0.79 per share during 2020.
 
During the years ended December 31, 2021 and
2020, we received dividends on this common stock investment of approximately
 
$2.0 million and $1.8 million, respectively.
Long-Term Debt
Junior Subordinated
 
Debt
Interest
 
expense on
 
our junior
 
subordinated
 
debt securities
 
was approximately
 
$1.0 million
 
and $1.1
 
million for
 
the years
 
ended
December
 
31, 2021
 
and 2020,
 
respectively.
 
The average
 
rate of
 
interest
 
paid for
 
the year
 
ended December
 
31, 2021
 
was 3.66%
compared
 
to 4.22%
 
for the year
 
ended December
 
31, 2020.
 
The junior
 
subordinated
 
debt securities
 
pay interest
 
at a floating
 
rate.
 
The
rate is adjusted
 
quarterly
 
and set
 
at a spread
 
of 3.50%
 
over the
 
prevailing
 
three-month
 
LIBOR rate
 
on the determination
 
date.
 
As of
December
 
31, 2021,
 
the interest
 
rate was
 
3.70%.
Note Payable
On October 30, 2019,
 
the Company borrowed $680,000 from a bank. The note is payable in equal
 
monthly principal and interest
installments of approximately $4,500 through October 30, 2039. Interest accrues
 
at 4.89% through October 30, 2024. Thereafter,
interest accrues based on the weekly average yield to the United States Treasury securities adjusted to
 
a constant maturity of 5 years,
plus 3.25%.
 
The note is secured by a mortgage on the Company’s office building.
Paycheck Protection Plan Loan
On April 13, 2020, the Company received approximately $152,000 through the Paycheck
 
Protection Program (“PPP”) of the
CARES Act in the form of a low interest loan.
 
The Small Business Administration notified the Company that, effective as of April 22,
2021, all principal and accrued interest under the PPP loan has been forgiven.
Gains or Losses and Other Income
The table
 
below presents
 
our gains
 
or losses
 
and other
 
income for
 
the years
 
ended December
 
31, 2021
 
and 2020.
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 47 -
2021
2020
Change
Realized gains (losses) on sales of MBS
$
69
$
(5,745)
$
5,814
Unrealized (losses) gains on MBS
(3,099)
112
(3,211)
Total losses on
 
MBS
(3,030)
(5,633)
2,603
Losses on derivative instruments
-
(5,293)
5,293
Gains on retained interests in securitizations
-
59
(59)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,869)
584
(2,453)
We invest in
 
MBS with
 
the intent
 
to earn net
 
income from
 
the realized
 
yield on those
 
assets over
 
their related
 
funding and
 
hedging
costs, and
 
not for the
 
purpose of
 
making short
 
term gains
 
from trading
 
in these securities.
 
However, we
 
have sold,
 
and may continue
 
to
sell, existing
 
assets to
 
acquire
 
new assets,
 
which our
 
management
 
believes might
 
have higher
 
risk-adjusted
 
returns in
 
light of current
 
or
anticipated
 
interest
 
rates, federal
 
government
 
programs
 
or general
 
economic conditions
 
or to manage
 
our balance
 
sheet as
 
part of our
asset/liability
 
management
 
strategy.
 
During the
 
year ended
 
December 31,
 
2021, we
 
received proceeds
 
of $13.1
 
million from
 
the sales
 
of
MBS compared
 
to $176.2
 
million for
 
the year
 
ended December
 
31, 2020.
 
Most of the
 
2020 sales
 
occurred
 
during the
 
second half
 
of March
2020 as we
 
sold assets
 
in order
 
to maintain
 
our leverage
 
ratio at
 
prudent levels,
 
maintain sufficient
 
cash and liquidity
 
and reduce
 
risk
associated
 
with the
 
market turmoil
 
brought about
 
by COVID-19.
The fair
 
value of our
 
MBS portfolio
 
and derivative
 
instruments,
 
and the gains
 
(losses) reported
 
on those
 
financial
 
instruments,
 
are
sensitive
 
to changes
 
in interest
 
rates.
 
The table
 
below presents
 
historical
 
interest
 
rate data
 
as of each
 
quarter end
 
during
 
2021 and
 
2020.
15 Year
30 Year
Three
5 Year
10 Year
Fixed-Rate
Fixed-Rate
Month
Treasury Rate
(1)
Treasury Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
Libor
(3)
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 Year and 10
 
Year Treasury
 
Rates are obtained from quoted end of day prices on the Chicago Board Options
 
Exchange.
(2)
Historical 30 Year and
 
15 Year Fixed
 
Rate Mortgage Rates are obtained from Freddie Mac’s
 
Primary Mortgage Market Survey.
(3)
Historical LIBOR are obtained from the Intercontinental Exchange Benchmark Administration
 
Ltd.
Operating Expenses
For the year
 
ended December
 
31, 2021,
 
our total
 
operating
 
expenses were
 
approximately
 
$8.3 million
 
compared
 
to approximately
$6.7 million
 
for the year
 
ended December
 
31, 2020.
 
The table
 
below presents
 
a breakdown
 
of operating
 
expenses for
 
the years
 
ended
December
 
31, 2021
 
and 2020.
(in thousands)
2021
2020
Change
Compensation and benefits
$
5,721
$
4,235
$
1,486
Legal fees
137
145
(8)
Accounting, auditing and other professional fees
377
431
(54)
Directors’ fees and liability insurance
763
691
72
Administrative and other expenses
1,287
1,165
122
$
8,285
$
6,667
$
1,618
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 48 -
The increase
 
in compensation
 
and benefits
 
in 2021 compared
 
to 2020 reflects
 
an evaluation
 
performed
 
by the Company’s
 
Board of
Directors
 
of the performance
 
of the Company’s
 
executive
 
officers,
 
particularly
 
the increase
 
in advisory
 
services
 
revenue.
Financial
 
Condition:
Mortgage-Backed Securities
As of December
 
31, 2021,
 
our MBS portfolio
 
consisted
 
of $60.8
 
million of
 
agency or
 
government
 
MBS at fair
 
value and
 
had a
weighted
 
average coupon
 
of 3.41%.
 
During the
 
year ended
 
December 31,
 
2021,
 
we received
 
principal
 
repayments
 
of $14.5
 
million
compared
 
to $13.9
 
million for
 
the year
 
ended December
 
31, 2020.
 
The average
 
prepayment
 
speeds for
 
the quarters
 
ended December
 
31,
2021 and
 
2020 were
 
21.1% and
 
14.4%,
 
respectively.
The following
 
table presents
 
the three-month
 
constant prepayment
 
rate (“CPR”)
 
experienced
 
on our structured
 
and PT MBS
 
sub-
portfolios,
 
on an annualized
 
basis, for
 
the quarterly
 
periods presented.
 
CPR is a
 
method of
 
expressing
 
the prepayment
 
rate for
 
a mortgage
pool that
 
assumes that
 
a constant
 
fraction
 
of the remaining
 
principal
 
is prepaid
 
each month
 
or year. Specifically,
 
the CPR
 
in the chart
below represents
 
the three
 
month prepayment
 
rate of the
 
securities
 
in the respective
 
asset category.
 
Structured
PT MBS
MBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
December 31, 2021
13.7
35.2
21.1
September 30, 2021
15.5
26.9
18.3
June 30, 2021
21.0
31.3
21.9
March 31, 2021
18.5
16.4
18.3
December 31, 2020
12.8
24.5
14.4
September 30, 2020
13.0
32.0
15.8
June 30, 2020
12.4
25.0
15.3
March 31, 2020
11.6
18.1
13.7
The following
 
tables summarize
 
certain characteristics
 
of our PT
 
MBS and structured
 
MBS as of
 
December
 
31, 2021
 
and 2020:
 
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
December 31, 2021
Fixed Rate PT MBS
$
58,029
95.4%
3.69%
330
1-Sep-51
Interest-Only Securities
2,759
4.6%
2.86%
306
15-May-51
Inverse Interest-Only Securities
15
0.0%
5.90%
209
15-May-39
Total Mortgage Assets
$
60,803
100.0%
3.41%
329
1-Sep-51
December 31, 2020
Fixed Rate PT MBS
$
64,902
99.6%
3.89%
333
1-Aug-50
Interest-Only Securities
251
0.4%
3.56%
299
15-Jul-48
Inverse Interest-Only Securities
25
0.0%
5.84%
221
15-May-39
Total Mortgage Assets
$
65,178
100.0%
3.89%
333
1-Aug-50
($ in thousands)
December 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 49 -
Fannie Mae
$
39,703
65.3%
$
38,946
59.8%
Freddie Mac
21,100
34.7%
26,232
40.2%
Total Portfolio
$
60,803
100.0%
$
65,178
100.0%
December 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
109.33
$
109.51
Weighted Average Structured Purchase Price
$
4.81
$
4.28
Weighted Average Pass-through Current Price
$
109.30
$
112.67
Weighted Average Structured Current Price
$
9.87
$
3.20
Effective Duration
(1)
2.103
3.309
(1)
Effective duration is the approximate percentage change in price
 
for a 100 bp change in rates.
 
An effective duration of 2.103 indicates that an
interest rate increase of 1.0% would be expected to cause a 2.103% decrease in the value
 
of the MBS in our investment portfolio at December
31, 2021.
 
An effective duration of 3.309 indicates that an interest rate increase
 
of 1.0% would be expected to cause a 3.309% decrease in the
value of the MBS in our investment portfolio at December 31, 2020. These figures
 
include the structured securities in the portfolio but do include
the effect of our funding cost hedges. Effective duration quotes
 
for individual investments are obtained from The Yield
 
Book, Inc.
The following
 
table presents
 
a summary
 
of our portfolio
 
assets acquired
 
during the
 
years ended
 
December
 
31, 2021
 
and 2020.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
PT MBS
$
23,338
$
106.48
1.41%
$
43,130
$
111.44
1.99%
Structured MBS
2,852
10.01
3.44%
-
-
0.00%
Our portfolio
 
of PT MBS
 
is typically
 
comprised
 
of adjustable-rate
 
MBS, fixed-rate
 
MBS and hybrid
 
adjustable-rate
 
MBS. We generally
seek to acquire
 
low duration
 
assets that
 
offer high
 
levels of
 
protection
 
from mortgage
 
prepayments
 
provided
 
that they
 
are reasonably
priced by
 
the market.
 
The stated
 
contractual
 
final maturity
 
of the mortgage
 
loans underlying
 
our portfolio
 
of PT MBS
 
generally ranges
 
up
to 30 years.
 
However, the
 
effect of prepayments
 
of the underlying
 
mortgage
 
loans tends
 
to shorten
 
the resulting
 
cash flows
 
from our
investments
 
substantially.
 
Prepayments
 
occur for
 
various reasons,
 
including
 
refinancing
 
of underlying
 
mortgages,
 
loan payoffs
 
in
connection
 
with home
 
sales, and
 
borrowers
 
paying more
 
than their
 
scheduled
 
loan payments,
 
which accelerates
 
the amortization
 
of the
loans.
 
The duration
 
of our IO
 
and IIO portfolio
 
will vary
 
greatly depending
 
on the structural
 
features
 
of the securities.
 
While prepayment
activity will
 
always affect
 
the cash
 
flows associated
 
with the
 
securities,
 
the interest
 
only nature
 
of IO’s may
 
cause their
 
durations
 
to become
extremely
 
negative when
 
prepayments
 
are high,
 
and less negative
 
when prepayments
 
are low. Prepayments
 
affect the
 
durations
 
of IIO’s
similarly, but the
 
floating rate
 
nature of
 
the coupon
 
of IIOs (which
 
is inversely
 
related to
 
the level
 
of one month
 
LIBOR) cause
 
their price
movements
 
- and model
 
duration
 
- to be affected
 
by changes
 
in both
 
prepayments
 
and one month
 
LIBOR - both
 
current and
 
anticipated
levels.
 
As a result,
 
the duration
 
of IIO securities
 
will also
 
vary greatly.
Prepayments
 
on the loans
 
underlying
 
our MBS
 
can alter
 
the timing
 
of the cash
 
flows received
 
by us. As
 
a result,
 
we gauge
 
the interest
rate sensitivity
 
of its assets
 
by measuring
 
their effective
 
duration.
 
While modified
 
duration
 
measures
 
the price
 
sensitivity
 
of a bond
 
to
movements
 
in interest
 
rates, effective
 
duration
 
captures
 
both the
 
movement in
 
interest
 
rates and
 
the fact
 
that cash
 
flows to
 
a mortgage
related security
 
are altered
 
when interest
 
rates move.
 
Accordingly, when
 
the contract
 
interest
 
rate on a
 
mortgage
 
loan is substantially
above prevailing
 
interest
 
rates in
 
the market,
 
the effective
 
duration
 
of securities
 
collateralized
 
by such loans
 
can be quite
 
low because
 
of
expected prepayments.
 
We face the
 
risk that
 
the market
 
value of our
 
PT MBS assets
 
will increase
 
or decrease
 
at different
 
rates than
 
that of our
 
structured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 50 -
MBS or liabilities,
 
including
 
our hedging
 
instruments.
 
Accordingly, we
 
assess our
 
interest
 
rate risk
 
by estimating
 
the duration
 
of our assets
and the duration
 
of our liabilities.
 
We generally
 
calculate
 
duration
 
and effective
 
duration
 
using various
 
third-party
 
models or
 
obtain these
quotes from
 
third-parties.
 
However, empirical
 
results and
 
various third-party
 
models may
 
produce
 
different duration
 
numbers for
 
the same
securities.
 
The following
 
sensitivity
 
analysis
 
shows the
 
estimated
 
impact on
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments
 
and hedge
positions
 
as of December
 
31, 2021,
 
assuming rates
 
instantaneously
 
fall 100 bps,
 
rise 100
 
bps and
 
rise 200
 
bps, adjusted
 
to reflect
 
the
impact of
 
convexity, which
 
is the
 
measure of
 
the sensitivity
 
of our hedge
 
positions
 
and Agency
 
MBS’ effective
 
duration to
 
movements
 
in
interest
 
rates.
 
($ in thousands)
Fair
$ Change in Fair Value
% Change in Fair Value
MBS Portfolio
Value
-100BPS
+100BPS
+200BPS
-100BPS
+100BPS
+200BPS
Fixed Rate MBS
$
58,029
$
1,830
$
(2,594)
$
(5,654)
3.15%
(4.47)%
(9.74)%
Interest-Only MBS
2,759
(813)
651
999
(29.48)%
23.59%
36.21%
Inverse Interest-Only MBS
15
1
(2)
(4)
5.51%
(14.75)%
(29.76)%
Total MBS
 
Portfolio
$
60,803
$
1,018
$
(1,945)
$
(4,659)
1.67%
(3.20)%
(7.66)%
In addition
 
to changes
 
in interest
 
rates, other
 
factors impact
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments
 
and hedging
instruments,
 
such as the
 
shape of
 
the yield
 
curve, market
 
expectations
 
as to future
 
interest
 
rate changes
 
and other
 
market conditions.
Accordingly, in
 
the event
 
of changes
 
in actual
 
interest
 
rates, the
 
change in
 
the fair
 
value of our
 
assets would
 
likely differ
 
from that
 
shown
above and
 
such difference
 
might be
 
material and
 
adverse to
 
our stockholders.
Repurchase Agreements
As of December
 
31, 2021,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number
 
of commercial
banks and
 
other financial
 
institutions
 
and had borrowings
 
in place with
 
five of these
 
counterparties.
 
We believe
 
these facilities
 
provide
borrowing
 
capacity in
 
excess of
 
our needs.
 
None of these
 
lenders are
 
affiliated
 
with the
 
Company. These borrowings
 
are secured
 
by our
MBS and cash.
 
As of December
 
31, 2021,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$58.9 million
 
with a net
weighted
 
average borrowing
 
cost of 0.14%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
 
6 to
45 days, with
 
a weighted
 
average maturity
 
of 16 days.
 
Securing
 
the repurchase
 
agreement
 
obligation
 
as of December
 
31, 2021
 
are MBS
with an estimated
 
fair value,
 
including
 
accrued interest,
 
of $61.0 million
 
and a weighted
 
average maturity
 
of 330 months,
 
and cash
 
posted
as collateral
 
of $1.4 million.
 
Through
 
March 11, 2022,
 
we have been
 
able to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to
those that
 
existed at
 
December
 
31, 2021
 
with maturities
 
through May
 
16, 2022.
The table below presents information about our period-end and average repurchase
 
agreement obligations for each quarter in
2021 and 2020.
($ in thousands)
Ending
Maximum
Average
Difference Between Ending
Balance
Balance
Balance
Repurchase Agreements and
of Repurchase
of Repurchase
of Repurchase
Average Repurchase Agreements
Three Months Ended
Agreements
Agreements
Agreements
Amount
Percent
December 31, 2021
$
58,878
$
62,139
$
61,019
$
(2,141)
(3.51)%
September 30, 2021
63,160
72,047
67,253
(4,093)
(6.09)%
June 30, 2021
71,346
72,372
72,241
(895)
(1.24)%
March 31, 2021
73,136
76,004
69,104
4,032
5.83%
December 31, 2020
65,071
70,684
67,878
(2,807)
(4.14)%
 
 
 
 
 
 
 
 
 
 
 
 
- 51 -
September 30, 2020
70,685
70,794
61,151
9,534
15.59%
(1)
June 30, 2020
51,617
52,068
51,987
(370)
(0.71)%
March 31, 2020
52,357
214,921
131,156
(78,799)
(60.08)%
(2)
(1)
 
The higher ending balance relative to the average balance during the quarter
 
ended September 30, 2020 reflects the increase in the portfolio.
During that quarter,
 
the Company's investment in PT MBS increased $20.4 million.
(2)
 
The lower ending balance relative to the average balance during the quarter
 
ended March 31, 2020 reflects the Company’s response to the
COVID-19 pandemic. During that quarter,
 
the Company's investment in PT MBS decreased $162.4 million.
Liquidity and Capital Resources
Liquidity is
 
our ability
 
to turn non-cash
 
assets into
 
cash, purchase
 
additional
 
investments,
 
repay principal
 
and interest
 
on borrowings,
fund overhead
 
and fulfill
 
margin calls.
 
We have both
 
internal
 
and external
 
sources of
 
liquidity. However,
 
our material
 
unused sources
 
of
liquidity
 
include cash
 
balances,
 
unencumbered
 
assets and
 
our ability
 
to sell encumbered
 
assets to
 
raise cash.
 
At the onset
 
of the COVID-
19 pandemic
 
in the spring
 
of 2020,
 
the markets
 
the Company
 
operates
 
in were severely
 
disrupted
 
and the Company
 
was forced
 
to rely on
these sources
 
of liquidity. Our
 
balance sheet
 
also generates
 
liquidity
 
on an on-going
 
basis through
 
payments of
 
principal
 
and interest
 
we
receive on
 
our MBS
 
portfolio
 
and dividends
 
we receive
 
on our investment
 
in Orchid
 
common stock.
 
Internal
 
Sources of
 
Liquidity
Our internal
 
sources of
 
liquidity
 
include our
 
cash balances,
 
unencumbered
 
assets and
 
our ability
 
to liquidate
 
our encumbered
 
security
holdings.
 
Our balance
 
sheet also
 
generated
 
liquidity
 
on an ongoing
 
basis through
 
payments
 
of principal
 
and interest
 
we receive
 
on our
MBS portfolio
 
and dividends
 
we receive
 
on our investment
 
in Orchid
 
common stock.
 
We have previously,
 
and may
 
again in the
 
future, employ
 
a hedging
 
strategy
 
that typically
 
involves
 
taking short
 
positions
 
in Eurodollar
futures,
 
T-Note futures,
 
TBAs or other
 
instruments.
 
When the
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
 
move in price
 
in such a
 
way
that we do
 
not receive
 
enough cash
 
through margin
 
calls to offset
 
the Eurodollar
 
related margin
 
calls. If
 
this were
 
to occur
 
in sufficient
magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size
 
of the levered
 
portfolio,
 
pledge additional
 
structured
 
securities
 
to raise
funds or
 
risk operating
 
the portfolio
 
with less
 
liquidity.
External
 
Sources of
 
Liquidity
Our primary
 
external
 
sources of
 
liquidity
 
are our ability
 
to (i) borrow
 
under master
 
repurchase
 
agreements
 
and (ii)
 
use the TBA
 
security
market. Our
 
borrowing
 
capacity will
 
vary over
 
time as the
 
market value
 
of our interest
 
earning assets
 
varies. Our
 
master repurchase
agreements
 
have no stated
 
expiration,
 
but can be
 
terminated
 
at any time
 
at our option
 
or at the
 
option of
 
the counterparty.
 
However, once
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase
 
agreement
 
has been
 
entered into,
 
it generally
 
may not be
 
terminated
 
by
either party.
 
A negotiated
 
termination
 
can occur, but
 
may involve
 
a fee to be
 
paid by the
 
party seeking
 
to terminate
 
the repurchase
agreement
 
transaction.
 
Under our
 
repurchase
 
agreement
 
funding arrangements,
 
we are required
 
to post margin
 
at the initiation
 
of the borrowing.
 
The margin
posted represents
 
the haircut,
 
which is a
 
percentage
 
of the market
 
value of the
 
collateral
 
pledged.
 
To the extent the
 
market value
 
of the
asset collateralizing
 
the financing
 
transaction
 
declines,
 
the market
 
value of our
 
posted margin
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases
 
in value,
 
we would
 
be over collateralized
 
and we
would be
 
entitled to
 
have excess
 
margin returned
 
to us by the
 
counterparty.
 
Our lenders
 
typically
 
value our
 
pledged securities
 
daily to
ensure the
 
adequacy of
 
our margin
 
and make margin
 
calls as
 
needed, as
 
do we.
 
Typically, but not always,
 
the parties
 
agree to
 
a minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis. Our
 
master repurchase
 
agreements
do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis.
- 52 -
As discussed
 
above, we
 
invest a
 
portion of
 
our capital
 
in structured
 
MBS.
 
We generally
 
do not apply
 
leverage
 
to this portion
 
of our
portfolio.
 
The leverage
 
inherent
 
in structured
 
securities
 
replaces
 
the leverage
 
obtained by
 
acquiring
 
PT securities
 
and funding
 
them in the
repurchase
 
market.
 
This structured
 
MBS strategy
 
has been
 
a core element
 
of the Company’s
 
overall investment
 
strategy
 
since 2008.
 
However, we
 
have and
 
may continue
 
to pledge
 
a portion
 
of our structured
 
MBS in order
 
to raise our
 
cash levels,
 
but generally
 
will not
pledge these
 
securities
 
in order
 
to acquire
 
additional
 
assets.
In future
 
periods we
 
expect to
 
continue to
 
finance our
 
activities
 
through repurchase
 
agreements.
 
As of December
 
31, 2021,
 
we had
cash and cash
 
equivalents
 
of $8.4
 
million.
 
We generated
 
cash flows
 
of $16.7
 
million from
 
principal
 
and interest
 
payments on
 
our MBS
portfolio
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $67.4
 
million during
 
the year
 
ended December
 
31, 2021.
 
In addition,
during the
 
year ended
 
December
 
31, 2021,
 
we received
 
approximately
 
$9.4 million
 
in management
 
fees and
 
expense reimbursements
 
as
manager of
 
Orchid and
 
approximately
 
$2.0 million
 
in dividends
 
from our
 
investment
 
in Orchid
 
common stock.
In order
 
to generate
 
additional
 
cash to be
 
invested in
 
our MBS
 
portfolio,
 
on October
 
30, 2019,
 
we obtained
 
a $680,000
 
loan secured
by a mortgage
 
on the Company’s
 
office property.
 
The loan
 
is payable
 
in equal monthly
 
principal
 
and interest
 
installments
 
of approximately
$4,500 through
 
October 30,
 
2039. Interest
 
accrued at
 
4.89%, through
 
October 30,
 
2024. Thereafter,
 
interest
 
accrued based
 
on the weekly
average yield
 
to the United
 
States Treasury
 
securities
 
adjusted
 
to a constant
 
maturity of
 
five years,
 
plus 3.25%.
 
Net loan
 
proceeds
 
were
approximately
 
$651,000.
 
In addition,
 
during 2020,
 
we completed
 
the sale of
 
real property
 
that was
 
not used
 
in the Company’s
 
business.
 
The net proceeds
 
from this
 
sale were
 
approximately
 
$462,000 and
 
were invested
 
in our MBS
 
portfolio.
Outlook
Orchid Island
 
Capital Inc.
To the extent Orchid
 
is able to
 
increase
 
its capital
 
base over
 
time, we
 
will benefit
 
via increased
 
management
 
fees.
 
In addition,
 
Orchid
is obligated
 
to reimburse
 
us for direct
 
expenses paid
 
on its behalf
 
and to pay
 
to us Orchid’s
 
pro rata
 
share of
 
overhead
 
as defined
 
in the
management
 
agreement.
 
As a stockholder
 
of Orchid,
 
we will also
 
continue to
 
share in
 
distributions,
 
if any, paid by
 
Orchid to
 
its
stockholders.
 
Our operating
 
results are
 
also impacted
 
by changes
 
in the market
 
value of our
 
holdings of
 
Orchid common
 
shares,
 
although
these market
 
value changes
 
do not impact
 
our cash
 
flows from
 
Orchid.
The independent
 
Board of
 
Directors
 
of Orchid
 
has the ability
 
to terminate
 
the management
 
agreement
 
and thus
 
end our ability
 
to
collect management
 
fees and
 
share overhead
 
costs.
 
Should Orchid
 
terminate
 
the management
 
agreement
 
without cause,
 
it will be
obligated
 
to pay us
 
a termination
 
fee equal
 
to three
 
times the
 
average annual
 
management
 
fee, as
 
defined in
 
the management
 
agreement,
before or
 
on the last
 
day of the
 
current automatic
 
renewal term.
Economic Summary
COVID-19 continued to impact the United States and the rest of the world during
 
the fourth quarter of 2021 and into the first
quarter of 2022.
 
The most recent variant, Omicron, spreads much more readily
 
than past variants, but also tends to be much less
severe.
 
Instances of new cases spiked rapidly, starting in December of 2021 and peaked, in the U.S., the week ended January 16,
2022 at 5.58 million.
 
Since then, cases have declined fairly rapidly, as have hospitalizations, which have also tended to involve much
shorter stays in the hospital, especially in comparison to the Delta variant.
 
Despite the Omicron wave, the economy added 481,000
jobs in January 2022, 678,000 jobs in February 2022 and January retail sales also
 
rose well above estimates at 3.8%, causing the
markets and the Fed to meaningfully revise expectations for the path of monetary
 
policy in 2022 and beyond.
The rationale for the shift in expectations for monetary policy was found
 
in the economic data that was released during the fourth
quarter of 2021.
 
There were several economic indicators that reached milestone
 
levels and made it clear the economy had more than
recovered from the pandemic.
 
The Fed focuses on two areas of economic performance – inflation and the labor market
 
– tied to their
dual mandates of stable prices and maximum employment.
 
With respect to inflation, the year-over-year consumer price index reading
- 53 -
increased from the 4% increase reported in September of 2021 to 5.43%
 
in December of 2021. Core personal consumption
expenditures – the Fed’s preferred inflation measure – increased from 3.7% year-over-year
 
to 4.85% between September and
December of 2021. In the latter case, this was the highest reading since the
 
early 1980s.
 
The producer price index was also increasing
rapidly – approaching 7% year over year in December of 2021.
 
This led the Fed to formally declare that their assessment of inflation
as “transitory” was no longer the case.
Labor market indicators also reached new milestones. Initial claims for
 
unemployment insurance breached the 200,000 level
during the fourth quarter of 2021–
 
the first time this happened since the late 1960s.
 
Continuing claims for unemployment insurance
reached levels even lower than the lows reached prior to the pandemic,
 
and the unemployment rate reached 3.9% in December, still
0.4% above the lowest level reached prior to the pandemic but
 
below the Fed’s long-term target level and their proxy for full
employment.
 
The final piece of information was gross domestic product growth
 
of 6.9% for the fourth quarter, released in January of
2022.
 
The Fed’s outlook for monetary policy pivoted materially beginning in November
 
of 2021.
The economic data has strengthened further in early 2022.
 
In particular, measures of inflation have accelerated from the trend of
late 2021 and are very broad based, as prices for essentially every category
 
of goods and services are accelerating.
 
The employment
data has also been very strong, exhibiting little effect from the Omicron variant. The
 
combination of accelerating inflation well above the
Fed’s target level and a very tight labor market have led the market to anticipate the Fed will react
 
aggressively soon. The Fed has
signaled they are about to start an accelerated removal of the extreme monetary accommodation
 
necessitated by the pandemic.
 
In
January of 2022 the FOMC announced they would end their asset purchases
 
in March of 2022 and were likely to start decreasing the
reinvestment of their U.S. Treasury and MBS assets as they matured or were repaid starting shortly after their
 
first rate hike. The first
rate hike is likely to be in March as well. Current pricing in the futures market
 
indicates the Fed will increase the Fed Funds rate at least
five times by January of 2023 and by approximately 75 basis points more in 2023.
Based solely on domestic economic developments of late the Fed is likely to aggressively
 
remove their accommodative monetary
policy. However, a potentially significant geo-political development has unfolded in the Ukraine. Russia invaded Ukraine on February
24, 2022. The United States and several NATO allies have imposed significant economic sanctions that are likely to cripple the
Russian economy and currency, the Ruble. Should the situation deteriorate further and military action lead to a protracted
 
war, there
would likely be an economic impact on Europe and therefore indirectly in the U.S., potentially
 
slowing economic activity at the margin
and possibly lessening the need for the Fed to remove monetary policy
 
as aggressively as expected otherwise.
Legislative Response and the Federal Reserve
 
Congress passed the CARES Act (described below) quickly in response to
 
the pandemic’s emergence during the spring of 2020.
 
As provisions of the CARES Act expired and the effects of the pandemic continued
 
to adversely impact the country, the federal
government passed an additional stimulus package in late December of 2020. Further, on March 11, 2021, President Biden signed into
law an additional $1.9 trillion coronavirus aid package as part of the American
 
Rescue Plan Act of 2021.
 
This law provided for, among
other things, direct payments to most Americans with a gross income of less
 
than $75,000 a year, expansion of the child tax credit,
extension of expanded unemployment benefits through September 6, 2021, funding
 
for procurement of vaccines and health providers,
loans to qualified businesses, funding for rental and mortgage assistance and
 
funding for schools. The expanded federal
unemployment benefits expired on September 6, 2021.
 
In addition, the Fed provided as much support to the markets and the economy
as it could within the constraints of its mandate.
 
During the third quarter of 2020, the Fed unveiled a new monetary policy framework
 
focused on average inflation rate targeting
that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target
 
level. Further, the
Fed stated they would look past the presence of very tight labor markets,
 
should they be present at the time.
 
This marks a significant
shift from their prior policy framework, which was focused on the unemployment
 
rate as a key indicator of impending inflation.
 
Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for a
 
considerable period but
longer-term rates could rise given the Fed’s intention to let inflation potentially run above
 
2% in the future as the economy more fully
- 54 -
recovers.
 
As mentioned above, this policy shift will not likely have an effect on current
 
monetary policy as inflation is now running
considerably higher than the Fed’s 2% target level and the Fed appears likely to move quickly
 
to remove the extreme monetary
accommodation they provided as the pandemic emerged in the U.S. in the
 
spring of 2020.
Interest Rates
At the beginning of 2021, interest rates were still close to the lowest levels
 
ever observed.
 
As the country and economy emerged
from the effects of the pandemic and the federal government and the Fed took unprecedented
 
actions to buttress the economy from
the effects of the pandemic, interest rates increased over the course of the year.
 
Increases in interest rates were not uniform over the
year as shorter maturity rates, typically more sensitive to anticipated increases in
 
short term rates controlled by the Fed, increased
more than longer term rates.
 
As inflation accelerated in the fourth quarter of 2021, and even more so in early
 
2022, this trend
intensified and the spread between certain intermediate rates – such as 5-year
 
and 7-year maturities – trade at yields only marginally
below longer-term rates such as 10-year U.S. Treasuries.
 
This flattening of the rates curve is typical as the economy strengthens
 
and
the market anticipates increases in short-term rates by the Fed. As economic and/or
 
inflation data strengthen and the market
anticipates progressively more increases in short-term rates, this flattening effect
 
intensifies as well. Eventually the rates curve could
actually invert, whereby the intermediate rates mentioned above actually yield
 
more than longer-term rates.
 
This would occur when the
market anticipates the increases to short-term rates by the Fed will actually slow the
 
economy too much in the future and a possible
recession is on the horizon.
 
However, recent developments in the Ukraine have reversed some of the compression in the treasury
curve as shorter term rates have decreased more than longer-term rates, a sign of
 
a “flight to quality” rally as investors across the
globe seek the safety of short-term US treasury securities in times of duress.
 
Given the unprecedented nature of the monetary and
fiscal stimulus needed to combat the pandemic and the related supercharged
 
effect on the economy, the current recovery and pending
rate increase cycle will be even more difficult to manage by the Fed and we expect that such
 
an outcome is more likely to occur than in
past cycles.
The Agency MBS Market
As was anticipated, the Fed announced a tapering of their U.S.
 
Treasury and Agency MBS asset purchases at their November
2021 meeting.
 
As described above, the forthcoming data was likely to necessitate an accelerated
 
pace of accommodation removal
and in December of 2021, and again in January of 2022, the Fed announced
 
revised schedules for tapering.
 
This means a material
source of demand for Agency MBS is about to leave the market.
 
Given Fed purchases are a source of reserves into the banking
system, this also means banks, which have also been a material source
 
for Agency MBS, may also be buying fewer securities.
However, the securities that were the focus of the Fed and bank buying, namely production coupon securities, performed
 
relatively well
during the fourth quarter of 2021.
Total
 
returns for Agency MBS for the quarter and year ended December 31, 2021
 
were -0.4% and -1.2%, respectively.
 
Agency
MBS returns generally trailed other major domestic fixed income categories.
 
High yield debt returned 0.7% and 5.4% for the quarter
and year ended December 31, 2021, respectively.
 
Investment grade returns for the same two periods were 0.2% and -1.0%,
respectively.
 
Legacy non-Agency MBS returns were equal to or exceeded high yield returns.
 
Relative to comparable duration U.S.
Treasuries Agency MBS returns were -1.0% and -1.6%, respectively for the same two periods.
 
Again, these returns trailed the same
other major domestic fixed-income categories and by comparable amounts.
 
Within the Agency MBS 30-year coupons, production
coupons – 2.0% and 2.5% - outperformed higher, liquid securities – 3.0% and 3.5% - both on absolute
 
terms and relative to
comparable duration U.S. Treasuries for the fourth quarter of 2021.
 
Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 until
 
July 2020 to address disruptions in the U.S.
Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully
tamed volatile funding costs that had threatened to cause disruption across the
 
financial system.
 
- 55 -
The Fed has taken a number of other actions to stabilize markets as a result
 
of the impacts of the COVID-19 pandemic. On March
15, 2020, the Fed announced a $700 billion asset purchase program to provide
 
liquidity to the U.S. Treasury and Agency MBS
markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of
Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%,
 
after having already lowered the Fed Funds rate
by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell announced
 
expectations to maintain interest rates at this level
until the Fed is confident that the economy has weathered recent events
 
and is on track to achieve maximum employment and price
stability goals. The Federal Open Market Committee (“FOMC”) continued to reaffirm this commitment
 
at all subsequent meetings
through December of 2021, as well as an intention to allow inflation to climb modestly
 
above their 2% target and maintain that level for
a period sufficient for inflation to average 2% long term. On January 26, 2022, the FOMC reiterated
 
its goals of maximum employment
and a 2% long-run inflation rate and stated that, with a strong labor market
 
and inflation well above 2%, it expected it would soon be
appropriate to raise the target federal funds rate.
The COVID-19 pandemic and the actions taken to contain and minimize its
 
impact resulted in the deterioration of the markets for
U.S. Treasuries, Agency MBS and other mortgage and fixed income markets. As a result, investors liquidated
 
significant holdings in
these assets. In response, on March 23, 2020, the Fed announced a program
 
to acquire U.S. Treasuries and Agency MBS in the
amounts needed to support smooth market functioning. With these purchases, market
 
conditions improved substantially, and in early
April, the Fed began to gradually reduce the pace of these purchases. Through
 
November of 2021, the Fed was committed to
purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November of 2021,
 
it began tapering its net
asset purchases each month, reducing them to $70 billion, $60 billion and $40
 
billion of U.S. Treasuries and $35 billion, $30 billion and
$20 billion of Agency MBS in November of 2021, December of 2021 and January
 
of 2022, respectively.
 
On January 26, 2022, the
FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20
 
billion per month and its holdings of Agency
MBS by $10 billion per month for February of 2022 and would end its net asset
 
purchases entirely by early March of 2022.
 
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020.
 
The CARES Act provided
many forms of direct support to individuals and small businesses in order to stem the
 
steep decline in economic activity.
 
This over $2
trillion COVID-19 relief bill, among other things, provided for direct payments to
 
each American making up to $75,000 a year, increased
unemployment benefits for up to four months (on top of state benefits), funding
 
to hospitals and health providers, loans and
investments to businesses, states and municipalities and grants to the airline
 
industry. On April 24, 2020, President Trump signed an
additional funding bill into law that provides an additional $484 billion of funding
 
to individuals, small businesses, hospitals, health care
providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a
moratorium on evictions (July 25, 2020), expanded unemployment benefits (July
 
31, 2020), and a moratorium on foreclosures (August
31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the Department
 
of Health and Human
Services, the Centers for Disease Control and Prevention (“CDC”),
 
the Department of Housing and Urban Development, and
Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures,
 
including through temporary
financial assistance.
 
On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package
 
as part of the
Consolidated Appropriations Act, 2021, providing for extensions of
 
many of the CARES Act policies and programs as well as additional
relief. The package provided for, among other things, direct payments to most Americans with a gross income of less
 
than $75,000 a
year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health providers,
 
loans to
qualified businesses, funding for rental assistance and funding for schools.
 
On January 29, 2021, the CDC issued guidance extending
eviction moratoriums for covered persons through March 31, 2021. The FHFA subsequently extended the foreclosure
 
moratorium
begun under the CARES Act for loans backed by Fannie Mae and Freddie
 
Mac and the eviction moratorium for real estate owned by
Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development
Department subsequently extended the FHA foreclosure and eviction moratoria
 
to July 31, 2021 and September 30, 2021, respectively.
 
Despite the expirations of these foreclosure moratoria, a final rule adopted by
 
the CFPB on June 28, 2021 effectively prohibited
servicers from initiating a foreclosure before January 1, 2022 in most instances.
- 56 -
On March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the American
Rescue Plan Act of 2021.
 
This law provided for, among other things, direct payments to most Americans with a gross income of less
than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September
 
6, 2021,
funding for procurement of vaccines and health providers, loans to qualified businesses,
 
funding for rental and mortgage assistance
and funding for schools. The expanded federal unemployment benefits expired on September
 
6, 2021.
In January 2019, the Trump administration made statements of its plans to work with Congress
 
to overhaul Fannie Mae and
Freddie Mac and expectations to announce a framework for the development of
 
a policy for comprehensive housing finance reform
soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed
 
to increase their capital buffers
to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and
Freddie Mac being privatized and represents the first concrete step on the road to
 
GSE reform.
 
On June 30, 2020, the FHFA released
a proposed rule on a new regulatory framework for the GSEs which seeks to implement
 
both a risk-based capital framework and
minimum leverage capital requirements. The final rule on the new capital framework
 
for the GSEs was published in the federal register
in December 2020.
 
On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue
to retain capital up to their regulatory minimums, including buffers, as prescribed in the December
 
rule.
 
These letter agreements
provide, in part, (i) there will be no exit from conservatorship until all
 
material litigation is settled and the GSE has common equity Tier 1
capital of at least 3% of its assets, (ii) the GSEs will comply with
 
the FHFA’s
 
regulatory capital framework, (iii) higher-risk single-family
mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process
for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect
 
to ending the
conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs
 
in the U.S. mortgage market. On September 14,
2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans
acquired for cash consideration, multifamily loans, loans with higher risk
 
characteristics and second homes and investment properties.
 
On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December
 
rule to,
among other things, reduce the Tier 1 capital and risk-weight floor requirements.
In 2017, policymakers announced that LIBOR would be replaced by December
 
31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying
 
transactions on which to base levels and the
liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in its
 
capacity as administrator of
USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other
 
than one-week and two-month tenors) by 18
months to June 2023.
 
Notwithstanding this possible extension, a joint statement by key regulatory
 
authorities calls on banks to cease
entering into new contracts that use USD LIBOR as a reference rate by no
 
later than December 31, 2021. The ARRC, a steering
committee comprised of large U.S. financial institutions, has proposed replacing
 
USD-LIBOR with a new SOFR, a rate based on U.S.
repo trading. Many banks believe that it may take four to five years to complete
 
the transition to SOFR, despite the December 31, 2021
deadline. We will monitor the emergence of SOFR carefully as it appears likely to become
 
the new benchmark for hedges and a range
of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives
 
to
LIBOR.
On December 7, 2021, the CFPB released a final rule that amends Regulation
 
Z, which implemented the Truth in Lending Act,
aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and
 
open-end (e.g., home equity line of credit)
products. The rule, which mostly becomes effective in April of 2022, establishes requirements
 
for the selection of replacement indices
for existing LIBOR-linked consumer loans. Although the rule does not mandate
 
the use of SOFR as the alternative rate, it identifies
SOFR as a comparable rate for closed-end products and states that for open-end products,
 
the CFPB has determined that ARRC’s
recommended spread-adjusted indices based on SOFR for consumer products
 
to replace the one-month, three-month, or six-month
USD LIBOR index “have historical fluctuations that are substantially similar to
 
those of the LIBOR indices that they are intended to
replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement
 
index to replace the one-year USD
LIBOR until it obtained additional information.
 
- 57 -
On December 8, 2021, the House of Representatives passed the Adjustable Interest
 
Rate (LIBOR) Act of 2021 (H.R. 4616) (the
“LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts
 
that use LIBOR as a benchmark and do not
contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR
 
Act, SOFR becomes the new benchmark rate by
operation of law for any such contract. The LIBOR Act establishes a safe harbor from
 
litigation for claims arising out of or related to the
use of SOFR as the recommended benchmark replacement. The LIBOR Act
 
makes clear that it should not be construed to disfavor the
use of any benchmark on a prospective basis.
The LIBOR Act also attempts to forestall challenges that it is impairing
 
contracts. It provides that the discontinuance of LIBOR and
the automatic statutory transition to a replacement rate neither impairs or
 
affects the rights of a party to receive payment under such
contracts, nor allows a party to discharge their performance obligations or to declare
 
a breach of contract. It amends the Trust
Indenture Act of 1939 to state that the “the right of any holder of any
 
indenture security to receive payment of the principal of and
interest on such indenture security shall not be deemed to be impaired or
 
affected” by application of the LIBOR Act to any indenture
security.
 
On December 9, 2021, the United States Senate referred the LIBOR Act to
 
the Committee on Banking, Housing and Urban
Affairs.
One-week and two-month U.S. dollar LIBOR rates phased out on December
 
31, 2021, but other U.S. dollar tenors may continue
until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely
 
to become the new benchmark for hedges
and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may
 
become accepted
alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe for
 
its delinquent loan buyout
policy for Single-Family Uniform Mortgage-Backed Securities (UMBS)
 
and Mortgage-Backed Securities (MBS) from four consecutively
missed monthly payments to twenty-four consecutively missed monthly payments (i.e.,
 
24 months past due). This new timeframe
applied to outstanding single-family pools and newly issued single-family pools and was
 
first reflected when January 2021 factors were
released on the fourth business day in February 2021.
 
For Agency MBS investors, when a delinquent loan is bought out of
 
a pool of mortgage loans, the removal of the loan from the
pool is the same as a total prepayment of the loan.
 
The respective GSEs anticipated, however, that delinquent loans will be
repurchased in most cases before the 24-month deadline under one of the following
 
exceptions listed below.
•
 
a loan that is paid in full, or where the related lien is released and/or the
 
note debt is satisfied or forgiven;
•
 
a loan repurchased by a seller/servicer under applicable selling and
 
servicing requirements;
•
 
a loan entering a permanent modification, which generally requires it to
 
be removed from the MBS. During any modification
trial period, the loan will remain in the MBS until the trial period ends;
•
 
a loan subject to a short sale or deed-in-lieu of foreclosure; or
•
 
a loan referred to foreclosure.
Because of these exceptions, the GSEs believe based on prevailing assumptions
 
and market conditions this change will have only
a marginal impact on prepayment speeds, in aggregate. Cohort level impacts
 
may vary. For example, more than half of loans referred
to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on
delinquency levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed will
 
ultimately undertake are unknown and will continue to
evolve.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in
 
many ways, including the following:
- 58 -
Effects on our Assets
A change in or elimination of the guarantee structure of Agency MBS may increase our
 
costs (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure
 
of Agency
MBS may cause us to change our investment strategy to focus on non-Agency
 
MBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest rate
 
and prepayment risks.
Lower long-term interest rates can affect the value of our Agency MBS in a number of ways.
 
If prepayment rates are relatively low
(due, in part, to the refinancing problems described above), lower long-term
 
interest rates can increase the value of higher-coupon
Agency MBS. This is because investors typically place a premium on assets with yields
 
that are higher than market yields. Although
lower long-term interest rates may increase asset values in our portfolio, we
 
may not be able to invest new funds in similarly-yielding
assets.
If prepayment levels increase, the value of our Agency MBS affected by such prepayments
 
may decline. This is because a
principal prepayment accelerates the effective term of an Agency MBS, which would shorten the period
 
during which an investor would
receive above-market returns (assuming the yield on the prepaid asset is higher than
 
market yields). Also, prepayment proceeds may
not be able to be reinvested in similar-yielding assets. Agency MBS backed
 
by mortgages with high interest rates are more susceptible
to prepayment risk because holders of those mortgages are most likely to refinance
 
to a lower rate. IOs and IIOs, however, may be the
types of Agency MBS most sensitive to increased prepayment rates. Because the
 
holder of an IO or IIO receives no principal
payments, the values of IOs and IIOs are entirely dependent on the existence of a principal
 
balance on the underlying mortgages. If the
principal balance is eliminated due to prepayment, IOs and IIOs essentially become
 
worthless. Although increased prepayment rates
can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs
 
act like zero-coupon bonds,
meaning they are purchased at a discount to their par value and have an effective
 
interest rate based on the discount and the term of
the underlying loan, an increase in prepayment rates would reduce the effective term
 
of our POs and accelerate the yields earned on
those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency MBS.
 
As long-term rates rise, rates available to borrowers also
rise.
 
This tends to cause prepayment activity to slow and extend the expected
 
average life of mortgage cash flows.
 
As the expected
average life of the mortgage cash flows increases, coupled with higher discount
 
rates, the value of Agency MBS declines.
 
Some of the
instruments the Company may use to hedge our Agency MBS assets, such as interest rate
 
futures, swaps and swaptions, are stable
average life instruments.
 
This means that to the extent we use such instruments to hedge
 
our Agency MBS assets, our hedges may
not adequately protect us from price declines, and therefore may negatively impact our
 
book value.
 
It is for this reason we use interest
only securities in our portfolio. As interest rates rise, the expected average
 
life of these securities increases, causing generally positive
price movements as the number and size of the cash flows increase the
 
longer the underlying mortgages remain outstanding. This
makes interest only securities desirable hedge instruments for pass-through
 
Agency MBS.
 
As described above, the Agency MBS market began to experience severe
 
dislocations in mid-March 2020 as a result of the
economic, health and market turmoil brought about by COVID-19. On March 23, 2020,
 
the Fed announced that it would purchase
Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely
 
stabilized the Agency
MBS market. However, in November 2021 the Fed announced a tapering of these purchases. The Fed’s reduction of these purchases
could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions
 
described above will likely
delay potential defaults on loans that would otherwise be bought out of Agency MBS
 
pools as described above.
 
Depending on the
ultimate resolution of the foreclosures
 
or evictions, when and if they occur, these loans may be removed from the pool into which they
were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time.
As the majority of the Company’s Agency MBS assets were acquired at a premium to
 
par, this will tend to increase the realized yield on
the asset in question.
- 59 -
Because we base our investment decisions on risk management principles
 
rather than anticipated movements in interest rates, in
a volatile interest rate environment we may allocate more capital to structured Agency
 
MBS with shorter durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than other
 
asset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs and
 
IIOs, which typically have different sensitivities to changes in
long-term interest rates than PT MBS, particularly PT MBS backed
 
by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balances
 
through the use of short-
term repurchase agreement transactions. The interest rates on our debt
 
are determined by the short term interest rate markets. An
increase in the Fed Funds rate or LIBOR would increase our borrowing costs, which
 
could affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would be
 
most prevalent with respect to our Agency MBS backed by
fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not
 
change even though market rates may
change.
In order to protect our net interest margin against increases in short-term interest rates, we
 
may enter into interest rate swaps,
which economically convert our floating-rate repurchase
 
agreement debt to fixed-rate debt, or utilize other hedging instruments
 
such as
Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The country and economy currently appear to be on the verge of recovering from
 
the COVID-19 pandemic.
 
While the virus
continues to infect people and often results in hospitalizations and deaths,
 
the effect on economic activity has decreased materially.
 
Coupled with unprecedented monetary and fiscal policy, the most significant combination of the two since the Second World War, the
fading effect of the pandemic is clearly causing the economy to run at unsustainable
 
levels, resulting in very tight labor markets and the
highest levels of inflation in decades. The Fed has begun the rapid transformation
 
from accommodation to constraint and will likely
begin raising short-term rates at their meeting in March of 2022.
 
Currently the market anticipates the Fed will continue to raise rates
throughout the year and into 2023, possibly by as much as 200 basis points.
 
Further, they are rapidly winding down their asset
purchases and will likely stop asset purchases altogether – possibly by the
 
end of the year – as they begin the process of “normalizing”
the size of their balance sheet.
 
Market experts estimate the Fed may have to shrink the size of their balance
 
sheet by up to $4 trillion,
and over a much shorter time frame than the last time they did so over the
 
period from 2017 to 2019.
 
The effect of these developments
on the level of interest rates has been a material flattening of the U.S.
 
Treasury curve, whereby short and intermediate term rates rise
and more so relative to longer maturity U.S. Treasuries.
 
For the Company, this means our funding costs are likely to rise materially over the course of 2022 and possibly into 2023.
 
While
longer-term maturities have not risen as much as short and intermediate term rates,
 
they have risen and refinancing and purchase
activity in the residential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency
MBS securities. The net effect of higher funding costs and slower premium amortization
 
will depend on the extent and timing of both,
but may reduce the Company’s net interest income, and perhaps materially
 
so, over this period.
 
These developments will likely impact Orchid Island Capital in a similar manner. In particular, Orchid’s ability to grow or maintain its
capital base at its current level could be adversely affected if these developments continue to
 
pressure Orchid’s MBS assets.
 
This
could slow the growth of or reduce the Company’s advisory service revenues and could reduce
 
the amount of dividends paid by Orchid
on its common stock.
All of the above developments are being impacted by the geo-political events in
 
the Ukraine which may cause the Fed to alter their
monetary policy decisions over the course of 2022 and beyond.
 
However, given the level of inflation and strength of the economy at
- 60 -
present, such developments would likely have to be severe in order to meaningfully
 
impact the path of monetary policy over the near-
term.
Critical Accounting Estimates
Our consolidated
 
financial
 
statements
 
are prepared
 
in accordance
 
with GAAP. GAAP requires
 
our management
 
to make some
complex and
 
subjective
 
decisions
 
and assessments.
 
Our most
 
critical accounting
 
policies
 
involve decisions
 
and assessments
 
which could
significantly
 
affect reported
 
assets, liabilities,
 
revenues
 
and expenses.
 
Management
 
has identified
 
the following
 
as its most
 
critical
accounting
 
estimates:
Mortgage-Backed
 
Securities
Our investments
 
in MBS are
 
accounted
 
for at fair
 
value. We acquire
 
our MBS
 
for the purpose
 
of generating
 
long-term
 
returns,
 
and not
for the short-term
 
investment
 
of idle capital.
 
As discussed
 
in Note 14
 
to the financial
 
statements,
 
our MBS
 
are valued
 
using Level
 
2 valuations,
 
and such valuations
 
currently
 
are
determined
 
based on
 
independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, when
 
available.
 
Because the
 
price estimates
 
may vary,
management
 
must make
 
certain
 
judgments
 
and assumptions
 
about the
 
appropriate
 
price to
 
use to calculate
 
the fair
 
values. Alternatively,
the Company
 
could opt
 
to have the
 
value of all
 
of our positions
 
in MBS determined
 
by either
 
an independent
 
third-party
 
or do so
 
internally.
In managing
 
our portfolio,
 
the Company
 
employs the
 
following
 
four-step
 
process at
 
each valuation
 
date to determine
 
the fair
 
value of our
MBS.
●
First, the
 
Company obtains
 
fair values
 
from subscription-based
 
independent
 
pricing services.
 
●
Second, the
 
Company requests
 
non-binding
 
quotes from
 
one to four
 
broker-dealers
 
for certain
 
MBS in order
 
to validate
 
the
values obtained
 
by the pricing
 
service. The
 
Company requests
 
these quotes
 
from broker-dealers
 
that actively
 
trade and
 
make
markets in
 
the respective
 
asset class
 
for which
 
the quote
 
is requested.
 
●
Third, the
 
Company reviews
 
the values
 
obtained
 
by the pricing
 
source and
 
the broker-dealers
 
for consistency
 
across similar
assets.
 
●
Finally, if the
 
data from
 
the pricing
 
services and
 
broker-dealers
 
is not homogenous
 
or if the
 
data obtained
 
is inconsistent
 
with
management’s
 
market observations,
 
the Company
 
makes a judgment
 
to determine
 
which price
 
appears the
 
most consistent
 
with
observed
 
prices from
 
similar assets
 
and selects
 
that price.
 
To the extent management
 
believes
 
that none
 
of the prices
 
are
consistent
 
with observed
 
prices for
 
similar assets,
 
which is typically
 
the case for
 
only an immaterial
 
portion of
 
our portfolio
 
each
quarter, the
 
Company may
 
use a third
 
price that
 
is consistent
 
with observed
 
prices for
 
identical
 
or similar
 
assets. In
 
the case
 
of
assets that
 
have quoted
 
prices such
 
as Agency
 
MBS backed
 
by fixed-rate
 
mortgages,
 
the Company
 
generally
 
uses the quoted
 
or
observed
 
market price.
 
For assets
 
such as Agency
 
MBS backed
 
by ARMs or
 
structured
 
Agency MBS,
 
the Company
 
may
determine
 
the price
 
based on
 
the yield
 
or spread
 
that is identical
 
to an observed
 
transaction
 
or a similar
 
asset for
 
which a dealer
mark or subscription-based
 
price has
 
been obtained.
 
Management
 
believes its
 
pricing methodology
 
to be consistent
 
with the
 
definition
 
of fair value
 
described
 
in Financial
 
Accounting
Standards
 
Board (the
 
“FASB”) Accounting
 
Standards
 
Codification
 
(“ASC”)
 
Topic 820, Fair Value Measurements.
Income Recognition
All of our
 
MBS are
 
either PT
 
MBS or structured
 
MBS, including
 
CMOs, IOs,
 
IIOs or POs.
 
Income on
 
PT MBS,
 
POs and CMOs
 
that
contain principal
 
balances
 
is based
 
on the stated
 
interest
 
rate of the
 
security. As a
 
result of
 
accounting
 
for our MBS
 
under the fair
 
value
option, premium
 
or discount
 
present
 
at the date
 
of purchase
 
is not amortized.
 
For IOs,
 
IIOs and
 
CMOs that
 
do not contain
 
principal
balances,
 
income is
 
accrued based
 
on the carrying
 
value and
 
the effective
 
yield. As
 
cash is received
 
it is first
 
applied to
 
accrued interest
and then
 
to reduce
 
the carrying
 
value of the
 
security. At each
 
reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
 
from the
 
reporting
- 61 -
period based
 
on the new
 
estimate of
 
prepayments,
 
current interest
 
rates and
 
current asset
 
prices. The
 
new effective
 
yield is
 
calculated
based on
 
the carrying
 
value at the
 
end of the
 
previous reporting
 
period, the
 
new prepayment
 
estimates
 
and the contractual
 
terms of
 
the
security. Changes
 
in fair value
 
of all of
 
our MBS
 
during the
 
period are
 
recorded in
 
earnings
 
and reported
 
as unrealized
 
gains or
 
losses on
mortgage-backed
 
securities
 
in the accompanying
 
consolidated
 
statements
 
of operations.
 
For IIO securities,
 
effective yield
 
and income
recognition
 
calculations
 
also take
 
into account
 
the index
 
value applicable
 
to the security.
Income Taxes
Income
 
taxes are
 
provided
 
for using
 
the
 
asset
 
and liability
 
method.
 
Deferred tax
 
assets and
 
liabilities
 
represent the
 
differences
between the financial
 
statement and income
 
tax bases of assets
 
and liabilities using enacted
 
tax rates. The measurement
 
of net deferred
tax assets
 
is adjusted
 
by a
 
valuation allowance
 
if, based
 
on the
 
Company’s evaluation,
 
it is
 
more likely
 
than not
 
that they
 
will not
 
be
realized. A
 
majority of
 
the Company’s
 
net deferred
 
tax assets,
 
which consist
 
primarily of
 
NOLs, are
 
expected to
 
be realized
 
over an
extended number
 
of years.
 
Management’s conclusion
 
is supported
 
by taxable
 
income projections
 
which include
 
forecasts of
 
management
fees, Orchid
 
dividends and
 
net interest
 
income, and
 
the subsequent
 
reinvestment of
 
those amounts
 
into the
 
MBS portfolio.
 
However,
management reassesses its valuation allowance conclusions whenever there is a material
 
change in taxable income projections.
Capital Expenditures
At December 31, 2021, we had no material commitments for capital expenditures.
ITEM 7A.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES
 
ABOUT MARKET
 
RISK.
 
Not Applicable.
- 62 -
ITEM 8. Financial
 
Statements
 
and Supplementary
 
Data.
Index to Financial
 
Statements
 
Report of
 
Independent
 
Registered
 
Public Accounting
 
Firm (
BDO USA, LLP
:
West Palm Beach, FL
; PCAOB ID#
243
)
63
Consolidated
 
Balance Sheets
65
Consolidated
 
Statements
 
of Operations
66
Consolidated
 
Statements
 
of Equity
67
Consolidated
 
Statements
 
of Cash Flows
68
Notes to
 
Consolidated
 
Financial
 
Statements
69
- 63 -
Report of Independent Registered Public
 
Accounting Firm
Stockholders and Board of Directors
 
Bimini Capital Management, Inc.
Vero Beach, Florida
Opinion on the Consolidated Financial
 
Statements
 
We
 
have
 
audited
 
the
 
accompanying
 
consolidated
 
balance
 
sheets
 
of
 
Bimini
 
Capital
 
Management,
 
Inc.
 
(the
“Company”) as of December 31, 2021 and 2020, the
 
related consolidated statements of operations, stockholders’
equity,
 
and cash
 
flows for
 
each of
 
the two
 
years in
 
the period
 
ended December 31,
 
2021, and
 
the related notes
(collectively
 
referred
 
to
 
as
 
the
 
“consolidated financial
 
statements”). In
 
our
 
opinion,
 
the
 
consolidated financial
statements present
 
fairly, in all material respects,
 
the financial
 
position of
 
the Company
 
at December
 
31, 2021 and
2020, and the results of its operations and its
 
cash flows for each of the two years
 
in the period ended December
31, 2021
,
 
in conformity with accounting principles
 
generally accepted in the United States
 
of America.
Basis for Opinion
These consolidated financial
 
statements are the
 
responsibility of the
 
Company’s management. Our responsibility
 
is
to express
 
an opinion
 
on the
 
Company’s
 
consolidated financial
 
statements based
 
on our
 
audits. We
 
are a
 
public
accounting firm registered
 
with the Public
 
Company Accounting
 
Oversight Board
 
(United States)
 
(“PCAOB”) and
 
are
required to be independent with
 
respect to the Company in
 
accordance with the U.S. federal securities
 
laws and
the applicable rules and regulations of the Securities
 
and Exchange Commission and the PCAOB.
We conducted our audits
 
in accordance
 
with the standards
 
of the PCAOB.
 
Those standards
 
require that
 
we plan and
perform the audit to obtain reasonable
 
assurance about whether the consolidated
 
financial statements are free of
material misstatement,
 
whether due to error
 
or fraud. The
 
Company is not required
 
to have, nor were
 
we engaged
to perform, an audit
 
of its internal control
 
over financial reporting.
 
As part of our audits
 
we are required to obtain
an understanding of
 
internal control over
 
financial reporting but
 
not for the
 
purpose of expressing
 
an opinion on
the
 
effectiveness
 
of
 
the
 
Company’s
 
internal
 
control
 
over
 
financial
 
reporting.
 
Accordingly,
 
we
 
express
 
no
 
such
opinion.
Our audits
 
included performing
 
procedures
 
to assess
 
the risks
 
of material
 
misstatement
 
of the
 
consolidated
 
financial
statements, whether
 
due to
 
error or
 
fraud, and
 
performing procedures
 
that respond
 
to those
 
risks. Such
 
procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in
 
the consolidated financial
statements. Our audits also included evaluating the accounting principles used
 
and significant estimates made by
management, as well as evaluating the
 
overall presentation of the consolidated financial statements. We
 
believe
that our audits provide a reasonable basis
 
for our opinion.
Critical Audit Matters
The
 
critical
 
audit
 
matters
 
communicated
 
below
 
are
 
matters
 
arising
 
from
 
the
 
current
 
period
 
audit
 
of
 
the
consolidated
 
financial
 
statements that
 
were communicated
 
or required
 
to be
 
communicated
 
to the
 
audit committee
and that: (1)
 
relate to accounts
 
or disclosures that
 
are material to
 
the consolidated financial statements
 
and (2)
involved
 
our
 
especially challenging,
 
subjective,
 
or
 
complex
 
judgments. The
 
communication of the critical
 
audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are
 
not,
 
by
 
communicating
 
the
 
critical
 
audit
 
matters
 
below,
 
providing separate
 
opinions
 
on
 
the
 
critical
 
audit
matters or on the accounts or disclosures
 
to which they relate.
Realizability of deferred tax assets
As described in Note 12 to the consolidated
 
financial statements, the Company has recorded
 
$64.8 million in gross
deferred tax
 
assets as
 
of December
 
31, 2021
 
and recorded
 
a valuation
 
allowance of
 
$29.8 million.
 
Management
applies
 
significant
 
judgment
 
in
 
assessing
 
the
 
projections
 
of
 
future
 
taxable
 
income
 
in
 
the
 
determination
 
of
 
the
amount
 
of
 
deferred
 
tax
 
assets
 
that
 
were
 
more-likely-than-not
 
to
 
be
 
realized
 
in
 
the
 
future.
 
In
 
assessing
 
the
realizability of deferred tax assets, management considers
 
whether it is more likely than not that some portion or
all of the deferred tax assets will not be
 
realized.
 
- 64 -
We identified assessing
 
the realizability of
 
deferred tax assets
 
as a critical
 
audit matter. Specifically, we identified
there is significant judgment required by management in formulating the forecast of taxable income over the net
operating loss expiration periods
 
to determine the
 
amount of deferred
 
tax assets that were
 
more-likely-than-not
to be realized
 
in the future. Auditing
 
these forecasts involved especially challenging
 
auditor judgment, including
the need for specialized knowledge and skill
 
in assessing these elements.
 
The primary procedures we performed
 
to address this critical audit matter included:
●
Evaluating the design
 
and implementation
 
of controls relating
 
to the projection
 
of taxable income
 
in future
periods, including controls over management’s process to select the
 
assumptions utilized.
●
Evaluating the positive and negative evidence in assessing whether the deferred
 
tax assets are more likely
than not to be utilized, including evaluating the trends of historical financial results, projected sources of
taxable income in future periods, and market
 
information (such as interest yield curves).
●
Assessing the
 
reasonableness
 
of management’s
 
historical ability
 
to make
 
forecasts of
 
future taxable
 
income,
by performing a retrospective review of the
 
prior year’s estimates.
●
Utilizing personnel with specialized
 
knowledge and skill in
 
income taxes to
 
assist in the
 
evaluation of the
appropriateness of the Company’s positions and analysis of the realizability
 
of the deferred tax assets.
Valuation of Investments in Mortgage-Backed Securities
 
As described
 
in Notes
1
and
14
to the
 
consolidated financial
 
statements, the
 
Company
accounts for
 
its
  
mortgage-
backed
 
securities
 
at
 
fair
 
value,
 
which
totaled
$60.8
 m
illion
 
at
 
December
 
31,
 
2021.
  
The
 
fair
 
value
 
of
 
mortgage-
backed
 
securities
 
is
based
 
on
 
independent
 
pricing
 
sources
 
and/or
 
third-party
 
broker
quotes,
 
when
 
available.
Because
 
the
 
price
 
estimates
 
may
 
vary,
 
management
 
must
 
make
 
certain
 
judgments
 
and
 
assumptions
 
about
 
the
appropriate
 
price
 
to
 
use to
 
calculate
 
the
 
fair
 
values
 
based
 
on
 
various
 
techniques
 
including
 
observing
 
the
 
most
recent
 
market
 
for
 
like
 
or
 
identical
 
assets
 
(including security
 
coupon
 
rate,
 
maturity,
 
yield,
 
prepayment speed),
market credit spreads, and model driven approaches.
  
 
We identified
 
the valuation of mortgage-backed securities
as
a critical audit matter.
  
The principal considerations
for our
 
determination
 
are: (i)
the potential
 
for bias
 
in how
 
management subjectively
 
selects the
 
price from
 
multiple
pricing sources
 
to determine
 
the fair
 
value of
 
the mortgage-backed
 
securities and
 
(ii)
the audit
 
effort involved,
including the use of
valuation professionals with specialized skill
 
and knowledge.
   
 
The primary procedures we performed
 
to address this critical audit matter included:
  
 
●
Evaluating
 
the
design
 
and
 
implementation
 
of
controls
relating
 
to
 
the
 
valuation
 
of
 
mortgaged-backed
securities,
 
including
controls
 
over
management’s
process to
 
select
 
the
 
price from
 
multiple
 
pricing
sources.
  
●
Reviewing
the
range
 
of
 
values
 
used
 
for
 
each
 
investment
 
position,
and
assessing
the
 
price
 
selected
for
management bias by comparing
 
the price
to the high, low and
 
average of the range
 
of pricing sources.
   
●
Testing
 
the
 
reasonableness of
 
fair
 
values
 
determined by
 
management by
 
comparing the
 
fair
 
value of
certain securities to recent transactions,
 
if applicable.
 
●
Utilizing personnel
 
with specialized
 
knowledge and
 
skill in valuation
 
to
develop an independent
 
estimate
of
 
the
 
fair
 
value
 
of
 
each
 
investment
 
position
by
 
considering
 
the stated
 
security
 
coupon
 
rate,
 
yield,
maturity,
 
and prepayment speeds, and comparing
 
to the fair value used by management.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2008.
West Palm Beach, Florida
March 11, 2022
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 65 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2021 and 2020
2021
2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
60,788,129
$
65,153,274
Unpledged
15,015
24,957
Total mortgage
 
-backed securities
60,803,144
65,178,231
Cash and cash equivalents
8,421,410
7,558,342
Restricted cash
1,391,000
3,353,015
Investment in Orchid Island Capital, Inc. common stock, at fair value
11,679,107
13,547,764
Accrued interest receivable
229,942
202,192
Property and equipment, net
2,024,190
2,093,440
Deferred tax assets, net of allowances
35,036,312
34,668,467
Due from affiliates
1,062,155
632,471
Other assets
1,437,381
1,466,647
Total Assets
$
122,084,641
$
128,700,569
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
58,877,999
$
65,071,113
Long-term debt
27,438,976
27,612,781
Accrued interest payable
55,610
107,417
Other liabilities
2,712,206
1,421,409
Total Liabilities
89,084,791
94,212,720
 
Commitments and Contingencies (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.001
 
par value;
10,000,000
 
shares authorized;
100,000
 
shares
designated Series A Junior Preferred Stock,
9,900,000
 
shares undesignated;
no shares issued and outstanding as of December 31, 2021 and 2020
-
-
Class A Common stock, $
0.001
 
par value;
98,000,000
 
shares designated:
10,702,194
shares issued and outstanding as of December 31, 2021 and
11,608,555
 
shares issued
-
-
and outstanding as of December 31, 2020
10,702
11,609
Class B Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of December 31, 2021 and 2020
32
32
Class C Common stock, $
0.001
 
par value;
1,000,000
 
shares designated,
31,938
 
shares
issued and outstanding as of December 31, 2021 and 2020
32
32
Additional paid-in capital
330,880,252
332,642,758
Accumulated deficit
(297,891,168)
(298,166,582)
Stockholders' Equity
32,999,850
34,487,849
Total Liabilities
 
and Equity
$
122,084,641
$
128,700,569
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 66 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONSOLIDATED STATEMENTS
 
OF OPERATIONS
For the Years Ended December 31, 2021
 
and 2020
2021
2020
Revenues:
Advisory services
$
9,788,340
$
6,795,072
Interest income
2,237,217
3,764,003
Dividend income from Orchid Island Capital, Inc. common stock
2,024,379
1,752,730
Total revenues
14,049,936
12,311,805
Interest expense:
Repurchase agreements
(116,179)
(1,073,528)
Long-term debt
(996,794)
(1,150,613)
Net revenues
12,936,963
10,087,664
Other income (expense)
Unrealized (losses) gains on mortgage-backed securities
(3,098,866)
111,615
Realized gains (losses) on mortgage-backed securities
69,498
(5,744,589)
Unrealized (losses) gains on Orchid Island Capital, Inc. common stock
(1,868,657)
583,961
Losses on derivative instruments
(198)
(5,292,521)
Gains on retained interests in securitizations
-
58,735
Other income
154,191
3,478
Other expense, net
(4,744,032)
(10,279,321)
Expenses:
Compensation and related benefits
5,721,315
4,235,487
Directors' fees and liability insurance
762,735
690,713
Audit, legal and other professional fees
513,925
576,662
Administrative and other expenses
1,287,387
1,164,039
Total expenses
8,285,362
6,666,901
Net loss before income tax benefit
(92,431)
(6,858,558)
Income tax benefit
(367,845)
(1,369,416)
Net income (loss)
$
275,414
$
(5,489,142)
Basic and Diluted Net Income (Loss) Per Share of:
CLASS A COMMON STOCK
Basic and Diluted
$
0.02
$
(0.47)
CLASS B COMMON STOCK
Basic and Diluted
$
0.02
$
(0.47)
Weighted Average Shares Outstanding:
CLASS A COMMON STOCK
Basic and Diluted
11,198,434
11,608,555
CLASS B COMMON STOCK
Basic and Diluted
31,938
31,938
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 67 -
BIMINI CAPITAL MANAGEMENT,
 
INC
CONSOLIDATED STATEMENTS
 
OF EQUITY
Years Ended December 31, 2021 and 2020
Stockholders' Equity
Common Stock
Additional
Accumulated
Shares
Par Value
Paid-in Capital
Deficit
Total
Balances, January 1, 2020
11,672,431
$
11,673
$
332,642,758
$
(292,677,440)
$
39,976,991
Net loss
-
-
-
(5,489,142)
(5,489,142)
Balances, December 31, 2020
11,672,431
11,673
332,642,758
(298,166,582)
34,487,849
Net income
-
-
-
275,414
275,414
Class A common shares repurchased and retired
(906,361)
(907)
(1,762,506)
-
(1,763,413)
Balances, December 31, 2021
10,766,070
$
10,766
$
330,880,252
$
(297,891,168)
$
32,999,850
See Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 68 -
BIMINI CAPITAL MANAGEMENT,
 
INC.
CONSOLIDATED STATEMENTS
 
OF CASH FLOWS
Years Ended December 31, 2021 and 2020
2021
2020
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net income (loss)
$
275,414
$
(5,489,142)
Adjustments to reconcile net income (loss) to net cash provided by operating
 
activities:
Depreciation
69,250
69,536
Deferred income tax
(367,845)
(1,379,931)
Losses on mortgage-backed securities
3,029,368
5,632,974
Gains on retained interests in securitizations
-
(58,735)
Gain from disposition of real property held for sale
-
(11,591)
PPP loan forgiveness
(153,724)
-
Realized losses on forward settling to-be-announced securities
-
1,441,406
Unrealized losses (gains) on Orchid Island Capital, Inc. common stock
1,868,657
(583,961)
Changes in operating assets and liabilities:
Accrued interest receivable
(27,750)
548,683
Due from affiliates
(429,684)
(10,351)
Other assets
29,266
1,629,514
Accrued interest payable
(50,248)
(537,885)
Other liabilities
1,290,797
48,469
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
5,533,501
1,298,986
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(26,189,505)
(43,129,835)
Sales
13,063,248
176,249,711
Principal repayments
14,471,976
13,909,872
Payments received on retained interests in securitizations
-
58,735
Net settlement of forward settling TBA contracts
-
(1,500,000)
Purchases of Orchid Island Capital, Inc. common stock
-
(4,071,592)
Proceeds from disposition of real property held for sale
-
461,590
NET CASH PROVIDED BY INVESTING ACTIVITIES
1,345,719
141,978,481
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
293,283,000
538,558,549
Principal repayments on repurchase agreements
(299,476,114)
(683,441,436)
Proceeds from long-term debt
-
152,165
Principal repayments on long-term debt
(21,640)
(20,505)
Class A common shares repurchased and retired
(1,763,413)
-
NET CASH USED IN FINANCING ACTIVITIES
(7,978,167)
(144,751,227)
NET DECREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(1,098,947)
(1,473,760)
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the year
10,911,357
12,385,117
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the year
$
9,812,410
$
10,911,357
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest
$
1,164,780
$
2,762,026
Income taxes
$
-
$
(1,581,828)
See Notes to Consolidated Financial Statements
- 69 -
BIMINI CAPITAL
 
MANAGEMENT, INC.
NOTES TO CONSOLIDATED
 
FINANCIAL
 
STATEMENTS
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
 
Description
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital”
 
or the “Company”) formed in September 2003, is a
holding company.
 
The Company operates in two business segments through its principal wholly-owned
 
operating subsidiary,
 
Royal
Palm Capital, LLC, which includes its wholly-owned subsidiary, Bimini Advisors Holdings, LLC.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC
 
(
an investment advisor registered with the
Securities and Exchange Commission), are collectively referred to as "Bimini Advisors."
 
Bimini Advisors manages a residential
mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc.
 
("Orchid") and receives fees for providing these services.
 
Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily
 
of MBS investments and shares of Orchid common
stock, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries
 
are collectively referred to as "Royal Palm."
 
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini
 
Capital, Bimini Advisors and Royal Palm.
 
All
inter-company accounts and transactions have been eliminated from the
 
consolidated financial statements.
Variable Interest Entities (VIEs)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed
 
the primary beneficiary of the VIE. Bimini Capital
has a common share investment in a trust used in connection with the issuance
 
of Bimini Capital's junior subordinated notes. See Note
9 for a description of the accounting used for this VIE.
We obtain interests in VIEs through our investments in mortgage-backed securities.
 
Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial
 
interest in these VIEs in the future. As a result, we do not
consolidate these VIEs and we account for our interests in these VIEs as mortgage-backed
 
securities. See Note 3 for additional
information regarding our investments in mortgage-backed securities. Our maximum
 
exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Basis of Presentation
 
The accompanying consolidated financial statements are prepared on the accrual
 
basis of accounting in accordance with
accounting principles generally accepted in the United States (“GAAP”).
 
In the opinion of management, all adjustments considered
necessary for a fair presentation of the Company's consolidated financial position,
 
results of operations and cash flows have been
included and are of a normal and recurring nature.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
 
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
 
and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
 
the reporting period. Actual results could differ from
 
 
 
 
 
 
 
 
 
 
 
 
- 70 -
those estimates.
 
Significant estimates affecting the accompanying consolidated financial statements include
 
determining the fair
values of MBS and derivatives, determining the amounts of asset valuation allowances,
 
and the computation of the income tax
provision or benefit and the deferred tax asset allowances recorded for each accounting
 
period.
Segment Reporting
The Company’s operations are classified into two principal reportable segments: the asset
 
management segment and the
investment portfolio segment. These segments are evaluated by management in deciding
 
how to allocate resources and in assessing
performance.
 
The accounting policies of the operating segments are the same as the
 
Company’s accounting policies described in this
note with the exception that inter-segment revenues and expenses are included in
 
the presentation of segment results.
 
For further
information see Note 15.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions
 
and highly liquid investments with original maturities
of three months or less at the time of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and
derivative
 
instruments.
The following
 
table presents
 
the Company’s
 
cash, cash
 
equivalents
 
and restricted
 
cash as of
 
December
 
31, 2021
and 2020.
2021
2020
Cash and cash equivalents
$
8,421,410
$
7,558,342
Restricted cash
1,391,000
3,353,015
Total cash, cash equivalents
 
and restricted cash
$
9,812,410
$
10,911,357
The Company
 
maintains
 
cash balances
 
at several
 
banks and
 
excess margin
 
with an exchange
 
clearing member.
 
At times,
 
balances
may exceed
 
federally
 
insured
 
limits. The
 
Company has
 
not experienced
 
any losses
 
related to
 
these balances.
 
The Federal
 
Deposit
Insurance
 
Corporation
 
insures eligible
 
accounts up
 
to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash balances
 
are
uninsured,
 
but are held
 
in separate
 
accounts that
 
are segregated
 
from the
 
general funds
 
of the counterparty.
 
The Company
 
limits
uninsured
 
balances to
 
only large,
 
well-known
 
banks and
 
exchange clearing
 
members and
 
believes
 
that it is
 
not exposed
 
to significant
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms
 
of a management agreement. Under the terms
of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly
 
management fee and a pro rata portion of certain
overhead costs and to reimburse the Company for any direct expenses incurred
 
on its behalf. Revenues
 
from management fees are
recognized over the period of time in which the service is performed.
Mortgage-Backed Securities
The Company invests primarily in pass-through (“PT”) mortgage-backed certificates
 
issued by Freddie Mac, Fannie Mae or Ginnie
Mae (“MBS”), collateralized mortgage obligations (“CMOs”),
 
interest-only (“IO”) securities and inverse interest-only (“IIO”) securities
representing interest in or obligations backed by pools of mortgage-backed loans.
 
We refer to MBS and CMOs as PT MBS. We refer to
IO and IIO securities as structured MBS. The Company has elected to account
 
for its investment in MBS under the fair value option.
 
Electing the fair value option requires the Company to record changes in fair
 
value in the consolidated statement of operations, which,
in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with
the underlying economics and how the portfolio is managed.
- 71 -
The Company records MBS transactions on the trade date.
 
Security purchases that have not settled as of the balance sheet date
are included in the MBS balance with an offsetting liability recorded, whereas securities sold
 
that have not settled as of the balance
sheet date are removed from the MBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid
 
to transfer the liability in an orderly transaction
between market participants at the measurement date.
 
The fair value measurement assumes that the transaction to sell
 
the asset or
transfer the liability either occurs in the principal market for the asset
 
or liability, or in the absence of a principal market, occurs in the
most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or
third-party broker quotes, when available.
 
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase
 
are
not amortized.
 
Premium lost and discount accretion resulting from monthly principal repayments
 
are reflected in unrealized gains and
losses on MBS in the consolidated statements
 
of operations.
 
For IO securities, the income is accrued based on the carrying value and
the effective yield. The difference between income accrued and the interest received on the security is
 
characterized as a return of
investment and serves to reduce the asset’s carrying value. At each reporting date, the
 
effective yield is adjusted prospectively for
future reporting periods based on the new estimate of prepayments and the contractual
 
terms of the security.
 
For IIO securities,
effective yield and income recognition calculations also take into account the index
 
value applicable to the security.
 
Changes in fair
value of MBS during each reporting period are recorded in earnings and reported
 
as unrealized gains or losses on mortgage-backed
securities in the accompanying consolidated statements of operations. The
 
amount reported as unrealized gains or losses on
mortgage-backed securities thus captures the net effect of changes in the fair market
 
value of securities caused by market
developments and any premium or discount lost as a result of principal repayments
 
during the period.
Orchid Island Capital, Inc. Common Stock
The Company
 
accounts for
 
its investment
 
in Orchid
 
common shares
 
at fair value.
 
The change
 
in the fair
 
value and
 
dividends
 
received
on this investment
 
are reflected
 
in the consolidated
 
statements
 
of operations.
 
We estimate
 
the fair
 
value of our
 
investment
 
in Orchid
 
on a
market approach
 
using “Level
 
1” inputs
 
based on
 
the quoted
 
market price
 
of Orchid’s
 
common stock
 
on a national
 
stock exchange.
Retained Interests in Securitizations
The Company holds retained interests in the subordinated tranches of securities
 
created in securitization transactions.
 
These
retained interests currently have a recorded fair value of zero, as the prospect
 
of future cash flows being received is uncertain. Any
cash received from the retained interests is reflected as a gain in the consolidated
 
statements of operations.
Derivative Financial Instruments
The Company uses derivative instruments to manage interest rate risk,
 
facilitate asset/liability strategies and manage other
exposures, and it may continue to do so in the future. The principal instruments
 
that the Company has used to date are Treasury Note
(“T-Note”) and Eurodollar futures contracts,
 
and “to-be-announced” (“TBA”) securities, but it may enter into other
 
derivatives in the
future.
The Company accounts for TBA securities as derivative instruments. Gains
 
and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying
 
consolidated statements of operations.
 
Derivative instruments are carried at fair value, and changes in fair value are recorded
 
in the consolidated statements of
operations for each period. The Company’s derivative financial instruments are not designated
 
as hedge accounting relationships, but
rather are used as economic hedges of its portfolio assets and liabilities. Gains and losses
 
on derivatives, except those that result in
cash receipts or payments, are included in operating activities on the statements
 
of cash flows. Cash payments and cash receipts from
- 72 -
settlements of derivatives,
 
including current period net cash settlements on interest rate swaps, is classified
 
as an investing activity on
the statements of cash flows.
Holding derivatives creates exposure to credit risk related to the potential
 
for failure by counterparties to honor their commitments.
 
In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments
provided for under the terms of the agreement.
 
The Company’s derivative agreements require it to post or receive collateral to mitigate
such risk. In addition,
 
the Company uses only registered central clearing exchanges and well-established
 
commercial banks as
counterparties, monitors positions with individual counterparties and adjusts
 
posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that
 
value is disclosed either in the body of the
consolidated financial statements or in the accompanying notes. MBS, Orchid
 
common stock and derivative assets and liabilities are
accounted for at fair value in the consolidated balance sheets. The methods
 
and assumptions used to estimate fair value for these
instruments are presented in Note 14 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest
 
receivable, other assets, repurchase
agreements, accrued interest payable and other liabilities generally approximates
 
their carrying value due to the short-term nature of
these financial instruments.
 
It is impractical to estimate the fair value of the Company’s junior subordinated notes.
 
Currently, there is a limited market for these
types of instruments and the Company is unable to ascertain what interest rates
 
would be available to the Company for similar financial
instruments. Further information regarding these instruments is presented in
 
Note 9 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable
 
life of 3 years, office furniture and equipment with
depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings
 
and improvements with depreciable lives of 30
years.
 
Property and equipment is recorded at acquisition cost and depreciated
 
to their respective salvage values using the straight-line
method over the estimated useful lives of the assets. Depreciation is included in administrative
 
and other expenses in the consolidated
statement of operations.
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS through
 
the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized
 
financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Earnings Per Share
Basic EPS is calculated as income available to common stockholders divided
 
by the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class
 
method, as applicable for common stock
equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result
 
is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible
 
into Class A Common Stock, are entitled to receive
dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock. Accordingly, shares of the
Class B Common Stock are included in the computation of basic EPS using
 
the two-class method and, consequently, are presented
separately from Class A Common Stock.
- 73 -
The shares of Class C Common Stock are not included in the basic EPS computation
 
as these shares do not have participation
rights. The outstanding shares of Class B and Class C Common Stock
 
are not included in the computation of diluted EPS for the Class
A Common Stock as the conditions for conversion into shares of Class A Common
 
Stock were not met.
Income Taxes
 
Income taxes are provided for using the asset and liability method. Deferred tax
 
assets and liabilities represent the differences
between the financial statement and income tax bases of assets and liabilities using
 
enacted tax rates. The measurement of net
deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation,
 
it is more likely than not that they will
not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31,
 
2018 remain open for examination.
Although management believes its calculations for tax returns are correct and the
 
positions taken thereon are reasonable, the final
outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in
significant costs or benefits to the Company.
 
For tax filing purposes, Bimini Capital and its includable subsidiaries,
 
and Royal Palm and
its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain
 
tax positions will be sustained upon
examination based on the facts, circumstances and information available at the
 
end of each period.
 
The measurement of uncertain tax
positions is adjusted when new information is available, or when an event
 
occurs that requires a change. The Company recognizes tax
positions in the consolidated financial statements only when it is more likely than
 
not that the position will be sustained upon
examination by the relevant taxing authority based on the technical merits
 
of the position. A position that meets this standard is
measured at the largest amount of benefit that will more likely than not be realized
 
upon settlement. The difference between the benefit
recognized and the tax benefit claimed on a tax return is referred to as
 
an unrecognized tax benefit and is recorded as a liability in the
consolidated balance sheets. The Company records income tax-related interest and penalties,
 
if applicable, within the income tax
provision.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848): Facilitation
of the Effects of Reference Rate Reform on Financial Reporting.”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP
requirements for modifications on debt instruments, leases, derivatives, and other
 
contracts, related to the expected market transition
from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark
 
indices, or collectively, IBORs, to
alternative reference rates. ASU 2020-04 generally considers contract modifications
 
related to reference rate reform to be an event that
does not require contract remeasurement at the modification date nor a reassessment
 
of a previous accounting determination. The
guidance in ASU 2020-04 is optional and may be elected over time, through December
 
31, 2022, as reference rate reform activities
occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply
 
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
 
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
 
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
 
31, 2022, as reference rate reform
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 74 -
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated
 
financial
statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the
 
terms of a management agreement.
 
As Manager,
Bimini Advisors is responsible for administering Orchid's business activities and
 
day-to-day operations. Pursuant to the terms of the
management agreement, Bimini Advisors provides Orchid with its management
 
team, including its officers, along with appropriate
support personnel. Bimini Advisors is at all times subject to the supervision
 
and oversight of Orchid's board of directors and
 
has only
such functions and authority as delegated to it. Bimini Advisors receives a monthly
 
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Orchid’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Orchid’s month-end equity that is greater than $250 million and
 
less than or equal to $500 million,
and
●
One-twelfth of 1.00% of the Orchid’s month-end equity that is greater than $500 million.
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred
 
on its behalf and to pay to Bimini Advisors an
amount equal to Orchid's pro rata portion of certain overhead costs set forth in
 
the management agreement. The management
agreement has been renewed through February 20, 2023 and provides for automatic
 
one-year extension options thereafter. Should
Orchid terminate the management agreement without cause, it will be obligated to
 
pay Bimini Advisors a termination fee equal to three
times the average annual management fee, as defined in the management agreement,
 
before or on the last day of the automatic
renewal term.
The following table summarizes the advisory services revenue from
 
Orchid for the years ended December 31, 2021 and 2020.
(in thousands)
2021
2020
Management fee
$
8,156
$
5,281
Allocated overhead
1,632
1,514
Total
$
9,788
$
6,795
At December 31, 2021 and 2020, the net amount due from Orchid was approximately
 
$
1.1
 
million and $
0.6
 
million, respectively.
NOTE 3.
 
MORTGAGE-BACKED SECURITIES
 
The following
 
table presents
 
the Company’s
 
MBS portfolio
 
as of December
 
31, 2021
 
and 2020:
(in thousands)
2021
2020
Fixed-rate Mortgages
 
$
58,029
$
64,902
Interest-Only Securities
2,759
251
Inverse Interest-Only Securities
15
25
Total
$
60,803
$
65,178
The following
 
table is a
 
summary of
 
our net gain
 
(loss) from
 
the sale of
 
MBS for
 
the years
 
ended December
 
31, 2021 and
 
2020:
(in thousands)
2021
2020
Proceeds from sales of MBS
$
13,063
$
176,250
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 75 -
Carrying value of MBS sold
12,994
181,995
Net gain (loss) on sales of MBS
$
69
$
(5,745)
Gross gain sales of MBS
$
69
$
60
Gross loss on sales of MBS
-
(5,805)
Net gain (loss) on sales of MBS
$
69
$
(5,745)
NOTE 4.
 
PROPERTY AND EQUIPMENT, NET
The composition
 
of property
 
and equipment
 
at December
 
31, 2021
 
and 2020
 
follows:
(in thousands)
2021
2020
Land
$
1,185
$
1,185
Buildings and improvements
1,827
1,827
Computer equipment and software
26
181
Office furniture and equipment
193
198
Total cost
3,231
3,391
Less accumulated depreciation and amortization
1,207
1,298
Property and equipment, net
$
2,024
$
2,093
Depreciation
 
of property
 
and equipment
 
totaled approximately
 
$
69,000
 
and $
70,000
 
for the years
 
ended December
 
31, 2021
 
and
2020, respectively.
NOTE 5.
 
OTHER ASSETS
The composition of other assets at December 31, 2021 and 2020 follows:
(in thousands)
2021
2020
Investment in Bimini Capital Trust II
$
804
$
804
Prepaid expenses
297
278
Servicing advances
159
205
Other
177
180
Total other
 
assets
$
1,437
$
1,467
Receivables
 
are carried
 
at their
 
estimated
 
collectible
 
amounts.
 
The Company
 
maintains
 
an allowance
 
for credit
 
losses for
 
expected
losses, if
 
any. Management
 
considers
 
the following
 
factors when
 
determining
 
the expected
 
losses of
 
specific
 
accounts:
 
past transaction
activity, current
 
economic
 
conditions,
 
changes in
 
payment terms
 
and reasonable
 
and supportable
 
forecasts.
 
Adjustments
 
to the allowance
for credit
 
losses are
 
recorded
 
with a corresponding
 
adjustment
 
included in
 
the consolidated
 
statement
 
of operations.
 
As of December
 
31,
2021 and
 
2020, management
 
determined
 
that no allowance
 
for credit
 
losses was
 
necessary.
 
Collections
 
on amounts
 
previously
 
written off
are included
 
in income
 
as received.
NOTE 6.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its RMBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest
 
rates are
generally
 
fixed based
 
on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders
 
will typically
 
require the
 
Company to
 
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of
 
the pledged
securities
 
increases,
 
lenders
 
may release
 
collateral
 
back to the
 
Company. As of December
 
31, 2021,
 
the Company
 
had met all
 
margin call
requirements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 76 -
As of December
 
31, 2021
 
and December
 
31, 2020,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
December 31, 2021
Fair value of securities pledged, including accrued
interest receivable
$
-
$
60,859
$
159
$
-
$
61,018
Repurchase agreement liabilities associated with
these securities
$
-
$
58,793
$
85
$
-
$
58,878
Net weighted average borrowing rate
-
0.14%
0.70%
-
0.14%
December 31, 2020
Fair value of securities pledged, including accrued
interest receivable
$
-
$
49,096
$
8,853
$
7,405
$
65,354
Repurchase agreement liabilities associated with
these securities
$
-
$
49,120
$
8,649
$
7,302
$
65,071
Net weighted average borrowing rate
-
0.25%
0.23%
0.30%
0.25%
In addition,
 
cash pledged
 
to counterparties
 
as collateral
 
for repurchase
 
agreements
 
was approximately
 
$
1.4
 
million and
 
$
3.4
 
million as
of December
 
31, 2021
 
and 2020,
 
respectively.
If, during
 
the term
 
of a repurchase
 
agreement,
 
a lender
 
files for
 
bankruptcy, the
 
Company might
 
experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable,
and cash posted by the Company as collateral, if any.
 
At December
 
31, 2021
 
and December
 
31, 2020,
 
the Company
 
had an aggregate
amount at
 
risk (the
 
difference
 
between the
 
amount loaned
 
to the Company,
 
including
 
interest
 
payable, and
 
the fair
 
value of securities
 
and
cash pledged
 
(if any),
 
including
 
accrued interest
 
on such securities)
 
with all
 
counterparties
 
of approximately
 
$
3.5
 
million and
 
$
3.6
 
million,
respectively.
 
The Company
 
did not
 
have an amount
 
at risk with
 
any individual
 
counterparty
 
greater
 
than 10%
 
of the Company’s
 
equity at
December
 
31, 2021
 
and December
 
31, 2020.
 
NOTE 7. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
Bimini’s assets
 
pledged
 
as collateral
 
under its
 
repurchase
 
agreements
 
and derivative
 
agreements
 
as of
December
 
31, 2021
 
and 2020.
($ in thousands)
December 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT MBS - at fair value
$
58,029
$
-
$
58,029
$
64,902
$
-
$
64,902
Structured MBS - at fair value
2,759
-
2,759
251
-
251
Accrued interest on pledged securities
230
-
230
201
-
201
Cash
1,391
-
1,391
3,352
1
3,353
Total
$
62,409
$
-
$
62,409
$
68,706
$
1
$
68,707
Assets Pledged
 
from Counterparties
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 77 -
The table
 
below summarizes
 
assets pledged
 
to Bimini
 
from counterparties
 
under repurchase
 
agreements
 
as of December
 
31, 2021
and 2020.
 
Cash received
 
as margin
 
is recognized
 
in cash and
 
cash equivalents
 
with a corresponding
 
amount recognized
 
as an increase
 
in
repurchase
 
agreements
 
in the consolidated
 
balance sheets.
($ in thousands)
Assets Pledged to Bimini
2021
2020
Cash
$
106
$
80
Total
$
106
$
80
NOTE 8. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
repurchase
 
agreements
 
are subject
 
to underlying
 
agreements
 
with master
 
netting or
 
similar arrangements,
 
which
provide for
 
the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
 
bankruptcy
 
of either
 
party to
 
the transactions.
 
The Company
 
reports
its assets
 
and liabilities
 
subject to
 
these arrangements
 
on a gross
 
basis.
 
The following
 
table presents
 
information
 
regarding
 
those assets
and liabilities
 
subject to
 
such arrangements
 
as if the
 
Company had
 
presented
 
them on a
 
net basis
 
as of December
 
31, 2021
 
and 2020.
(in thousands)
Offsetting of Liabilities
Net Amount
Gross Amount Not Offset in the
of Liabilities
Consolidated Balance Sheet
Gross Amount
Presented
Financial
Gross Amount
Offset in the
in the
Instruments
Cash
of Recognized
Consolidated
Consolidated
Posted as
Posted as
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2021
Repurchase Agreements
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
$
58,878
$
-
$
58,878
$
(57,487)
$
(1,391)
$
-
December 31, 2020
Repurchase Agreements
$
65,071
$
-
$
65,071
$
(61,719)
$
(3,352)
$
-
$
65,071
$
-
$
65,071
$
(61,719)
$
(3,352)
$
-
The amounts
 
disclosed
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
are limited
 
to the amount
 
sufficient
 
to reduce
 
the
asset or
 
liability
 
presented
 
in the consolidated
 
balance sheet
 
to zero.
 
The fair
 
value of the
 
actual collateral
 
received by
 
or posted
 
to the
same counterparty
 
typically
 
exceeds the
 
amounts presented.
 
See Note
 
7 for a discussion
 
of collateral
 
posted for, or
 
received against,
repurchase
 
obligations
 
and derivative
 
instruments.
NOTE 9.
 
LONG-TERM DEBT
Long-term
 
debt at December
 
31, 2021
 
and 2020
 
is summarized
 
as follows:
(in thousands)
2021
2020
Junior subordinated debt
$
26,804
$
26,804
Note payable
635
657
Paycheck Protection Plan ("PPP") loan
-
152
Total
$
27,439
$
27,613
Junior Subordinated
 
Debt
During 2005,
 
Bimini Capital
 
sponsored
 
the formation
 
of a statutory
 
trust, known
 
as Bimini
 
Capital Trust
 
II (“BCTII”)
 
of which 100%
 
of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 78 -
the common
 
equity is owned
 
by Bimini
 
Capital.
 
It was formed
 
for the purpose
 
of issuing
 
trust preferred
 
capital securities
 
to third-party
investors
 
and investing
 
the proceeds
 
from the
 
sale of such
 
capital securities
 
solely in
 
junior subordinated
 
debt securities
 
of Bimini
 
Capital.
The debt
 
securities
 
held by BCTII
 
are the sole
 
assets of
 
BCTII.
As of December
 
31, 2021
 
and 2020,
 
the outstanding
 
principal
 
balance on
 
the junior
 
subordinated
 
debt securities
 
owed to BCTII
 
was
$
26.8
 
million.
 
The BCTII
 
trust preferred
 
securities
 
and Bimini
 
Capital's
 
BCTII Junior
 
Subordinated
 
Notes have
 
a rate of
 
interest that
 
floats
at a spread
 
of
3.50
% over the
 
prevailing
 
three-month
 
LIBOR rate.
 
As of December
 
31, 2021,
 
the interest
 
rate was
3.70
%. The BCTII
 
trust
preferred
 
securities
 
and Bimini
 
Capital's
 
BCTII Junior
 
Subordinated
 
Notes require
 
quarterly
 
interest
 
distributions
 
and are redeemable
 
at
Bimini Capital's
 
option, in
 
whole or
 
in part and
 
without penalty.
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes are
 
subordinate
 
and junior
in right
 
of payment
 
to all present
 
and future
 
senior indebtedness.
 
BCTII is
 
a VIE because
 
the holders
 
of the equity
 
investment
 
at risk do
 
not have
 
substantive
 
decision
 
making ability
 
over BCTII’s
activities.
 
Since Bimini
 
Capital's
 
investment
 
in BCTII's
 
common equity
 
securities
 
was financed
 
directly by
 
BCTII as
 
a result
 
of its loan
 
of the
proceeds
 
to Bimini
 
Capital,
 
that investment
 
is not considered
 
to be an
 
equity investment
 
at risk.
 
Since Bimini
 
Capital's
 
common share
investment
 
in BCTII
 
is not a variable
 
interest,
 
Bimini Capital
 
is not the
 
primary beneficiary
 
of BCTII.
 
Therefore,
 
Bimini Capital
 
has not
consolidated
 
the financial
 
statements
 
of BCTII
 
into its consolidated
 
financial
 
statements
 
and this
 
investment
 
is accounted
 
for on the
 
equity
method.
The accompanying
 
consolidated
 
financial
 
statements
 
present
 
Bimini Capital's
 
BCTII Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as a
liability
 
and Bimini
 
Capital's
 
investment
 
in the common
 
equity securities
 
of BCTII
 
as an asset
 
(included
 
in other
 
assets).
 
For financial
statement
 
purposes,
 
Bimini Capital
 
records payments
 
of interest
 
on the Junior
 
Subordinated
 
Notes issued
 
to BCTII
 
as interest
 
expense.
Note Payable
On October
 
30, 2019,
 
the Company
 
borrowed
 
$
680,000
 
from a bank.
 
The note
 
is payable
 
in equal
 
monthly principal
 
and interest
installments
 
of approximately
 
$
5,000
 
through October
 
30, 2039.
 
Interest
 
accrues at
4.89
% through
 
October 30,
 
2024. Thereafter,
 
interest
accrues based
 
on the weekly
 
average
 
yield to the
 
United States
 
Treasury securities
 
adjusted to
 
a constant
 
maturity of
 
5 years,
 
plus
3.25
%.
The note
 
is secured
 
by a mortgage
 
on the Company’s
 
office building.
Paycheck Protection
 
Plan Loan
On April
 
13, 2020,
 
the Company
 
received approximately
 
$
152,000
 
through the
 
Paycheck Protection
 
Program (“PPP”)
 
of the CARES
Act in the
 
form of a
 
low interest
 
loan.
 
The PPP
 
loan had
 
a fixed rate
 
of
1.00
% and a term
 
of two years,
 
if not forgiven,
 
in whole or
 
in part.
The Small
 
Business Administration
 
notified the
 
Company that,
 
effective April
 
22, 2021,
 
all principal
 
and accrued
 
interest
 
under the
 
PPP
loan was
 
forgiven.
The table
 
below presents
 
the future
 
scheduled
 
principal
 
payments
 
on the Company’s
 
long-term
 
debt.
(in thousands)
Year Ending December
 
31,
Amounts
2022
$
23
2023
24
2024
25
2025
26
2026
28
Thereafter
27,313
Total
$
27,439
NOTE 10.
 
CAPITAL STOCK
- 79 -
Authorized
 
Shares
The total
 
number of
 
shares of
 
capital stock
 
which the
 
Company
 
has the authority
 
to issue is
 
110,000,000 shares,
 
classified
 
as
100,000,000
 
shares of
 
common stock,
 
and
10,000,000
 
shares of
 
preferred
 
stock. The
 
Board of Directors
 
has the authority
 
to classify
 
any
unissued shares
 
by setting
 
or changing
 
in any one
 
or more respects
 
the preferences,
 
conversion
 
or other
 
rights, voting
 
powers,
restrictions,
 
limitations
 
as to dividends,
 
qualifications
 
or terms
 
or conditions
 
of redemption
 
of such shares.
 
Common Stock
Of the
100,000,000
 
authorized
 
shares of
 
common stock,
98,000,000
 
shares were
 
designated
 
as Class A
 
common stock,
1,000,000
shares were
 
designated
 
as Class B
 
common stock
 
and
1,000,000
 
shares were
 
designated
 
as Class C
 
common stock.
 
Holders
 
of shares
of common
 
stock have
 
no sinking
 
fund or redemption
 
rights and
 
have no pre-emptive
 
rights to
 
subscribe
 
for any of
 
the Company’s
securities.
 
All common
 
shares
 
have a $
0.001
 
par value.
Class A
 
Common Stock
Each outstanding
 
share of
 
Class A common
 
stock entitles
 
the holder
 
to one vote
 
on all matters
 
submitted
 
to a vote
 
of stockholders,
including
 
the election
 
of directors.
 
Holders of
 
shares of
 
Class A common
 
stock are
 
not entitled
 
to cumulate
 
their votes
 
in the election
 
of
directors.
 
Subject to
 
the preferential
 
rights of
 
any other
 
class or series
 
of stock
 
and to the
 
provisions
 
of the Company's
 
charter, as amended,
regarding
 
the restrictions
 
on transfer
 
of stock,
 
holders of
 
shares of
 
Class A common
 
stock are
 
entitled to
 
receive dividends
 
on such stock
 
if,
as and when
 
authorized
 
and declared
 
by the Board
 
of Directors.
 
Class B
 
Common Stock
Each outstanding
 
share of
 
Class B common
 
stock entitles
 
the holder
 
to one vote
 
on all matters
 
submitted
 
to a vote
 
of common
stockholders,
 
including
 
the election
 
of directors.
 
Holders of
 
shares of
 
Class B common
 
stock are
 
not entitled
 
to cumulate
 
their votes
 
in the
election of
 
directors.
 
Holders of
 
shares of
 
Class A common
 
stock and
 
Class B common
 
stock shall
 
vote together
 
as one class
 
in all matters
except that
 
any matters
 
which would
 
adversely
 
affect the
 
rights and
 
preferences
 
of Class B
 
common stock
 
as a separate
 
class shall
require a
 
separate
 
approval
 
by holders
 
of a majority
 
of the outstanding
 
shares of
 
Class B common
 
stock.
 
Holders of shares of Class B
common stock are entitled to receive dividends on each share of Class B common
 
stock in an amount equal to the dividends declared
on each share of Class A common stock if, as and when authorized and declared by
 
the Board of Directors.
 
Each share
 
of Class
 
B common
 
stock shall
 
automatically
 
be converted
 
into one
 
share of
 
Class A common
 
stock on the
 
first day
 
of the
fiscal quarter
 
following
 
the fiscal
 
quarter during
 
which the
 
Company's Board
 
of Directors
 
were notified
 
that, as
 
of the end
 
of such fiscal
quarter, the
 
stockholders'
 
equity attributable
 
to the Class
 
A common
 
stock,
 
calculated
 
on a pro
 
forma basis
 
as if conversion
 
of the Class
 
B
common stock
 
(or portion
 
thereof
 
to be converted)
 
had occurred,
 
and otherwise
 
determined
 
in accordance
 
with GAAP, equals
 
no less than
$
150.00
 
per share
 
(adjusted
 
equitably
 
for any stock
 
splits, stock
 
combinations,
 
stock dividends
 
or the like);
 
provided,
 
that the number
 
of
shares of
 
Class B common
 
stock to
 
be converted
 
into Class
 
A common
 
stock in any
 
quarter shall
 
not exceed
 
an amount
 
that will
 
cause the
stockholders'
 
equity attributable
 
to the Class
 
A common
 
stock calculated
 
as set forth
 
above to
 
be less than
 
$
150.00
 
per share;
 
provided
further, that
 
such conversions
 
shall continue
 
to occur
 
until all
 
shares of
 
Class B common
 
stock have
 
been converted
 
into shares
 
of Class
 
A
common stock;
 
and provided
 
further, that
 
the total
 
number of
 
shares of
 
Class A common
 
stock issuable
 
upon conversion
 
of the Class
 
B
common stock
 
shall not
 
exceed
3
% of the
 
total shares
 
of common
 
stock outstanding
 
prior to
 
completion
 
of an initial
 
public offering
 
of Bimini
Capital's
 
Class A common
 
stock.
 
Class C
 
Common Stock
- 80 -
No dividends
 
will be paid
 
on the Class
 
C common
 
stock.
 
Holders
 
of shares
 
of Class
 
C common
 
stock are
 
not entitled
 
to vote
 
on any
matter submitted
 
to a vote
 
of stockholders,
 
including
 
the election
 
of directors,
 
except that
 
any matters
 
that would
 
adversely affect
 
the rights
and privileges
 
of the Class
 
C common
 
stock as a
 
separate
 
class shall
 
require the
 
approval
 
of a majority
 
of the Class
 
C common
 
stock.
 
Each share
 
of Class
 
C common
 
stock shall
 
automatically
 
be converted
 
into one
 
share of
 
Class A common
 
stock on the
 
first day
 
of the
fiscal quarter
 
following
 
the fiscal
 
quarter during
 
which the
 
Company's Board
 
of Directors
 
were notified
 
that, as
 
of the end
 
of such fiscal
quarter, the
 
stockholders'
 
equity attributable
 
to the Class
 
A common
 
stock,
 
calculated
 
on a pro
 
forma basis
 
as if conversion
 
of the Class
 
C
common stock
 
had occurred
 
and giving
 
effect to the
 
conversion
 
of all of
 
the shares
 
of Class B
 
common stock
 
as of such
 
date, and
otherwise
 
determined
 
in accordance
 
with GAAP, equals
 
no less than
 
$
150.00
 
per share
 
(adjusted
 
equitably
 
for any stock
 
splits,
 
stock
combinations,
 
stock dividends
 
or the like);
 
provided,
 
that the
 
number of
 
shares of
 
Class C common
 
stock to be
 
converted
 
into Class
 
A
common stock
 
shall not
 
exceed an
 
amount that
 
will cause
 
the stockholders'
 
equity attributable
 
to the Class
 
A common
 
stock calculated
 
as
set forth
 
above to
 
be less than
 
$
150.00
 
per share;
 
and provided
 
further, that
 
such conversions
 
shall continue
 
to occur until
 
all shares
 
of
Class C common
 
stock have
 
been converted
 
into shares
 
of Class A
 
common stock
 
and provided
 
further, that
 
the total
 
number of
 
shares of
Class A common
 
stock issuable
 
upon conversion
 
of the Class
 
C common
 
stock shall
 
not exceed
3
% of the
 
total shares
 
of common
 
stock
outstanding
 
prior to
 
completion
 
of an initial
 
public offering
 
of Bimini
 
Capital's
 
Class A common
 
stock.
Preferred Stock
General
 
There are
10,000,000
 
authorized shares of preferred stock, with a $
0.001
 
par value per share. The Company's Board of Directors
has the authority to classify any unissued shares of preferred stock and to reclassify
 
any previously classified but unissued shares of
any series of preferred stock previously authorized by the Board of Directors.
 
Prior to issuance of shares of each class or series of
preferred stock, the Board of Directors is required by the Company’s charter to fix the terms,
 
preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions, qualifications
 
and terms or conditions of redemption for
each such class or series.
 
Classified and Designated Shares
Pursuant to the Company’s supplementary amendment of its charter, effective November 3, 2005, and by resolutions adopted
 
on
September 29, 2005, the Company’s Board of Directors classified and designated
1,800,000
 
shares of the authorized but unissued
preferred stock, $
0.001
 
par value, as Class A Redeemable Preferred Stock and
2,000,000
 
shares of the authorized but unissued
preferred stock as Class B Redeemable Preferred Stock.
Preferred Stock
 
The Class A Redeemable Preferred Stock and Class B Redeemable Preferred
 
Stock rank equal to each other and shall have the
same preferences, rights, voting powers, restrictions, limitations as to dividends
 
and other distributions, qualifications and terms;
provided, however that the redemption provisions of the Class A Redeemable Preferred
 
Stock and the Class B Redeemable Preferred
Stock differ.
 
Each outstanding share of Class A Redeemable Preferred Stock and Class B
 
Redeemable Preferred Stock shall have
one-fifth of a vote on all matters submitted to a vote of stockholders (or such lesser
 
fraction of a vote as would be required to comply
with the rules and regulations of the NYSE relating to the Company’s right to issue securities
 
without obtaining a stockholder vote).
Holders of shares of preferred stock shall vote together with holders of shares
 
of common stock as one class in all matters that would
be subject to a vote of stockholders.
 
The previously outstanding shares of Class A Redeemable Preferred Stock were
 
converted into Class A common stock on April
28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.
- 81 -
In 2015 the Board approved Articles Supplementary to the Company’s charter reclassifying
 
and designating
1,800,000
 
shares of
authorized but unissued Class A Redeemable Preferred Stock and
2,000,000
 
shares of authorized but unissued Class B Redeemable
Preferred Stock into undesignated preferred stock, par value $
0.001
 
per share, of the Company (“Preferred Stock”). After giving effect
to the reclassification and designation of the shares of Class A Preferred Stock
 
and Class B Preferred Stock, the Company has
authority to issue
10,000,000
 
shares of undesignated Preferred Stock and no shares of Class A Preferred
 
Stock or Class B Preferred
Stock. The Articles Supplementary were filed with the State Department
 
of Assessments and Taxation of Maryland (the “SDAT”) and
became effective upon filing on December 21, 2015.
 
In 2015 the Board approved Articles Supplementary to the Company’s charter creating
 
a new series of Preferred Stock designated
as Series A Junior Preferred Stock, par value $
0.001
 
per share, of the Company (the “Series A Preferred Stock”). The Articles
Supplementary were filed with the SDAT and became effective upon filing on December 21, 2015.
 
 
Rights Plan
On
December 21, 2015
 
the Board adopted a rights agreement and declared a distribution
 
of one preferred stock purchase right
(“Right”) for each outstanding share of the Company’s Class A common stock, Class B common
 
stock, and Class C common stock.
The distribution was payable to stockholders of record as of the close of business
 
on December 21, 2015.
The Rights
. Subject to the terms, provisions and conditions of the Rights Plan, if the
 
Rights become exercisable, each Right would
initially represent the right to purchase from the Company one ten-thousandth
 
of a share of Series A Preferred Stock for a purchase
price of $4.76, subject to adjustment in accordance with the terms of the Rights
 
Plan (the “Purchase Price”). If issued, each fractional
share of Series A Preferred Stock would give the stockholder approximately the
 
same distribution, voting and liquidation rights as does
one share of the Company’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights
 
as a
stockholder of the Company, including without limitation any distribution, voting or liquidation rights.
Exercisability.
 
The Rights will generally not be exercisable until the earlier of (i) 10 business
 
days after a public announcement by
the Company that a person or group has acquired
4.9
% or more of the outstanding Class A common stock without the approval
 
of the
Board of Directors (an “Acquiring Person”) and (ii) 10 business days after the
 
commencement of a tender or exchange offer by a
person or group for
4.9
% or more of the Class A common stock.
The date that the Rights may first become exercisable is referred to as
 
the “Distribution Date.” Until the Distribution Date, the
Class A common stock, Class B common stock and Class C common stock
 
certificates will represent the Rights and will contain a
notation to that effect. Any transfer of shares of Class A common stock, Class B common
 
stock and/or Class C common stock prior to
the Distribution Date will constitute a transfer of the associated Rights.
 
After the Distribution Date, the Rights may be transferred other
than in connection with the transfer of the underlying shares of Class A common
 
stock, Class B common stock or Class C common
stock.
After the Distribution Date and following a determination by the Board that a person
 
is an Acquiring Person, each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will thereupon
 
become void), will thereafter have the right to
receive upon exercise of a Right and payment of the Purchase Price,
 
that number of shares of Class A common stock, Class B
common stock or Class C common stock, as the case may be, having a market
 
value of two times the Purchase Price (or, at our
option, shares of Series A Preferred Stock or other consideration as provided
 
in the Rights Plan).
Exchange
. After the Distribution Date and following a determination by the
 
Board that a person or group is an Acquiring Person,
the Board may exchange the Rights (other than Rights owned by
 
such an Acquiring Person which will have become void), in whole or
in part, at an exchange ratio of one share of Class A common stock, Class B common
 
stock or Class C common stock, as the case
may be, or a fractional share of Series A Preferred Stock (or of a share of a similar
 
class or series of the Company’s preferred stock
having similar Rights, preferences and privileges) of equivalent value, per Right
 
(subject to adjustment).
- 82 -
Expiration
. The Rights and the Rights Plan will expire on the earliest of (i)
December 21, 2025
, (ii) the time at which the Rights are
redeemed pursuant to the Rights Plan, (iii) the time at which the Rights are exchanged pursuant
 
to the Rights Plan, (iv) the repeal of
Section 382 of the Code or any successor statute if the Board determines
 
that the Rights Plan is no longer necessary for the
preservation of the applicable tax benefits, (v) the beginning of a taxable
 
year of the Company to which the Board determines that no
applicable tax benefits may be carried forward and (vi) the close of business
 
on June 30, 2016 if approval of the Rights Plan by the
Company’s stockholders has not been obtained.
Redemption.
 
At any time prior to the time an Acquiring Person becomes such,
 
the Board may redeem the Rights in whole, but not
in part, at a price of $0.001 per Right (the “Redemption Price”). The redemption
 
of the Rights may be made effective at such time, on
such basis and with such conditions as the Board in its sole discretion may establish.
 
Immediately upon any redemption of the Rights,
the right to exercise the Rights will terminate and the only right of the holders of Rights
 
will be to receive the Redemption Price.
Anti-Dilution Provisions.
 
The Board may adjust the Purchase Price, the number of shares
 
of Series A Preferred Stock or other
securities issuable and the number of outstanding Rights to prevent dilution that
 
may occur as a result of certain events, including
among others, a stock dividend, a forward or reverse stock split or a reclassification
 
of the preferred shares or Class A common stock,
Class B common stock or Class C common stock. No adjustments to the Purchase
 
Price of less than 1% will be made.
Anti-Takeover
 
Effects.
 
While this was not the purpose of the Board when adopting the Rights Plan,
 
the Rights will have certain
anti-takeover effects. The Rights will cause substantial dilution to any person or group that
 
attempts to acquire the Company without
the approval of the Board. As a result, the overall effect of the Rights may be to render more
 
difficult or discourage any attempt to
acquire the Company even if such acquisition may be favorable to the interests of the
 
Company’s stockholders. Because the Board can
redeem the Rights, the Rights should not interfere with a merger or other
 
business combination approved by the Board.
Amendments.
 
Before the Distribution Date, the Board may amend or supplement
 
the Rights Plan without the consent of the
holders of the Rights. After the Distribution Date, the Board may amend or supplement
 
the Rights Plan only to cure an ambiguity, to
alter time period provisions, to correct inconsistent provisions, or to make
 
any additional changes to the Rights Plan, but only to the
extent that those changes do not impair or adversely affect, in any material respect, any
 
Rights holder and do not result in the Rights
again becoming redeemable, and no such amendment may cause the Rights again
 
to become redeemable or cause this Rights Plan
again to become amendable other than in accordance with the applicable timing
 
of the Rights Plan.
There were
 
no issuances
 
of the Company's
 
Class A Common
 
Stock, Class
 
B Common
 
Stock or
 
Class C Common
 
Stock during
 
the
years ended
 
December
 
31, 2021 and
 
2020.
Stock Repurchase
 
Plans
On March 26,
 
2018, the
 
Board of
 
Directors
 
of the Company
 
(the “Board”)
 
approved
 
a Stock Repurchase
 
Plan (the
 
“2018 Repurchase
Plan”).
 
Pursuant
 
to the 2018
 
Repurchase
 
Plan, the
 
Company could
 
purchase
 
up to 500,000
 
shares of
 
its Class
 
A Common
 
Stock from
time to time,
 
subject to
 
certain limitations
 
imposed by
 
Rule 10b-18
 
of the Securities
 
Exchange
 
Act of 1934.
 
The 2018
 
Repurchase
 
Plan
was terminated
 
on September
 
16, 2021.
 
During the
 
period beginning
 
January 1,
 
2021 through
 
September
 
16, 2021,
 
the Company
 
repurchased
 
a total of
1,195
 
shares under
the 2018
 
Repurchase
 
Plan at an
 
aggregate
 
cost of approximately
 
$
2,298
, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of
$
1.92
 
per share.
 
From the
 
inception
 
of the 2018
 
Repurchase
 
Plan through
 
its termination,
 
the Company
 
repurchased
 
a total of
71,598
shares at
 
an aggregate
 
cost of approximately
 
$
169,243
, including
 
commissions
 
and fees,
 
for a weighted
 
average price
 
of $
2.36
 
per share.
On September
 
16, 2021,
 
the Board
 
authorized
 
a share repurchase
 
plan pursuant
 
to Rule 10b5-1
 
of the Securities
 
Exchange
 
Act of
1934 (the
 
“2021 Repurchase
 
Plan”). Pursuant
 
to the 2021
 
Repurchase
 
Plan, the
 
Company may
 
purchase
 
shares of
 
its Class
 
A Common
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 83 -
Stock from
 
time to time
 
for an aggregate
 
purchase
 
price not
 
to exceed
 
$2.5 million.
 
Share repurchases
 
may be executed
 
through
 
various
means, including,
 
without limitation,
 
open market
 
transactions.
 
The 2021
 
Repurchase
 
Plan does
 
not obligate
 
the Company
 
to purchase
any shares,
 
and it expires
 
on September
 
16, 2023.
 
The authorization
 
for the 2021
 
Repurchase
 
Plan may
 
be terminated,
 
increased
 
or
decreased
 
by the Company’s
 
Board of
 
Directors
 
in its discretion
 
at any time.
 
During the
 
year ended
 
December
 
31, 2021,
the Company
repurchased
 
a total of
92,287
 
shares at
 
an aggregate
 
cost of approximately
 
$
192,905
, including
 
commissions
 
and fees,
 
for a weighted
average price
 
of $
2.09
 
per share
 
under the
 
2021 repurchase
 
Plan.
Subsequent
 
to December
 
31, 2021,
 
and through
 
March 10,
 
2022, the
Company repurchased
 
a total of
170,422
 
shares at
 
an aggregate
 
cost of approximately
 
$
343,732
, including
 
commissions
 
and fees,
 
for a
weighted
 
average price
 
of $
2.02
 
per share.
Tender Offer
In July 2021,
 
the Company
 
completed
 
a “modified
 
Dutch auction”
 
tender offer
 
and paid
 
an aggregate
 
of $1.5 million,
 
excluding
 
fees
and related
 
expenses,
 
to repurchase
812,879
 
shares of
 
Bimini Capital’s
 
Class A common
 
stock at
 
a price of
 
$
1.85
 
per share.
 
The
aggregate
 
cost of the
 
tender offer,
 
including
 
commissions
 
and fees,
 
was approximately
 
$
1.6
 
million.
NOTE 11.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
 
legal actions arising in the ordinary course of
business.
On
April 22, 2020
, the Company received a demand for payment from Citigroup, Inc. in the amount
 
of $
33.1
 
million related to the
indemnification provisions of various mortgage loan purchase agreements (“MLPA’s”) entered into between Citigroup Global Markets
Realty Corp and Royal Palm Capital, LLC (f/k/a Opteum Financial Services,
 
LLC) prior to the date Royal Palm’s mortgage origination
operations ceased in 2007. In November 2021, Citigroup notified the Company of additional
 
indemnity claims totaling $0.2 million. The
demands are based on Royal Palm’s alleged breaches of certain representations and warranties
 
in the related MLPA’s.
 
The Company
believes the demands are without merit and intends to defend against the demands
 
vigorously.
 
No provision or accrual has been
recorded as of December 31, 2021 related to the Citigroup demands.
Management is not aware of any other significant reported or unreported contingencies
 
at December 31, 2021.
NOTE 12.
 
INCOME TAXES
In 2021, the Company recorded an income tax benefit of $
0.4
 
million, including a $
2.2
 
million decrease in the deferred tax asset
valuation allowance as a result of management’s reassessment of the Company’s ability to
 
utilize net operating losses (“NOLs”) and
capital loss carryforwards to offset future taxable income. In 2020, the Company recorded
 
an income tax benefit of $
1.4
 
million,
including a $
0.3
 
million increase in the deferred tax asset valuation allowance as a result
 
of management’s reassessment of the
Company’s ability to utilize NOLs and capital loss carryforwards to offset future taxable income.
The income tax benefit included in the consolidated statements of operations consists
 
of the following for the years ended
December 31, 2021 and 2020:
(in thousands)
2021
2020
Current
$
-
$
10
Deferred
(368)
(1,379)
Income tax benefit, net
$
(368)
$
(1,369)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 84 -
The income tax provision differs from the amount computed by applying the federal income
 
tax statutory rate of 21 percent on
income or loss before income tax expense.
 
A reconciliation for the years ended December 31, 2021 and 2020 is
 
presented in the table
below.
(in thousands)
2021
2020
Federal tax benefit based on statutory rate applicable for each year
$
(19)
$
(1,440)
State income tax benefit
(8)
(302)
Non-deductible expenses
631
-
(Decrease) increase of deferred tax asset valuation allowance
(2,191)
349
Other
1,219
24
Income tax benefit
$
(368)
$
(1,369)
Deferred tax assets consisted of the following as of December 31, 2021
 
and 2020:
(in thousands)
2021
2020
Deferred tax assets:
Net operating loss carryforwards
$
58,391
$
58,701
Orchid Island Capital, Inc. common stock
3,198
3,083
MBS unrealized losses and gains
582
241
Capital loss carryforwards
1,423
2,573
Management agreement
813
813
Other
413
1,232
64,820
66,643
Valuation allowance
(29,784)
(31,975)
Net deferred tax assets
$
35,036
$
34,668
As of
 
December 31,
 
2021 and
 
2020, the
 
Company had
 
federal NOL
 
carryforwards of
 
approximately $
267.7
 
million and
 
$
268.9
 
million,
respectively, and Florida NOL
 
carryforwards of $
39.6
 
million and $
40.8
 
million, respectively. The NOL
 
carryforwards can
 
be used to
 
offset
future taxable income and will begin to expire in 2026.
In connection
 
with Orchid’s
 
2013 IPO,
 
Bimini Advisors
 
paid for,
 
and expensed
 
for GAAP
 
purposes, certain
 
offering costs
 
totaling
approximately
 
$
3.2
 
million.
 
For
 
tax
 
purposes,
 
these
 
offering
 
costs
 
created
 
an
 
intangible
 
asset
 
related
 
to
 
the
 
Orchid
 
management
agreement with a tax basis of
 
$
3.2
 
million. The deferred tax asset related
 
to the intangible asset at December
 
31, 2021 and 2020 totaled
$
0.8
 
million and $
0.8
 
million, respectively.
In assessing the
 
realizability of deferred tax assets,
 
management considers whether it
 
is more likely than
 
not that some portion
 
or
all of the deferred
 
tax assets will not
 
be realized. The ultimate realization
 
of capital loss and NOL
 
carryforwards is dependent upon the
generation
 
of
 
future
 
capital
 
gains
 
and
 
taxable
 
income
 
in
 
periods
 
prior
 
to
 
their
 
expiration.
 
The
 
valuation
 
allowance
 
is
 
based
 
on
management’s estimated
 
projections of
 
future taxable
 
income, and
 
the projected
 
ability to
 
utilize the
 
NOL carryforwards
 
to offset
 
that
projected taxable income before the NOLs expire. With respect to the taxable
 
income projections, management estimates the dividends
to be received on its Orchid share holdings as well as the management
 
fees and overhead sharing payments it will receive from Orchid.
With respect to the MBS portfolio, management makes estimates of various metrics such as the yields on the assets it plans to acquire,
its future funding and
 
interest costs, future
 
prepayment speeds and
 
net interest margin,
 
among others. Estimates are
 
also made for other
assets and expenses.
 
Changes in the taxable
 
income projections have a
 
direct impact on the
 
amount of the valuation
 
allowance, and
the impact
 
in any
 
reporting period
 
may be
 
significant. Utilization
 
of the
 
NOLs is
 
based on
 
these estimates
 
and the
 
assumptions that
management will be able to reinvest retained
 
earnings in order to grow the
 
MBS portfolio going forward and that
 
market value will not be
eroded due to adverse market conditions or hedging inefficiencies.
 
These estimates and assumptions may change from year to year to
the extent
 
Orchid’s book
 
value changes,
 
thus changing
 
projected management
 
fees and
 
overhead sharing
 
payments, and/or
 
market
conditions, including changes in interest rates, such that estimates
 
with respect to the portfolio metrics warrant revisions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 85 -
The Company
 
continues to
 
hold a
 
minimal amount
 
of residual
 
interests in
 
real estate
 
mortgage investment
 
conduits (“REMICs”),
some of which generate excess inclusion
 
income (“EII”).
 
These residual interests have no recorded
 
value on the balance sheet.
 
In its
2009
 
tax
 
return,
 
the
 
Company
 
disclosed
 
a
 
tax
 
filing
 
position
 
related
 
to
 
the
 
EII
 
taxable
 
income
 
and
 
has
 
since
 
included
 
a
 
notice
 
of
inconsistent treatment in its
 
tax returns to
 
disclose the position.
 
The tax filing
 
position will continue to
 
be disclosed with respect
 
to the
remaining securitizations as long as they are held.
The Company has
 
not identified any
 
unrecognized tax benefits
 
that would result
 
in liabilities its
 
consolidated financial statements.
The Company has not had any settlements in the current period with taxing
 
authorities and is not currently under audit. Additionally,
 
no
tax benefits have been recognized in the consolidated financial statements
 
as a result of a lapse of the applicable statute of limitations.
NOTE 13.
 
EARNINGS PER SHARE
Shares of
 
Class B common
 
stock, participating
 
and convertible
 
into Class
 
A common stock,
 
are entitled
 
to receive
 
dividends
 
in an
amount equal
 
to the dividends
 
declared
 
on each share
 
of Class A
 
common stock
 
if, and when,
 
authorized
 
and declared
 
by the Board
 
of
Directors.
 
The Class
 
B common stock
 
is included
 
in the computation
 
of basic EPS
 
using the
 
two-class
 
method, and
 
consequently
 
is
presented
 
separately
 
from Class
 
A common
 
stock. Shares
 
of Class
 
B common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A
EPS as the
 
conditions
 
for conversion
 
to Class A
 
common stock
 
were not
 
met at December
 
31, 2021 and
 
2020.
Shares of
 
Class C common
 
stock are
 
not included
 
in the basic
 
EPS computation
 
as these shares
 
do not have
 
participation
 
rights.
Shares of
 
Class C common
 
stock are
 
not included
 
in the computation
 
of diluted
 
Class A EPS
 
as the conditions
 
for conversion
 
to Class
 
A
common stock
 
were not
 
met at December
 
31, 2021
 
and 2020.
The table
 
below reconciles
 
the numerators
 
and denominators
 
of the basic
 
and diluted
 
EPS.
(in thousands, except per-share information)
2021
2020
Basic and diluted EPS per Class A common share:
Income (loss) attributable to Class A common shares:
Basic and diluted
$
274
$
(5,474)
Weighted average common shares:
Class A common shares outstanding at the balance sheet date
10,702
11,609
Effect of weighting
 
496
-
Weighted average shares-basic and diluted
11,198
11,609
Income (loss) per Class A common share:
Basic and diluted
$
0.02
$
(0.47)
(in thousands, except per-share information)
2021
2020
Basic and diluted EPS per Class B common share:
Income (loss) attributable to Class B common shares:
Basic and diluted
$
1
$
(15)
Weighted average common shares:
Class B common shares outstanding at the balance sheet date
32
32
Effect of weighting
 
-
-
Weighted average shares-basic and diluted
32
32
Income (loss) per Class B common share:
Basic and diluted
$
0.02
$
(0.47)
NOTE 14.
 
FAIR VALUE
- 86 -
Fair value
 
is the price
 
that would
 
be received
 
to sell an
 
asset or
 
paid to transfer
 
a liability
 
(an exit
 
price). A
 
fair value
 
measure should
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability, including
 
the assumptions
 
about the
 
risk inherent
in a particular
 
valuation
 
technique,
 
the effect
 
of a restriction
 
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required
disclosures
 
include stratification
 
of balance
 
sheet amounts
 
measured
 
at fair value
 
based on inputs
 
the Company
 
uses to derive
 
fair value
measurements.
 
These stratifications
 
are:
●
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical
 
assets or
 
liabilities
 
traded in
 
active markets
(which include
 
exchanges
 
and over-the-counter
 
markets with
 
sufficient
 
volume),
●
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical
 
or similar
 
instruments
 
in markets
 
that are
 
not active
 
and model-based
 
valuation
 
techniques
 
for which
 
all
significant
 
assumptions
 
are observable
 
in the market,
 
and
●
Level 3 valuations,
 
where the
 
valuation
 
is generated
 
from model-based
 
techniques
 
that use
 
significant
 
assumptions
 
not
observable
 
in the market,
 
but observable
 
based on
 
Company-specific
 
data. These
 
unobservable
 
assumptions
 
reflect the
Company’s own
 
estimates
 
for assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability. Valuation
techniques
 
typically
 
include option
 
pricing models,
 
discounted
 
cash flow
 
models and
 
similar techniques,
 
but may also
 
include
 
the
use of market
 
prices of
 
assets or
 
liabilities
 
that are
 
not directly
 
comparable
 
to the subject
 
asset or
 
liability.
MBS, Orchid
 
common stock,
 
retained
 
interests
 
and TBA
 
securities
 
were all
 
recorded
 
at fair value
 
on a recurring
 
basis during
 
2021 and
2020. When
 
determining
 
fair value
 
measurements,
 
the Company
 
considers
 
the principal
 
or most
 
advantageous
 
market in
 
which it
 
would
transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the asset.
 
When possible,
 
the Company
 
looks to
active and
 
observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
 
in active
 
markets, the
 
Company looks
 
to
market observable
 
data for
 
similar assets.
 
Fair value
 
measurements
 
for the retained
 
interests
 
are generated
 
by a model
 
that requires
management
 
to make a
 
significant
 
number of
 
assumptions,
 
and this
 
model resulted
 
in a value
 
of zero at
 
both December
 
31, 2021 and
2020.
 
The Company's
 
MBS and TBA
 
securities
 
are valued
 
using Level
 
2 valuations,
 
and such valuations
 
currently
 
are determined
 
by the
Company based
 
on independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, when
 
available.
 
Because the
 
price estimates
 
may vary,
the Company
 
must make
 
certain judgments
 
and assumptions
 
about the
 
appropriate
 
price to
 
use to calculate
 
the fair
 
values. The
 
Company
and the independent
 
pricing sources
 
use various
 
valuation
 
techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These
techniques
 
include observing
 
the most
 
recent market
 
for like
 
or identical
 
assets (including
 
security
 
coupon, maturity,
 
yield, and
 
prepayment
speeds), spread
 
pricing techniques
 
to determine
 
market credit
 
spreads (option
 
adjusted spread,
 
zero volatility
 
spread, spread
 
to the U.S.
Treasury curve
 
or spread
 
to a benchmark
 
such as a
 
TBA security),
 
and model
 
driven approaches
 
(the discounted
 
cash flow
 
method, Black
Scholes and
 
SABR models
 
which rely
 
upon observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
the volatility).
 
The
appropriate
 
spread pricing
 
method used
 
is based on
 
market convention.
 
The pricing
 
source determines
 
the spread
 
of recently
 
observed
trade activity
 
or observable
 
markets for
 
assets similar
 
to those
 
being priced.
 
The spread
 
is then adjusted
 
based on variances
 
in certain
characteristics
 
between the
 
market observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
of asset,
 
the expected
 
life
of the asset,
 
the stability
 
and predictability
 
of the expected
 
future cash
 
flows of
 
the asset,
 
whether
 
the coupon
 
of the asset
 
is fixed
 
or
adjustable,
 
the guarantor
 
of the security
 
if applicable,
 
the coupon,
 
the maturity, the
 
issuer, size of
 
the underlying
 
loans, year
 
in which
 
the
underlying
 
loans were
 
originated,
 
loan to value
 
ratio, state
 
in which the
 
underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
and other
 
variables
 
if appropriate.
 
The fair
 
value of the
 
security is
 
determined
 
by using the
 
adjusted
 
spread.
The Company’s
 
futures contracts
 
are Level
 
1 valuations,
 
as they are
 
exchange-traded
 
instruments
 
and quoted
 
market prices
 
are
readily available.
 
Futures contracts
 
are settled
 
daily. The Company’s
 
interest
 
rate swaps
 
and interest
 
rate swaptions
 
are Level 2
valuations.
 
The fair
 
value of interest
 
rate swaps
 
is determined
 
using a discounted
 
cash flow
 
approach
 
using forward
 
market interest
 
rates
and discount
 
rates, which
 
are observable
 
inputs. The
 
fair value
 
of interest
 
rate swaptions
 
is determined
 
using an option
 
pricing model.
The following
 
table presents
 
financial
 
assets and
 
liabilities
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
December
 
31, 2021
 
and
2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 87 -
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Fair Value
Assets
Inputs
Inputs
Measurements
(Level 1)
(Level 2)
(Level 3)
December 31, 2021
Mortgage-backed securities
$
60,803
$
-
$
60,803
$
-
Orchid Island Capital, Inc. common stock
11,679
11,679
-
-
December 31, 2020
Mortgage-backed securities
$
65,178
$
-
$
65,178
$
-
Orchid Island Capital, Inc. common stock
13,548
13,548
-
-
During the
 
years ended
 
December
 
31, 2021
 
and 2020,
 
there were
 
no transfers
 
of financial
 
assets or
 
liabilities
 
between levels
 
1, 2 or 3.
NOTE 15. SEGMENT INFORMATION
The Company’s operations are classified into two principal reportable segments; the asset
 
management segment and the
investment portfolio segment.
The asset management segment includes the investment advisory services provided by
 
Bimini Advisors to Orchid and Royal
Palm. As discussed in Note 2, the revenues of the asset management segment consist
 
of management fees and overhead
reimbursements received pursuant to a management agreement with Orchid.
 
Total revenue received under this management
agreement for the years ended December 31, 2021 and 2020, were approximately
 
$
9.8
 
million and $
6.8
 
million, respectively,
accounting for approximately
70
% and
55
% of consolidated revenues, respectively.
The investment portfolio segment includes the investment activities conducted
 
by Royal Palm.
 
The investment portfolio segment
receives revenue in the form of interest and dividend income on its investments.
Segment information for the years ended December 31, 2021 and 2020 is as follows:
(in thousands)
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2021
Advisory services, external customers
$
9,788
$
-
$
-
$
-
$
9,788
Advisory services, other operating segments
(1)
147
-
-
(147)
-
Interest and dividend income
-
4,262
-
-
4,262
Interest expense
-
(116)
(997)
(2)
-
(1,113)
Net revenues
9,935
4,146
(997)
(147)
12,937
Other (expense) income
-
(4,898)
154
(3)
-
(4,744)
Operating expenses
(4)
(5,676)
(2,609)
-
-
(8,285)
Intercompany expenses
(1)
-
(147)
-
147
-
Income (loss) before income taxes
$
4,259
$
(3,508)
$
(843)
$
-
$
(92)
Assets
$
1,901
$
111,022
$
9,162
$
 
-
$
122,085
Asset
Investment
Management
Portfolio
Corporate
Eliminations
Total
2020
Advisory services, external customers
$
6,795
$
-
$
-
$
-
$
6,795
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 88 -
Advisory services, other operating segments
(1)
152
-
-
(152)
-
Interest and dividend income
-
5,517
-
-
5,517
Interest expense
-
(1,074)
(1,151)
(2)
-
(2,225)
Net revenues
6,947
4,443
(1,151)
(152)
10,087
Other expense
-
(9,825)
(454)
(3)
-
(10,279)
Operating expenses
(4)
(3,653)
(3,014)
-
-
(6,667)
Intercompany expenses
(1)
-
(152)
-
152
-
Income (loss) before income taxes
$
3,294
$
(8,548)
$
(1,605)
$
-
$
(6,859)
Assets
$
1,469
$
113,764
$
13,468
$
 
-
$
128,701
(1)
Includes advisory services revenue received by Bimini Advisors from Royal Palm.
(2)
Includes interest on long-term debt.
(3)
Includes income recognized on the forgiveness of the PPP loan and gains (losses)
 
on Eurodollar futures contracts entered into as a hedge on
junior subordinated notes.
(4)
Corporate expenses are allocated based on each segment’s proportional
 
share of total revenues.
NOTE 16. RELATED PARTY TRANSACTIONS
Other Relationships with Orchid
At both December 31, 2021 and 2020, the Company owned
2,595,357
 
shares of Orchid common stock representing
approximately
1.5
% and
3.4
%, respectively, of Orchid’s outstanding common stock, on such dates. During the years ended December
31, 2021 and 2020, the Company received dividends on this common stock
 
investment of approximately $
2.0
 
million and $
1.8
 
million,
respectively.
Robert 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, is eligible to receive compensation
 
from Orchid and owns shares of common stock of
Orchid.
 
Hunter Haas, our Chief Financial Officer, Chief Investment Officer and Treasurer, also serves as Chief Financial Officer, Chief
Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors, is
 
eligible to receive compensation from
Orchid, and owns shares of common stock of Orchid.
 
Robert J. Dwyer and Frank E. Jaumot, our independent directors, each
 
own
shares of common stock of Orchid.
- 89 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
 
DISCLOSURE.
We had no
 
disagreements
 
with our
 
Independent
 
Registered
 
Public Accounting
 
Firm on any
 
matter of
 
accounting
 
principles
 
or
practices
 
or financial
 
statement
 
disclosure.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report (the “evaluation date”),
 
the Company carried out an evaluation, under the
supervision and with the participation of the Company’s management, including the Company’s Chief
 
Executive Officer (“the CEO”)
and Chief Financial Officer (“the CFO”), of the effectiveness of the design and operation of the Company’s disclosure
 
controls and
procedures, as defined in Rule 13a-15(e) under the Exchange Act of 1934 (the “Exchange
 
Act”). Based on this evaluation, the CEO
and CFO concluded that the Company’s disclosure controls and procedures, as designed
 
and implemented, were effective as of the
evaluation date (1) in ensuring that information regarding the Company
 
and its subsidiaries is accumulated and communicated to our
management, including our CEO and CFO, by our employees, as appropriate
 
to allow timely decisions regarding required disclosure
and (2) in providing reasonable assurance that information the Company must disclose
 
in its periodic reports under the Exchange Act
is recorded, processed, summarized and reported within the time periods
 
prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
 
There were no significant changes in the Company’s internal control over financial
 
reporting that occurred during the Company’s
most recent fiscal quarter that have materially affected, or are reasonably likely
 
to materially affect, the Company’s internal control over
financial reporting. In response to the COVID-19 pandemic, Company employees
 
began working from home on March 23, 2020 and
generally returned to the office in June 2021.
 
Management took measures to ensure that the Company’s internal control over financial
reporting were unchanged during this period.
Management’s Report of Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
 
adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules 13a-15(f) under
 
the Securities Exchange Act as a process designed by, or
under the supervision of, the Company’s principal executive and principal financial officers
 
and effected by the Company’s board of
directors, management and other personnel to provide reasonable assurance regarding
 
the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in
 
accordance with generally accepted accounting principles and
includes those policies and procedures that:
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
 
the transactions and dispositions of
the assets of the Company;
●
provide reasonable assurance that transactions are recorded as necessary to
 
permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and
 
that receipts and expenditures of the Company
are being made only in accordance with authorizations of management
 
and directors of the Company; and
●
provide reasonable assurance regarding prevention or timely detection of
 
unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may
 
not prevent or detect misstatements.
 
As a result,
even systems determined to be effective can provide only reasonable assurance regarding
 
the preparation and presentation of
consolidated financial statements.
 
Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks
that controls may become inadequate because of changes in conditions or that
 
the degree of compliance with the policies or
procedures may deteriorate.
- 90 -
 
The Company’s management assessed the effectiveness of the Company’s internal control over financial
 
reporting as of
December 31, 2021.
 
In making this assessment, the Company’s management used criteria
 
set forth in
Internal Control—Integrated
Framework (2013)
 
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 
Based on management’s assessment, the Company’s management believes that, as of December 31, 2021, the
 
Company’s
internal control over financial reporting was effective based on those criteria.
 
ITEM 9B.
 
OTHER INFORMATION.
 
None.
ITEM 9C.
 
DISCLOSURE
 
REGARDING
 
FOREIGN
 
JURISDICTIONS
 
THAT PREVENT INSPECTIONS.
 
Not applicable.
- 91 -
PART III
ITEM 10.
 
Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 and not otherwise set forth below is
 
incorporated herein by reference to the Company's
definitive Proxy Statement relating to the Company’s 2022 Annual Meeting of Stockholders,
 
which the Company expects to file with the
U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not
 
later than 120 days after December 31, 2021 (the "Proxy
Statement").
 
ITEM 11.
 
Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.
ITEM 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related
 
Stockholder Matters.
The information required by this Item 12 is incorporated herein by reference
 
to the Proxy Statement and to Part II, Item 5 of this
Form 10-K.
ITEM 13.
 
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference
 
to the Proxy Statement.
ITEM 14.
 
Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated herein by reference
 
to the Proxy Statement.
 
 
- 92 -
PART IV
ITEM 15.
 
Exhibits, Financial Statement Schedules.
a.
 
Financial Statements. The consolidated financial statements of the Company, together with the report of Independent
Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form
 
10-K and are incorporated herein by
reference.
 
The following information is filed as part of this Form 10-K:
Page
Report of Independent Registered Public Accounting Firm (BDO USA,
 
LLP;
West Palm Beach, FL; PCAOB ID#243)
63
Consolidated Balance Sheets
65
Consolidated Statements of Operations
 
66
Consolidated Statements of Equity
 
67
Consolidated Statements of Cash Flows
 
68
Notes to Consolidated Financial Statements
69
b.
 
Financial Statement Schedules.
 
Not applicable.
c.
 
Exhibits.
Exhibit No
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
- 93 -
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
.*
10.7
.*
21.1
**
31.1
**
31.2
**
32.1
***
32.2
***
101.INS
Instance Document****
101.SCH
Taxonomy Extension Schema Document****
101.CAL
Taxonomy Extension Calculation Linkbase Document****
101.DEF
Additional Taxonomy Extension Definition Linkbase Document****
101.LAB
Taxonomy Extension Label Linkbase Document****
101.PRE
Taxonomy Extension Presentation Linkbase Document****
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
 
Management compensatory plan or arrangement required to be filed by Item 601
 
of Regulation S-K.
**
 
Filed herewith.
***
 
Furnished herewith
****
 
Submitted electronically herewith.
ITEM 16.
 
Form 10-K Summary.
- 94 -
The Company has elected not to provide summary information.
 
 
 
 
 
 
 
 
- 95 -
Signatures
Pursuant to the requirements
 
of Section 13 or 15(d)
 
of the Securities Exchange
 
Act of 1934, as amended,
 
the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
BIMINI CAPITAL MANAGEMENT,
 
INC.
Date:
 
March 11, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chairman and Chief Executive Officer
Date:
 
March 11, 2022
By:
/s/ G. Hunter Haas, IV
G. Hunter Haas,
 
IV
President, Chief Financial Officer, Chief
Investment Officer and Treasurer (Principal
Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
 
persons on behalf of
the registrant and in the capacities indicated on March 11, 2022.
Signature
Capacity
/s/ Robert E. Cauley
Robert E. Cauley
Director, Chairman of the Board and
Chief Executive Officer
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
President, Chief Financial Officer, Chief Investment Officer and
Treasurer (Principal Financial Officer and Principal Accounting Officer)
/s/ Robert J. Dwyer
Robert J. Dwyer
Director
/s/ Frank E. Jaumot
Frank E. Jaumot
Director
Bimini Capital Management (QB) (USOTC:BMNM)
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