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, 2019
Commission File Number: 001-32171
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Bimini
Capital Management, Inc.
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(Exact
name of registrant as specified in its charter)
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Maryland
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72-1571637
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(State or other jurisdiction
of
incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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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
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Class A Common
Stock, $0.001 par value
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes ◻ No ý
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
ý
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
ý No ◻
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data
File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit
such files). Yes ý No ◻
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer
◻ Accelerated
filer ◻Non-accelerated filer ◻Smaller Reporting Company
ý
Emerging
growth company ◻
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ¨
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ◻ No ý
State the aggregate market value
of the voting stock held by non-affiliates of the Registrant as of
June 28, 2019:
Title of each Class
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Shares held by
non-affiliates
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Aggregate
market value held by non-affiliates
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Class A Common Stock, $0.001 par value
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8,627,677
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$19,600,000 (a)
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Class B Common Stock, $0.001 par value
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20,760
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$1,000 (b)
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Class C Common Stock, $0.001 par value
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31,938
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$1,500 (b)
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(a) The aggregate market value
was calculated by using the last sale price of the Class A Common
Stock as of June 28, 2019.
(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
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Latest
Practicable Date
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Shares
Outstanding
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Class A Common Stock, $0.001 par value
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March 27, 2020
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11,608,555
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Class B Common Stock, $0.001 par value
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March 27, 2020
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31,938
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Class C Common Stock, $0.001 par value
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March 27, 2020
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31,938
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrant’s
definitive Proxy Statement for its 2020 Annual Meeting of
Stockholders of the Registrant are incorporated by reference into
Part III of this Annual Report on Form 10‑K.
BIMINI
CAPITAL MANAGEMENT, INC.
INDEX
PART I
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ITEM 1.
Business.
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1
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ITEM 1A. Risk
Factors
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10
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ITEM 1B.
Unresolved Staff Comments.
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31
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ITEM 2.
Properties.
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31
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ITEM 3. Legal
Proceedings.
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31
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ITEM 4. Mine
Safety Disclosures.
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31
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PART II
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ITEM 5.
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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32
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ITEM 6.
Selected Financial Data.
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33
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ITEM 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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34
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ITEM 7A.
Quantitative and Qualitative Disclosures About Market
Risk.
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58
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ITEM 8.
Financial Statements and Supplementary Data.
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59
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ITEM 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
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92
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ITEM 9A.
Controls and Procedures.
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92
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ITEM 9B.
Other Information.
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93
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PART III
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ITEM 10. Directors, Executive Officers and Corporate
Governance.
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94
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ITEM 11.
Executive Compensation.
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94
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ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
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94
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ITEM 13.
Certain Relationships and Related Transactions, and Director
Independence.
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94
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ITEM 14.
Principal Accountant Fees and Services.
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94
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PART IV
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ITEM 15.
Exhibits and Financial Statement Schedules.
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95
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ITEM 16. Form
10-K Summary.
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96
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SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements
in this annual 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:
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our business and investment strategy;
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our expected operating results;
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our ability to acquire investments on attractive terms;
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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;
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the effect of changing interest rates on unemployment,
inflation and mortgage supply and demand;
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the effect of prepayment rates on the value of our
assets;
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our ability to access the capital markets;
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our ability to obtain future financing arrangements;
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our ability to successfully hedge the interest rate risk and
prepayment risk associated with our portfolio;
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the federal conservatorship of Fannie Mae and 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;
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our ability to make distributions to our stockholders in the
future;
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our understanding of our competition and our ability to
compete effectively;
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our ability to quantify risk based on historical
experience;
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our ability to use net operating loss (“NOLs”)carryforwards to
reduce our taxable income;
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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;
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the impact of possible future changes in tax laws or tax
rates;
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our ability to maintain our exemption from registration under
the Investment Company Act of 1940, as amended, or the Investment
Company Act;
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expected capital expenditures;
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the impact of technology on our operations and business,
and
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the eventual phase-out of the London Interbank Offered Rate
(“LIBOR”) index and its impact on our LIBOR sensitive assets,
liabilities and funding hedges
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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 Annual
Report on Form 10-K 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.
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”) in our own portfolio, and
serving as the external manager of Orchid Island Capital, Inc.
(“Orchid”) which also invests in MBS. In both cases, the
principal and interest payments of these MBS are guaranteed by the
Federal National Mortgage Association (“Fannie Mae”), the Federal
Home Loan Mortgage Corporation, (“Freddie Mac”) or the Government
National Mortgage Association (“Ginnie Mae” and, collectively with
Fannie Mae and Freddie Mac, “GSEs”) and are backed primarily by
single-family residential mortgage loans. We refer to these types
of MBS as Agency MBS. The investment strategy focuses on, and the
portfolios consist of, two categories of Agency MBS: (i)
traditional pass-through Agency MBS, 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:
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One-twelfth of 1.5% of the first $250 million of the Orchid’s
equity, as defined in the management agreement,
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One-twelfth of 1.25% of the Orchid’s equity that is greater
than $250 million and less than or equal to $500 million, and
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One-twelfth of 1.00% of the Orchid’s equity that is greater
than $500 million.
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Orchid is obligated to reimburse
Bimini Advisors for any direct expenses incurred on its
behalf. In addition, Bimini Advisors allocates to
Orchid its pro rata portion of certain overhead costs as set forth
in the management agreement. Should Orchid terminate the
management agreement without cause, it shall pay to Bimini Advisors
a termination fee equal to three times the average annual
management fee, as defined in the management agreement, before or
on the last day of the initial term or automatic renewal
term.
The Investment and Capital
Allocation Strategy
Investment Strategy
With respect to our own portfolio, the business objective is
to provide attractive risk-adjusted total returns to our investors
over the long term through a combination of capital appreciation
and interest income. We intend to achieve this objective by
investing in and strategically allocating capital between
pass-through Agency MBS and structured Agency MBS. We seek to
generate income from (i) the net interest margin on the leveraged
pass-through Agency MBS portfolio and the leveraged portion of the
structured Agency MBS portfolio, and (ii) the interest income we
generate from the unleveraged portion of the structured Agency MBS
portfolio. We also seek to minimize the volatility of both the net
asset value of, and income from, the portfolio through a process
which emphasizes capital allocation, asset selection, liquidity and
active interest rate risk management.
We fund the pass-through Agency MBS and certain of the
structured Agency MBS 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 four categories:
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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.
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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.
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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.
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CMOs. CMOs are a
type of MBS the principal and interest of which are paid, in most
cases, on a monthly basis. CMOs may be collateralized by whole
mortgage loans, but are more typically collateralized by portfolios
of mortgage pass-through securities issued directly by or under the
auspices of Ginnie Mae, Freddie Mac or Fannie Mae. CMOs are
structured into multiple classes, with each class bearing a
different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest
maturity class. Investors holding the longer maturity classes
receive principal only after the first class has been retired.
Generally, fixed-rate MBS are used to collateralize CMOs. However,
the CMO tranches need not all have fixed-rate coupons. Some CMO
tranches have floating rate coupons that adjust based on market
interest rates, subject to some limitations. Such tranches, often
called “CMO floaters,” can have relatively low price sensitivity to
interest rates.
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Structured Agency MBS
We also invest in structured Agency MBS, which include CMOs,
IOs, IIOs and POs. The payment of principal and interest, as
appropriate, on structured Agency MBS issued by Ginnie Mae, but not
the market value, is guaranteed by the full faith and credit of the
federal government. Payment of principal and interest, as
appropriate, on structured Agency MBS issued by Fannie Mae and
Freddie Mac, but not the market value, is guaranteed by the
respective agency issuing the security. The types of structured
Agency MBS in which we invest are described below.
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IOs. IOs represent
the stream of interest payments on a pool of mortgages, either
fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim
to any principal payments. The value of IOs depends primarily on
two factors, which are prepayments and interest rates. Prepayments
on the underlying pool of mortgages reduce the stream of interest
payments going forward, hence IOs are highly sensitive to
prepayment rates. IOs are also sensitive to changes in interest
rates. An increase in interest rates reduces the present value of
future interest payments on a pool of mortgages. On the other hand,
an increase in interest rates has a tendency to reduce prepayments,
which increases the expected absolute amount of future interest
payments.
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IIOs. IIOs
represent the stream of interest payments on a pool of mortgages
that underlie MBS, either fixed-rate mortgages or hybrid ARMs.
Holders of IIOs have no claim to any principal payments. The value
of IIOs depends primarily on three factors, which are prepayments,
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.
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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.
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Mortgage REIT Common Stock
We also maintain an investment in the common stock of
Orchid. Because Orchid is a mortgage REIT that invests
primarily in 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 may do so in the future.
Our investment strategy consists of the following
components:
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investing in pass-through Agency MBS and certain structured
Agency MBS on a leveraged basis to increase returns on the capital
allocated to this portfolio;
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investing in certain structured Agency MBS, such as IOs and
IIOs, generally on an unleveraged basis in order to (i) increase
returns due to the structural leverage contained in such
securities, (ii) enhance liquidity due to the fact that these
securities will be unencumbered or, when encumbered, the cash from
such borrowings may be retained and (iii) diversify portfolio
interest rate risk due to the different interest rate sensitivity
these securities have compared to pass-through Agency MBS;
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investing in Agency MBS in order to minimize credit
risk;
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investing in REIT common stock;
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investing in assets that will cause us to maintain our
exclusion from regulation as an investment company under the
Investment Company Act.
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Our management 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.
Over time, we will modify our investment strategy as market
conditions change to seek to maximize the returns from our
investment portfolio. We believe that this strategy will
enable us to provide attractive long-term returns to our
stockholders.
Capital Allocation Strategy
The percentage of capital invested in our two asset categories
will vary and will be managed in an effort to maintain the level of
income generated by the combined portfolios, the stability of that
income stream and the stability of the value of the combined
portfolios. Typically, pass-through Agency MBS and structured
Agency MBS exhibit materially different sensitivities to movements
in interest rates. Declines in the value of one portfolio may be
offset by appreciation in the other, although we cannot assure you
that this will be the case. Additionally, we will seek to maintain
adequate liquidity as we allocate capital.
We allocate our capital to assist our interest rate risk
management efforts. The unleveraged portfolio does not require
unencumbered cash or cash equivalents to be maintained in
anticipation of possible margin calls. To the extent more capital
is deployed in the unleveraged portfolio, our liquidity needs will
generally be less.
During periods of rising interest rates, refinancing
opportunities available to borrowers typically decrease because
borrowers are not able to refinance their current mortgage loans
with new mortgage loans at lower interest rates. In such instances,
securities that are highly sensitive to refinancing activity, such
as IOs and IIOs, typically increase in value. Our capital
allocation strategy allows us to redeploy our capital into such
securities when and if we believe interest rates will be higher in
the future, thereby allowing us to hold securities the value of
which we believe is likely to increase as interest rates rise.
Also, by being able to re-allocate capital into structured Agency
MBS, such as IOs, during periods of rising interest rates, we may
be able to offset the likely decline in the value of our
pass-through Agency MBS, which are negatively impacted by rising
interest rates.
Financing Strategy
We borrow against our Agency MBS and certain of our structured
Agency MBS using short-term repurchase agreements. Our borrowings
currently consist of short-term repurchase agreements. We may use
other sources of leverage, such as secured or unsecured debt or
issuances of preferred stock. We do not have a policy limiting the
amount of leverage we may incur. However, we generally expect that
the ratio of our total liabilities compared to our equity, which we
refer to as our leverage ratio, will be less than 12 to 1. Our
amount of leverage may vary depending on market conditions and
other factors that we deem relevant.
We allocate our capital between two sub-portfolios. The
pass-through Agency MBS portfolio will be leveraged generally
through repurchase agreement funding. The structured Agency MBS
portfolio generally will not be leveraged. The leverage ratio is
calculated by dividing our total liabilities by total stockholders’
equity at the end of each period. The amount of leverage typically
will be a function of the capital allocated to the pass-through
Agency MBS portfolio and the amount of haircuts required by our
lenders on our borrowings. When the capital allocation to the
pass-through Agency MBS portfolio is high, we expect that the
leverage ratio will be high because more capital is being
explicitly leveraged and less capital is un-leveraged. If the
haircuts required by our lenders on our borrowings are higher, all
else being equal, our leverage will be lower because our lenders
will lend less against the value of the capital deployed to the
pass-through Agency MBS portfolio. The allocation of capital
between the two portfolios will be a function of several
factors:
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The relative durations of the respective portfolios — We
generally seek to have a combined 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.
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The relative attractiveness of pass-through securities versus
structured securities — To the extent we believe the expected
returns of one type of security are higher than the other, we will
allocate more capital to the more attractive securities, subject to
the caveat that its combined duration remains at or near
zero.
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Liquidity — We seek to maintain adequate cash and unencumbered
securities relative to our repurchase agreement borrowings well in
excess of anticipated price or prepayment related margin calls from
our lenders. To the extent we feel price or prepayment related
margin calls will be higher/lower, we will typically allocate
less/more capital to the pass-through Agency MBS portfolio. Our
pass-through Agency MBS portfolio likely will be our only source of
price or prepayment related margin calls because we generally will
not apply leverage to our structured Agency MBS portfolio. From
time to time we may pledge a portion of our structured securities
and retain the cash derived so it can be used to enhance our
liquidity.
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Risk Management
We invest in Agency MBS to mitigate credit risk. Additionally,
our Agency MBS are backed by a diversified base of mortgage loans
to mitigate geographic, loan originator and other types of
concentration risks.
Interest Rate Risk
Management
We believe that the risk of adverse interest rate movements
represents the most significant risk to the value of our portfolio.
This risk arises because (i) the interest rate indices used to
calculate the interest rates on the mortgages underlying our assets
may be different from the interest rate indices used to calculate
the interest rates on the related borrowings, and (ii) interest
rate movements affecting our borrowings may not be reasonably
correlated with interest rate movements affecting our assets. We
attempt to mitigate our interest rate risk by using the techniques
described below:
Agency MBS Backed by
ARMs. We seek to minimize the differences between interest
rate indices and interest rate adjustment periods of our Agency MBS
backed by ARMs and related borrowings. At the time of funding, we
typically align (i) the underlying interest rate index used to
calculate interest rates for our Agency MBS backed by ARMs and the
related borrowings and (ii) the interest rate adjustment periods
for our Agency MBS backed by ARMs and the interest rate adjustment
periods for our related borrowings. As our borrowings mature or are
renewed, we may adjust the index used to calculate interest
expense, the duration of the reset periods and the maturities of
our borrowings.
Agency MBS Backed by
Fixed-Rate Mortgages. As interest rates rise, our borrowing
costs increase; however, the income on our Agency MBS backed by
fixed-rate mortgages remains unchanged. We may seek to limit
increases to our borrowing costs through the use of interest rate
swap or cap agreements, options, put or call agreements, futures
contracts, forward rate agreements or similar financial instruments
to economically convert our floating-rate borrowings into
fixed-rate borrowings.
Agency MBS Backed by Hybrid
ARMs. During the fixed-rate period of our Agency MBS backed
by hybrid ARMs, the security is similar to Agency MBS backed by
fixed-rate mortgages. During this period, we may employ the same
hedging strategy that we employ for our Agency MBS backed by
fixed-rate mortgages. Once our Agency MBS backed by hybrid ARMs
convert to floating rate securities, we may employ the same hedging
strategy as we employ for our Agency MBS backed by ARMs.
Derivative
Instruments. We enter into derivative instruments to
economically hedge against the possibility that rising rates may
adversely impact the cost of our repurchase agreement
liabilities. The principal instruments that the Company has
used to date are Eurodollar, 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)
extended to borrowers with credit histories weak enough to not be
eligible to refinance their mortgage loans, (iii) that are newly
originated fixed-rate or hybrid ARMs or (iv) that have interest
rates low enough such that a borrower would likely have little
incentive to refinance. To protect against decreases in prepayment
rates, we may also invest in Agency MBS backed by mortgages with
characteristics opposite to those described above, which would
typically be more likely to be refinanced. We may also invest in
certain types of structured Agency MBS as a means of mitigating our
portfolio-wide prepayment risks. For example, certain tranches of
CMOs are less sensitive to increases in prepayment rates, and we
may invest in those tranches as a means of hedging against
increases in prepayment rates.
Liquidity Management Strategy
Because of our use of leverage, we manage liquidity to meet
our lenders’ margin calls by maintaining cash balances or
unencumbered assets well in excess of anticipated margin calls; and
making margin calls on our lenders when we have an excess of
collateral pledged against our borrowings.
We also attempt to minimize the number of margin calls we
receive by:
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Deploying capital from our leveraged Agency MBS portfolio to
our unleveraged Agency MBS portfolio;
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Investing in Agency MBS backed by mortgages that we believe
are less likely to be prepaid to decrease the risk of excessive
margin calls when monthly prepayments are announced. Prepayments
are declared, and the market value of the related security
declines, before the receipt of the related cash flows. Prepayment
declarations give rise to a temporary collateral deficiency and
generally result in margin calls by lenders;
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Investing in REIT common stock; and
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Reducing our overall amount of leverage.
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To the extent we are unable to adequately manage our interest
rate exposure and are subjected to substantial margin calls, we may
be forced to sell assets at an inopportune time which in turn could
impair our liquidity and reduce our borrowing capacity and book
value.
Investment Company Act
Exemption
We operate our business so that we are exempt from
registration under the Investment Company Act. We rely on the
exemption provided by Section 3(c)(5)(C) of the Investment Company
Act, which applies to companies in the business of purchasing or
otherwise acquiring mortgages and other liens on, and interests in,
real estate. In order to rely on the exemption provided by Section
3(c)(5)(C), we must maintain at least 55% of our assets in
qualifying real estate assets. For the purposes of this test,
structured Agency MBS are non-qualifying real estate assets. We
monitor our portfolio periodically and prior to each investment to
confirm that we continue to qualify for the exemption. To qualify
for the exemption, we make investments so that at least 55% of the
assets we own consist of qualifying mortgages and other liens on
and interests in real estate, which we refer to as qualifying real
estate assets, and so that at least 80% of the assets we own
consist of real estate-related assets, including our qualifying
real estate assets.
We treat whole-pool pass-through Agency MBS as qualifying real
estate assets based on no-action letters issued by the staff of the
SEC. In August 2011, the SEC, through a concept release, requested
comments on interpretations of Section 3(c)(5)(C). To the extent
that the SEC or its staff publishes new or different guidance with
respect to these matters, we may fail to qualify for this
exemption. We manage our pass-through Agency MBS portfolio such
that we have sufficient whole-pool pass-through Agency MBS to
ensure we maintain our exemption from registration under the
Investment Company Act. At present, we generally do not expect that
our investments in structured Agency MBS will constitute qualifying
real estate assets, but will constitute real estate-related assets
for purposes of the Investment Company Act.
Employees
As of December 31, 2019, we had 7 full-time employees.
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 www.biminicapital.com.
We make available on the website under "Financial Information/SEC
filings," free of charge, our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and
any other reports (including any amendments to such reports) as
soon as reasonably practicable after we electronically file or
furnish such materials to the SEC. Information on our website,
however, is not part of this Annual Report on Form 10-K. In
addition, all of our filed reports can be obtained at the SEC’s
website at www.sec.gov.
ITEM 1A. RISK FACTORS.
You should
carefully consider the risks described below and all other
information contained in this Annual Report on Form 10-K, including
our annual consolidated financial statements and related notes
thereto, before making an investment decision regarding our common
stock. Our business, financial condition or results of operations
could be harmed by any of these risks. Similarly, these risks could
cause the market price of our common stock to decline and you might
lose all or part of your investment. Our forward-looking statements
in this annual report are subject to the following risks and
uncertainties. Our actual results could differ materially from
those anticipated by our forward-looking statements as a result of
the risk factors below.
Risks Related to Our Business
Increases in
interest rates may negatively affect the value of our investments
and increase the cost of our borrowings, which could result in
reduced earnings or losses.
Under a normal yield curve, an
investment in Agency MBS will decline in value if interest rates
increase. In addition, net interest income could decrease if the
yield curve becomes inverted or flat. While Fannie Mae, Freddie Mac
or Ginnie Mae guarantee the principal and interest payments related
to the Agency MBS we own, this guarantee does not protect us from
declines in market value caused by changes in interest rates.
Declines in the market value of our investments may ultimately
result in losses to us, which may reduce earnings and cash
available to fund our operations.
Significant increases in both
long-term and short-term interest rates pose a substantial risk
associated with our investment in Agency MBS. If long-term rates
were to increase significantly, the market value of our Agency MBS
would decline, and the duration and weighted average life of the
investments would increase. We could realize a loss if the
securities were sold. At the same time, an increase in short-term
interest rates would increase the amount of interest owed on our
repurchase agreements used to finance the purchase of Agency MBS,
which would decrease cash. Using this business model, we are
particularly susceptible to the effects of an inverted yield curve,
where short-term rates are higher than long-term rates. Although
rare in a historical context, the U.S. and many countries in Europe
have experienced inverted yield curves. Given the volatile nature
of the U.S. economy and the Fed’s possible future increases in
short-term interest rates, there can be no guarantee that the yield
curve will not become and/or remain inverted. If this occurs, it
could result in a decline in the value of our Agency MBS, our
business, financial position and results of operations.
An increase in
interest rates may also cause a decrease in the volume of newly
issued, or investor demand for, Agency MBS, which could materially
adversely affect our ability to acquire assets that satisfy our
investment objectives and our business, financial condition and
results of operations.
Rising interest rates generally
reduce the demand for consumer credit, including mortgage loans,
due to the higher cost of borrowing. A reduction in the volume of
mortgage loans may affect the volume of Agency MBS available to us,
which could affect our ability to acquire assets that satisfy our
investment objectives. Rising interest rates may also cause Agency
MBS that were issued prior to an interest rate increase to provide
yields that exceed prevailing market interest rates. If rising
interest rates cause us to be unable to acquire a sufficient volume
of Agency MBS or Agency MBS with a yield that exceeds our borrowing
costs, our ability to satisfy our investment objectives and to
generate income, our business, financial condition and results of
operations.
Interest rate
mismatches between our Agency MBS and our borrowings may reduce our
net interest margin during periods of changing interest rates,
which could materially adversely affect our business, financial
condition and results of operations.
Our portfolio includes Agency MBS
backed by ARMs, hybrid Arms and fixed-rate mortgages, and the mix
of these securities in the portfolio may be increased or decreased
over time. Additionally, the interest rates on ARMs and hybrid ARMs
may vary over time based on changes in a short-term interest rate
index, of which there are many.
We finance our acquisitions of
pass-through Agency MBS with short-term financing. During periods
of rising short-term interest rates, the income we earn on these
securities will not change (with respect to Agency MBS backed by
fixed-rate mortgage loans) or will not increase at the same rate
(with respect to Agency MBS backed by ARMs and hybrid ARMs) as our
related financing costs, which may reduce our net interest margin
or result in losses.
We invest in
structured Agency MBS, including 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
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.
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 RMBS 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. In addition to FHFA becoming the
conservator of Fannie Mae and Freddie Mac, the U.S. Department of
the 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 Department 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.
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 RMBS and could have broad adverse market implications. If
Fannie Mae or Freddie Mac was eliminated, or their structures were
to change in a material manner that is not compatible with our
business model, we would not be able to acquire Agency RMBS from
these entities, which could adversely affect our business
operations.
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 Uniform Mortgage Backed Securities
(“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.
The FHFA recently released a
Request For Input regarding pooling practices and other topics
relating to aligning the prepayment speeds of UMBS issued by each
of the Enterprises. There is no certainty about what, if any,
changes may result from the Request For Input. Some of the
proposals described in the Request For Input, if implemented, could
negatively impact the Agency RMBS market and could make it more
difficult for us to comply with our exemption from registration
under the Investment Company Act.
Purchases and
sales of Agency MBS by the Fed may adversely affect the price and
return associated with Agency MBS.
The Fed owns approximately $1.4 trillion of Agency RMBS as of
December 31, 2019. Starting in October 2017, the Fed began to phase
out its policy of reinvesting principal payments from its holdings
of Agency RMBS into new Agency RMBS purchases, therefore causing a
decline in Fed security holdings over time. While it is very
difficult to predict the impact of the Fed portfolio runoff on the
prices and liquidity of Agency RMBS, returns on Agency RMBS may be
adversely affected.
Increased
levels of prepayments on the mortgages underlying our Agency MBS
might decrease net interest income or result in a net loss, which
could materially adversely affect our business, financial condition
and results of operations.
In the case of residential
mortgages, there are seldom any restrictions on borrowers’ ability
to prepay their loans. Prepayment rates generally increase
when interest rates fall and decrease when interest rates rise.
Prepayment rates also may be affected by other factors, including,
without limitation, conditions in the housing and financial
markets, governmental action, general economic conditions and the
relative interest rates on ARMs, hybrid ARMs and fixed-rate
mortgage loans. With respect to pass-through Agency MBS,
faster-than-expected prepayments could also materially adversely
affect our business, financial condition and results of operations
in various ways, including, if we are unable to quickly acquire new
Agency MBS that generate comparable returns to replace the prepaid
Agency MBS.
When we acquire structured Agency
MBS, we anticipate that the underlying mortgages will prepay at a
projected rate, generating an expected yield. When the prepayment
rates on the mortgages underlying our structured Agency MBS are
higher than expected, our returns on those securities may be
materially adversely affected. For example, the value of our IOs
and IIOs are extremely sensitive to prepayments because holders of
these securities do not have the right to receive any principal
payments on the underlying mortgages. Therefore, if the mortgage
loans underlying our IOs and IIOs are prepaid, such securities
would cease to have any value, which, in turn, could materially
adversely affect our business, financial condition and results of
operations.
While we seek to minimize
prepayment risk, we must balance prepayment risk against other
risks and the potential returns of each investment. No strategy can
completely insulate us from prepayment or other such risks.
A decrease in
prepayment rates on the mortgages underlying our Agency MBS might
decrease net interest income or result in a net loss, which could
materially adversely affect our business, financial condition and
results of operations.
Certain of our structured Agency
MBS may be adversely affected by a decrease in prepayment rates.
For example, because POs are similar to zero-coupon bonds, our
expected returns on such securities will be contingent on our
receiving the principal payments of the underlying mortgage loans
at expected intervals that assume a certain prepayment rate. If
prepayment rates are lower than expected, we will not receive
principal payments as quickly as we anticipated and, therefore, our
expected returns on these securities will be adversely affected,
which, in turn, could materially adversely affect our business,
financial condition and results of operations.
While we seek to minimize
prepayment risk, we must balance prepayment risk against other
risks and the potential returns of each investment. No strategy can
completely insulate us from prepayment or other such risks.
Interest rate
caps on the ARMs and hybrid ARMs backing our Agency MBS may reduce
our net interest margin during periods of rising interest rates,
which could materially adversely affect our business, financial
condition and results of operations.
ARMs and hybrid ARMs are typically
subject to periodic and lifetime interest rate caps. Periodic
interest rate caps limit the amount an interest rate can increase
during any given period. Lifetime interest rate caps limit the
amount an interest rate can increase through the maturity of the
loan. Our borrowings typically are not subject to similar
restrictions. Accordingly, in a period of rapidly increasing
interest rates, our financing costs could increase without
limitation while caps could limit the interest we earn on the ARMs
and hybrid ARMs backing our Agency MBS. This problem is magnified
for ARMs and hybrid ARMs that are not fully indexed because such
periodic interest rate caps prevent the coupon on the security from
fully reaching the specified rate in one reset. Further, some ARMs
and hybrid ARMs may be subject to periodic payment caps that result
in a portion of the interest being deferred and added to the
principal outstanding. As a result, we may receive less cash income
on Agency MBS backed by ARMs and hybrid ARMs than necessary to pay
interest on our related borrowings. Interest rate caps on Agency
MBS backed by ARMs and hybrid ARMs could reduce our net interest
margin if interest rates were to increase beyond the level of the
caps, which could materially adversely affect our business,
financial condition and results of operations.
Failure to procure adequate repurchase agreement financing, or to
renew or replace existing repurchase agreement financing as it
matures, could materially adversely affect our business, financial
condition and results of operations.
We intend to maintain master
repurchase agreements with several counterparties. We cannot assure
you that any, or sufficient, repurchase agreement financing will be
available to us in the future on terms that are acceptable to us.
Any decline in the value of Agency MBS, or perceived market
uncertainty about their value, would make it more difficult for us
to obtain financing on favorable terms or at all, or maintain our
compliance with the terms of any financing arrangements already in
place. We may be unable to diversify the credit risk associated
with our lenders. In the event that we cannot obtain sufficient
funding on acceptable terms, our business, financial condition and
results of operations may be adversely affected.
Furthermore, because we intend to
rely primarily on short-term borrowings to fund our acquisition of
Agency MBS, our ability to achieve our investment 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.
Hedging against
interest rate exposure may not completely insulate us from interest
rate risk and could materially adversely affect our business,
financial condition and results of operations.
We may enter into interest rate cap
or swap agreements or pursue other hedging strategies, including
the purchase of puts, calls or other options and futures contracts
in order to hedge the interest rate risk of our portfolio. In
general, our hedging strategy depends on our view of our entire
portfolio consisting of assets, liabilities and derivative
instruments, in light of prevailing market conditions. We could
misjudge the condition of our investment portfolio or the market.
Our hedging activity will vary in scope based on the level and
volatility of interest rates and principal prepayments, the type of
Agency MBS we hold and other changing market conditions. Hedging
may fail to protect or could adversely affect us because, among
other things:
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hedging can be expensive, particularly during periods of
rising and volatile interest rates;
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available interest rate hedging may not correspond directly
with the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the
related liability;
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certain types of hedges may expose us to risk of loss beyond
the fee paid to initiate the hedge;
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the credit quality of the counterparty on the hedge may be
downgraded to such an extent that it impairs our ability to sell or
assign our side of the hedging transaction; and
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the counterparty in the hedging transaction may default on its
obligation to pay.
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There are no perfect hedging
strategies, and interest rate hedging may fail to protect us from
loss. Alternatively, we may fail to properly assess a risk to our
investment portfolio or may fail to recognize a risk entirely,
leaving us exposed to losses without the benefit of any offsetting
hedging activities. The derivative financial instruments we select
may not have the effect of reducing our interest rate risk. The
nature and timing of hedging transactions may influence the
effectiveness of these strategies. Poorly designed strategies or
improperly executed transactions could actually increase our risk
and losses. In addition, hedging activities could result in losses
if the event against which we hedge does not occur.
Because of the foregoing risks, our
hedging activity could materially adversely affect our business,
financial condition and results of operations.
Our use of
certain hedging techniques may expose us to counterparty
risks.
To the extent that our hedging
instruments are not traded on regulated exchanges, guaranteed by an
exchange or its clearinghouse, or regulated by any U.S. or foreign
governmental authorities, there may not be requirements with
respect to record keeping, financial responsibility or segregation
of customer funds and positions. Furthermore, the enforceability of
agreements underlying hedging transactions may depend on compliance
with applicable statutory, exchange and other regulatory
requirements and, depending on the domicile of the counterparty,
applicable international requirements. Consequently, if any of
these issues causes a counterparty to fail to perform under a
derivative agreement we could incur a significant loss.
For example, if a swap exchange
utilized in an interest rate swap agreement that we enter into as
part of our hedging strategy cannot perform under the terms of the
interest rate swap agreement, we may not receive payments due under
that agreement, and, thus, we may lose any potential benefit
associated with the interest rate swap. Additionally, we may also
risk the loss of any collateral we have pledged to secure our
obligations under these swap agreements if the exchange becomes
insolvent or files for bankruptcy. Similarly, if an interest rate
swaption counterparty fails to perform under the terms of the
interest rate swaption agreement, in addition to not being able to
exercise or otherwise cash settle the agreement, we could also
incur a loss for the premium paid for that swaption.
Our use of
leverage could materially adversely affect our business, financial
condition and results of operations.
We calculate our leverage ratio by
dividing our total liabilities by total equity at the end of each
period. Under normal market conditions, we generally expect
our leverage ratio to be less than 12 to 1, although at times our
borrowings may be above or below this level. We incur this
indebtedness by borrowing against a substantial portion of the
market value of our pass-through Agency RMBS and a portion of our
structured Agency RMBS. 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 RMBS 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 RMBS and a portion of our
structured Agency RMBS under repurchase agreements. A decline in
the market value of the pass-through Agency RMBS or structured
Agency RMBS 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 RMBS 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 RMBS, 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 a "pair
off"), net settling the paired off positions for cash, and
simultaneously purchasing a similar TBA contract for a later
settlement date, collectively referred to as a "dollar roll." The
Agency MBS purchased for a forward settlement date under the TBA
contract are typically priced at a discount to Agency MBS for
settlement in the current month. This difference (or discount) is
referred to as the "price drop." The price drop is the economic
equivalent of net interest income earned from carrying the
underlying Agency MBS over the roll period (interest income less
implied financing cost). Consequently, dollar roll transactions and
such forward purchases of Agency MBS represent a form of
off-balance sheet financing and increase our "at risk"
leverage.
Under certain market conditions,
TBA dollar roll transactions may result in negative carry income
whereby the Agency MBS purchased for a forward settlement date
under the TBA contract are priced at a premium to Agency MBS for
settlement in the current month. Additionally, sales of some or all
of the Fed's holdings of Agency MBS or declines in purchases of
Agency MBS by the Fed could adversely impact the dollar roll
market. Under such conditions, it may be uneconomical to roll our
TBA positions prior to the settlement date and we could have to
take physical delivery of the underlying securities and settle our
obligations for cash. We may not have sufficient funds or
alternative financing sources available to settle such obligations.
In addition, pursuant to the margin provisions established by the
Mortgage-Backed Securities Division ("MBSD") of the Fixed Income
Clearing Corporation, we are subject to margin calls on our TBA
contracts. Further, our clearing and custody agreements may require
us to post additional margin above the levels established by the
MBSD. Negative carry income on TBA dollar roll transactions or
failure to procure adequate financing to settle our obligations or
meet margin calls under our TBA contracts could result in defaults
or force us to sell assets under adverse market conditions and
adversely affect our financial condition and results of
operations.
Our forward
settling transactions, including TBA transactions, subject us to
certain risks, including price risks and counterparty risks.
We purchase some of our Agency
MBS through forward settling transactions, including TBAs. In a
forward settling transaction, we enter into a forward purchase
agreement with a counterparty to purchase either (i) an identified
Agency MBS, or (ii) a TBA, or to-be-issued, Agency MBS with certain
terms. As with any forward purchase contract, the value of the
underlying Agency MBS may decrease between the trade date and the
settlement date. Furthermore, a transaction counterparty may fail
to deliver the underlying Agency MBS at the settlement date. If any
of these risks were to occur, our financial condition and results
of operations may be materially adversely affected.
We rely on
analytical models and other data to analyze potential asset
acquisition and disposition opportunities and to manage our
portfolio. Such models and other data may be incorrect, misleading
or incomplete, which could cause us to purchase assets that do not
meet our expectations or to make asset management decisions that
are not in line with our strategy.
We rely on analytical models, and
information and other data supplied by third parties. These models
and data may be used to value assets or potential asset
acquisitions and dispositions and in connection with our asset
management activities. If our models and data prove to be
incorrect, misleading or incomplete, any decisions made in reliance
thereon could expose us to potential risks.
Our reliance on models and data may
induce us to purchase certain assets at prices that are too high,
to sell certain other assets at prices that are too low or to miss
favorable opportunities altogether. Similarly, any hedging
activities that are based on faulty models and data may prove to be
unsuccessful.
Some models, such as prepayment
models, may be predictive in nature. The use of predictive models
has inherent risks. For example, such models may incorrectly
forecast future behavior, leading to potential losses. In addition,
the predictive models used by us may differ substantially from
those models used by other market participants, resulting in
valuations based on these predictive models that may be
substantially higher or lower for certain assets than actual market
prices. Furthermore, because predictive models are usually
constructed based on historical data supplied by third parties, the
success of relying on such models may depend heavily on the
accuracy and reliability of the supplied historical data, and, in
the case of predicting performance in scenarios with little or no
historical precedent (such as extreme broad-based declines in home
prices, or deep economic recessions or depressions), such models
must employ greater degrees of extrapolation and are therefore more
speculative and less reliable.
All valuation models rely on
correct market data input. If incorrect market data is entered into
even a well-founded valuation model, the resulting valuations will
be incorrect. However, even if market data is inputted correctly,
“model prices” will often differ substantially from market prices,
especially for securities with complex characteristics or whose
values are particularly sensitive to various factors. If our market
data inputs are incorrect or our model prices differ substantially
from market prices, our business, financial condition and results
of operations could be materially adversely affected.
Valuations of
some of our assets are inherently uncertain, may be based on
estimates, may fluctuate over short periods of time and may differ
from the values that would have been used if a ready market for
these assets existed. As a result, the values of some of our assets
are uncertain.
While in many cases our
determination of the fair value of our assets is based on
valuations provided by third-party dealers and pricing services, we
can and do value assets based upon our judgment, and such
valuations may differ from those provided by third-party dealers
and pricing services. Valuations of certain assets are often
difficult to obtain or are unreliable. In general, dealers and
pricing services heavily disclaim their valuations. Additionally,
dealers may claim to furnish valuations only as an accommodation
and without special compensation, and so they may disclaim any and
all liability for any direct, incidental or consequential damages
arising out of any inaccuracy or incompleteness in valuations,
including any act of negligence or breach of any warranty.
Depending on the complexity and illiquidity of an asset, valuations
of the same asset can vary substantially from one dealer or pricing
service to another. The valuation process during times of market
distress can be particularly difficult and unpredictable and during
such time the disparity of valuations provided by third-party
dealers can widen.
Our business, financial condition
and results of operations 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 ot the repurchase term, or if the
value of the Agency MBS has declined by the end of the repurchase
transaction term or if we default on our obligations under the
repurchase transaction, we will lose money on these transactions,
which, in turn, may materially adversely affect our business,
financial condition and results of operations.
When we engage in a repurchase
transaction, we initially sell securities to the financial
institution under one of our master repurchase agreements in
exchange for cash, and our counterparty is obligated to resell the
securities to us at the end of the term of the transaction, which
is typically from 24 to 90 days but may be up to 364 days or more.
The cash we receive when we initially sell the securities is less
than the value of those securities, which is referred to as the
haircut. Many financial institutions from which we may obtain
repurchase agreement financing have increased their haircuts in the
past and may do so again in the future. If these haircuts are
increased, we will be required to post additional cash or
securities as collateral for our Agency MBS. If our counterparty
defaults on its obligation to resell the securities to us, we would
incur a loss on the transaction equal to the amount of the haircut
(assuming there was no change in the value of the securities). We
would also lose money on a repurchase transaction if the value of
the underlying securities had declined as of the end of the
transaction term, as we would have to repurchase the securities for
their initial value but would receive securities worth less than
that amount. Any losses we incur on our repurchase transactions
could materially adversely affect our business, financial condition
and results of operations.
If we default on one of our
obligations under a repurchase transaction, the counterparty can
terminate the transaction and cease entering into any other
repurchase transactions with us. In that case, we would likely need
to establish a replacement repurchase facility with another
financial institution in order to continue to leverage our
portfolio and carry out our investment strategy. There is no
assurance we would be able to establish a suitable replacement
facility on acceptable terms or at all.
We have issued
long-term debt to fund our operations which can increase the
volatility of our earnings and stockholders’ equity.
In October 2005, Bimini Capital
completed a private offering of trust preferred securities of
Bimini Capital Trust II, of which $26.8 million are still
outstanding. The Company must pay interest on these junior
subordinated notes on a quarterly basis at a rate equal to current
three month LIBOR rate plus 3.5%. To the extent the Company’s
does not generate sufficient earnings to cover the interest
payments on the debt, our earnings and stockholders’ equity may be
negatively impacted.
The Company considers the junior
subordinated notes as part of its long-term capital base.
Therefore, for purposes of all disclosure in this report concerning
our capital or leverage, the Company considers both stockholders’
equity and the $26.8 million of junior subordinated notes to
constitute capital.
The Company has also elected to
account for its investments in MBS under the fair value option and,
therefore, will report MBS on our financial statements at fair
value with unrealized gains and losses included in earnings.
Changes in the value of the MBS do not impact the outstanding
balance of the junior subordinated notes but rather our
stockholders’ equity. Therefore, changes in the value of our
MBS will be absorbed solely by our stockholders’ equity.
Because our stockholders equity is small in relation to our total
capital, such changes may result in significant changes in our
stockholders’ equity.
Clearing
facilities or exchanges upon which some of our hedging instruments
are traded may increase margin requirements on our hedging
instruments in the event of adverse economic developments.
In response to events having or
expected to have adverse economic consequences or which create
market uncertainty, clearing facilities or exchanges upon which
some of our hedging instruments, such as 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 annual report. A change in
our investment strategy may increase our exposure to interest rate
and real estate market fluctuations. Furthermore, a change in our
asset allocation could result in our allocating assets in a
different manner than as described in this annual report.
Competition
might prevent us from acquiring Agency MBS at favorable yields,
which could materially adversely affect our business, financial
condition and results of operations.
We operate in a highly competitive
market for investment opportunities. Our net income largely depends
on our ability to acquire Agency MBS at favorable spreads over our
borrowing costs. In acquiring Agency MBS, we compete with a variety
of institutional investors, including mortgage REITs, investment
banking firms, savings and loan associations, banks, insurance
companies, mutual funds, other lenders, other entities that
purchase Agency MBS, the Federal Reserve, other governmental
entities and government-sponsored entities, many of which have
greater financial, technical, marketing and other resources than we
do. Some competitors may have a lower cost of funds and access to
funding sources that may not be available to us, such as funding
from the U.S. government. Additionally, many of our competitors are
required to maintain an exemption from the Investment Company Act.
In addition, some of our competitors may have higher risk
tolerances or different risk assessments, which could allow them to
consider a wider variety of investments. Furthermore, competition
for investments in Agency MBS may lead the price of such
investments to increase, which may further limit our ability to
generate desired returns. As a result, we may not be able to
acquire sufficient Agency MBS at favorable spreads over our
borrowing costs, which would materially adversely affect our
business, financial condition and results of operations.
The occurrence
of cyber-incidents, or a deficiency in our cybersecurity or in
those of any of our third party service providers could negatively
impact our business by causing a disruption to our operations, a
compromise or corruption of our confidential information or damage
to our business relationships or reputation, all of which could
negatively impact our business and results of operations.
A cyber-incident is considered to
be any adverse event that threatens the confidentiality, integrity,
or availability of our information resources or the information
resources of our third party service providers. More specifically,
a cyber-incident is an intentional attack or an unintentional event
that can include gaining unauthorized access to systems to disrupt
operations, corrupt data, or steal confidential information. As our
reliance on technology has increased, so have the risks posed to
our systems, both internal and those we have outsourced. The
primary risks that could directly result from the occurrence of a
cyber-incident include operational interruption and private data
exposure. We have implemented processes, procedures and controls to
help mitigate these risks, but these measures, as well as our focus
on mitigating the risk of a cyber-incident, do not guarantee that
our business and results of operations will not be negatively
impacted by such an incident.
We are highly
dependent on communications and information systems operated by
third parties, and systems failures could significantly disrupt our
business, which may, in turn, adversely affect our business,
financial condition and results of operations.
Our business is highly dependent on
communications and information systems that allow us to monitor,
value, buy, sell, finance and hedge our investments. These systems
are operated by third parties and, as a result, we have limited
ability to ensure their continued operation. In the event of a
systems failure or interruption, we will have limited ability to
affect the timing and success of systems restoration. Any failure
or interruption of our systems could cause delays or other problems
in our securities trading activities, including Agency MBS trading
activities, which could have a material adverse effect on our
business, financial condition and results of operations.
We depend
primarily on two individuals to operate our business, and the loss
of one or both of such persons could materially adversely affect
our business, financial condition and results of operations.
We depend substantially on two
individuals, Robert E. Cauley, our Chairman and Chief Executive
Officer, and G. Hunter Haas, our President, Chief Investment
Officer and Chief Financial Officer, to manage our business.
We depend on the diligence, experience and skill of Mr. Cauley
and Mr. Haas in managing all aspects of our business,
including the selection, acquisition, structuring and monitoring of
securities portfolios and associated borrowings. Although we have
entered into contracts and compensation arrangements with
Mr. Cauley and Mr. Haas that encourage their continued
employment, those contracts may not prevent either Mr. Cauley
or Mr. Haas from leaving our company. The loss of either of
them could materially adversely affect our business, financial
condition and results of operations.
If we issue
debt securities, our operations may be restricted and we will be
exposed to additional risk.
If we decide to issue debt
securities in the future, it is likely that such securities will be
governed by an indenture or other instrument containing covenants
restricting our operating flexibility. Additionally, any
convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than
those of our Class A Common Stock. We, and indirectly our
stockholders, will bear the cost of issuing and servicing such
securities. Holders of debt securities may be granted specific
rights, including but not limited to, the right to hold a perfected
security interest in certain of our assets, the right to accelerate
payments due under the indenture, rights to restrict dividend
payments, and rights to approve the sale of assets. Such additional
restrictive covenants and operating restrictions could have a
material adverse effect on our business, financial condition and
results of operations.
The Basel III
standards and other supplementary regulatory standards may
negatively impact our access to financing or affect the terms of
our future financing arrangements.
In response to various financial
crises and the volatility of financial markets, the Basel Committee
on Banking Supervision, an international body comprised of senior
representatives of bank supervisory authorities and central banks
from 27 countries, including the United States, adopted the Basel
III standards several years ago. U.S. regulators have elected to
implement substantially all of the Basel III standards. These new
standards, including the Supplementary Leverage Ratio imposed by
the Federal Reserve Board, the Federal Deposit Insurance
Corporation and the Office of the Comptroller of the Currency,
require banks to hold more capital, predominantly in the form of
common equity, than under the prior capital framework. These
increased bank capital requirements may constrain our ability to
obtain attractive future financings and increase the cost of such
financings if they are obtained.
U.S. regulators adopted rules
requiring enhanced supplementary leverage ratio standards that
impose capital requirements more stringent than those of the Basel
III standards for the most systematically significant banking
organizations in the U.S. Adoption and implementation of the Basel
III standards and the supplemental regulatory standards adopted by
U.S. regulators may negatively impact our access to financing or
affect the terms of our future financing arrangements.
Changes in
banks’ inter-bank lending rate reporting practices or the method
pursuant to which LIBOR is determined may adversely affect the
value of the financial obligations to be held or issued by us that
are linked to LIBOR.
LIBOR and other indices which are
deemed “benchmarks” are the subject of recent national,
international, and other regulatory guidance and proposals for
reform. Some of these reforms are already effective while others
are still to be implemented. These reforms may cause such
benchmarks to perform differently than in the past, or have other
consequences which cannot be predicted. In particular, regulators
and law enforcement agencies in the U.K. and elsewhere are
conducting criminal and civil investigations into whether the banks
that contributed information to the British Bankers’ Association
(“BBA”) in connection with the daily calculation of LIBOR may have
been under-reporting or otherwise manipulating or attempting to
manipulate LIBOR. A number of BBA member banks have entered into
settlements with their regulators and law enforcement agencies with
respect to this alleged manipulation of LIBOR. Actions by the
regulators or law enforcement agencies, as well as ICE Benchmark
Administration (the current administrator of LIBOR), may result in
changes to the manner in which LIBOR is determined or the
establishment of alternative reference rates. For example, on July
27, 2017, the U.K. Financial Conduct Authority announced that it
intends to stop persuading or compelling banks to submit LIBOR
rates after 2021.
At this time, it is not possible to
predict the effect of any such changes, any establishment of
alternative reference rates or any other reforms to LIBOR that may
be implemented in the U.K. or elsewhere. Uncertainty as to the
nature of such potential changes, alternative reference rates or
other reforms may adversely affect the market for or value of any
securities on which the interest or dividend is determined by
reference to LIBOR, loans, derivatives and other financial
obligations or on our overall financial condition or results of
operations.
The development of alternative
reference rates is complex. In the United States, a committee
was formed in 2014 to study the process and develop an alternative
reference rate. The Alternative Reference Rate Committee (the
“ARRC”) selected the 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 February 5, 2020, Fannie Mae and
Freddie Mac announced that they will stop accepting LIBOR-indexed
ARMs by the end of 2020. Additionally, the two GSEs announced that
they will soon accept mortgages tied to the SOFR later in
2020.
More generally, any of the above
changes or any other consequential changes to LIBOR or any other
“benchmark” as a result of international, national or other
proposals for reform or other initiatives or investigations, or any
further uncertainty in relation to the timing and manner of
implementation of such changes, could have a material adverse
effect on the value of and return on any securities based on or
linked to a “benchmark.”
Our investment
in Orchid Island Capital, Inc. or other mortgage REIT common stock
may fluctuate in value which materially adversely affect our
business, financial condition and results of operations.
Investments in the securities of
companies that own Agency MBS will be subject to all of the risks
associated with the direct ownership of Agency MBS discussed above
that could adversely affect the market price of the investment and
the ability of the REIT to pay dividends. In addition, the market
value of the common stock could be affected by market conditions
beyond the Company’s control, 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.
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. A coronavirus outbreak occurred in China in
late 2019, and during the first quarter of 2020 the outbreak has
evolved into a global pandemic. The coronavirus outbreak and
its impact on global markets and Royal Palm's portfolio to date is
discussed below in “Item 7. Management’s Discussion and Analysis –
Outlook” and in Note 19 to our
Consolidated Financial Statements. At this time we are
not able to assess the long-term impact the coronavirus will have
on our business.
A
coronavirus outbreak occurred in China in late 2019, and during the
first quarter of 2020 the outbreak has evolved into a global
pandemic and
has had a significant impact on financial markets and economic
activity. Interest rates have declined significantly,
establishing new all-time low yields across the US Treasury
maturity curve. MBS valuations have also declined significantly as
investors seek liquidity, causing elevated margin call
activity.
We
cannot predict the effect that responses from the Federal
government will have on the financial markets or when those markets
will normalize. To date, the Company has disposed of a significant
portion of its MBS portfolio and may have to sell additional assets
to meet its cash needs.
The
coronavirus outbreak and its impact on global markets and Royal
Palm’s portfolio during March 2020 is discussed below in “Item 7.
Management’s Discussion and Analysis – Outlook” and in Note 19 to
our Consolidated Financial Statements. At this time we are
not able to assess the long-term impact the coronavirus will have
on 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, we could be required to restructure our activities in a
manner that, or at a time when, we would not otherwise choose to do
so, which could negatively affect the value of shares of our common
stock and our ability to distribute dividends. For example, if the
market value of our investments in CMOs or structured Agency MBS,
neither of which are qualifying real estate assets for Investment
Company Act purposes, were to increase by an amount that resulted
in less than 55% of our assets being invested in pass-through
Agency MBS, we might have to sell CMOs or structured Agency MBS in
order to maintain our exemption from the Investment Company Act.
The sale could occur during adverse market conditions, and we could
be forced to accept a price below that which we believe is
acceptable.
Alternatively, if we fail to
qualify for this exemption, we may have to register under the
Investment Company Act and we could become subject to substantial
regulation with respect to our capital structure (including our
ability to use leverage), management, operations, transactions with
affiliated persons (as defined in the Investment Company Act),
portfolio composition, including restrictions with respect to
diversification and industry concentration, and other
matters.
We may be required at times to
adopt less efficient methods of financing certain of our
securities, and we may be precluded from acquiring certain types of
higher yielding securities. The net effect of these factors would
be to lower our net interest income. If we fail to qualify for an
exemption from registration as an investment company or an
exclusion from the definition of an investment company, our ability
to use leverage would be substantially reduced, and we would not be
able to conduct our business as described in this prospectus. Our
business will be materially and adversely affected if we fail to
qualify for and maintain an exemption from regulation pursuant to
the Investment Company Act.
Failure to
obtain and maintain an exemption from being regulated as a
commodity pool operator could subject us to additional regulation
and compliance requirements and may result in fines and other
penalties which could materially adversely affect our business and
financial condition.
The Dodd-Frank Act established a
comprehensive regulatory framework for derivative contracts
commonly referred to as “swaps.” As a result, any investment fund
that trades in swaps may be considered a “commodity pool,” which
would cause its operators (in some cases the fund’s directors) to
be regulated as “commodity pool operators,” (“CPOs”). Under
new rules adopted by the U.S. Commodity Futures Trading Commission,
(the “CFTC”), those funds that become commodity pools solely
because of their use of swaps must register with the National
Futures Association (the “NFA”). Registration requires compliance
with the CFTC’s regulations and the NFA’s rules with respect to
capital raising, disclosure, reporting, recordkeeping and other
business conduct.
We use hedging instruments in
conjunction with our investment portfolio and related borrowings to
reduce or mitigate risks associated with changes in interest rates,
mortgage spreads, yield curve shapes and market volatility. These
hedging instruments may include interest rate swaps, interest rate
futures and options on interest rate futures. We do not currently
engage in any speculative derivatives activities or other
non-hedging transactions using swaps, futures or options on
futures. We do not use these instruments for the purpose of trading
in commodity interests, and we do not consider the Company or its
operations to be a commodity pool as to which CPO registration or
compliance is required. 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.
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:
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actual receipt of an improper benefit or profit in money,
property or services; or
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a final judgment based upon a finding of active and deliberate
dishonesty by the director or officer that was material to the
cause of action adjudicated.
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We have entered into
indemnification agreements with our directors and executive
officers that obligate us to indemnify them to the maximum extent
permitted by Maryland law. In addition, our charter authorizes the
Company to obligate itself to indemnify our present and former
directors and officers for actions taken by them in those and other
capacities to the maximum extent permitted by Maryland law. Our
bylaws require us, to the maximum extent permitted by Maryland law,
to indemnify each present and former director or officer in the
defense of any proceeding to which he or she is made, or threatened
to be made, a party by reason of his or her service to us. In
addition, we may be obligated to advance the defense costs incurred
by our directors and officers. As a result, we and our stockholders
may have more limited rights against our directors and officers
than might otherwise exist absent the provisions in our charter,
bylaws and indemnification agreements or that might exist with
other companies.
Certain
provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland
General Corporation Law ( the “MGCL”), may have the effect of
inhibiting a third party from making a proposal to acquire us or
impeding a change of control under circumstances that otherwise
could provide our stockholders with the opportunity to realize a
premium over the then-prevailing market price of our common stock,
including:
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“business combination” provisions that, subject to
limitations, prohibit certain business combinations between us and
an “interested stockholder” (defined generally as any person who
beneficially owns 10% or more of the voting power of our
outstanding voting stock or an affiliate or associate of ours who,
at any time within the two-year period immediately prior to the
date in question, was the beneficial owner of 10% or more of the
voting power of our then-outstanding stock) or an affiliate of an
interested stockholder for five years after the most recent date on
which the stockholder became an interested stockholder, and
thereafter require two supermajority stockholder votes to approve
any such combination; and
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“control share” provisions that provide that a holder of
“control shares” of the Company (defined as voting shares of stock
which, when aggregated with all other shares of stock owned by the
acquiror or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by virtue of a
revocable proxy), entitle the acquiror to exercise one of three
increasing ranges of voting power in electing directors) acquired
in a “control share acquisition” (defined as the direct or indirect
acquisition of ownership or control of issued and outstanding
“control shares,” subject to certain exceptions) generally has no
voting rights with respect to the control shares except to the
extent approved by our stockholders by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
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We have elected to opt-out of these
provisions of the MGCL, in the case of the business combination
provisions, by resolution of our Board of Directors (provided that
such business combination is first approved by our Board of
Directors, including a majority of our directors who are not
affiliates or associates of such person), and in the case of the
control share provisions, pursuant to a provision in our bylaws.
However, our Board of Directors may by resolution elect to repeal
the foregoing opt-out from the business combination provisions of
the MGCL, and we may, by amendment to our bylaws, opt in to the
control share provisions of the MGCL in the future.
U.S. Federal Income Tax Risks
An investment
in our common stock has various income tax risks.
This summary 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, 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.
Our officers devote as much time to
Bimini Capital and to Orchid as they deem appropriate. However,
these officers may have conflicts in allocating their time and
services among Bimini Capital and Orchid. During turbulent
conditions in the mortgage industry, distress in the credit markets
or other times when we will need focused support and assistance
from employees, Orchid and other entities for which we may act as
manager in the future will likewise require greater focus and
attention, placing personnel resources in high demand. In such
situations, Bimini Capital may not receive the necessary support
and assistance it requires or would otherwise receive if it were
not acting as manager of one or more other entities.
Mr. Cauley, our Chief Executive
Officer and Chairman of our Board of Directors, also serves as
Chief Executive Officer and Chairman of the Board of Directors of
Orchid and owns shares of common stock of Orchid at the time of
this filing and may continue to hold shares in the future. Mr.
Haas, our Chief Financial Officer, Chief Investment Officer and
President, is a member of the Board of Directors of Orchid, serves
as the Chief Financial Officer, Chief Investment Officer and
Treasurer of Orchid and owns shares of common stock of Orchid at
the time of this filing and may continue to hold shares in the
future. Mr. Dwyer and Mr. Jaumot, the two independent members
of our Board of Directors, own shares of common stock of Orchid at
the time of this filing and may continue to own shares in the
future. Accordingly, Messrs. Cauley, Haas, Dwyer and Jaumot
may have a conflict of interest with respect to actions by Bimini
Capital or Bimini Advisors that relate to Orchid as its
Manager.
Bimini continues to hold an
investment in the common stock of Orchid. In evaluating
opportunities for ourselves and Orchid, this may lead us to
emphasize certain asset acquisition, disposition or management
objectives over others, such as balancing risk or capital
preservation objectives against return objectives. This could
increase the risks or decrease the returns of your investment in
our common stock.
Orchid may
elect not to renew the management agreement without cause which may
adversely affect our business, financial condition and results of
operations.
Orchid may elect not to renew the
management agreement, even without cause. The management agreement
is automatically renewed in accordance with the terms of the
agreement, each year, on February 20. However, with the consent of
the majority of their independent directors, and upon providing
180-days’ prior written notice, Orchid may elect not to renew the
management agreement. If Orchid elects to not renew the agreement
because of a decision by its Board of Directors that the management
fee is unfair, Bimini Advisors will have the right to renegotiate a
mutually agreeable management fee. If Orchid elects to not renew
the management agreement without cause, it is required to pay
Bimini Advisors a termination fee equal to three times the average
annual management fee incurred during the prior 24-month period
immediately preceding the most recently completed calendar quarter
prior to the effective date of termination. Notwithstanding the
termination fee, nonrenewal of the management agreement may
adversely affect our business, financial condition and results of
operations.
Risks Related to Our Common Stock
Investing in
our common stock may involve a high degree of risk.
The investments we make in
accordance with our investment objectives may result in a high
amount of risk when compared to alternative investment options and
volatility or loss of principal. Our investments may be highly
speculative and aggressive, and therefore an investment in our
common stock may not be suitable for someone with lower risk
tolerance.
There is a
limited market for our Class A Common Stock.
Our Class A Common Stock trades on
the OTCQB under the symbol “BMNM”. We may apply to list our
Class A Common Stock on a national securities market if, in the
future, we qualify for such a listing. However, even if listed on a
national securities market, the ability to buy and sell our Class A
Common Stock may be limited due to our small public float, and
significant sales may depress or result in a decline in the market
price of our Class A Common Stock. Additionally, until such
time that our Class A Common Stock is approved for listing on a
national securities market, our ability to raise capital through
the sale of additional securities may be limited.
Accordingly, no assurance can be given as to:
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the likelihood that an actual market for our common stock will
develop, or be continued once developed;
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the liquidity of any such market;
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the ability of any holder to sell shares of our common stock;
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the prices that may be obtained for our common stock.
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We have not
made distributions to our stockholders since 2011.
Our Board of Directors has not
authorized the payment of any cash dividends to our stockholders
since 2011. All distributions will be made at the discretion
of our Board of Directors out of funds legally available therefor
and will depend on our earnings, our financial condition and such
other factors as our Board of Directors may deem relevant from time
to time. As a result of the termination of our REIT status
effective as of January 1, 2015, we are planning to retain any
available funds and future earnings to fund the development and
growth of our business. As a result, for the foreseeable future, we
do not expect to make distributions.
Future
offerings of debt securities, which would be senior to our common
stock upon liquidation, or equity securities, which would dilute
our existing stockholders and may be senior to our common stock for
the purposes of distributions, may harm the value of our common
stock.
In the future, we may attempt to
increase our capital resources by making additional offerings of
debt or equity securities, including commercial paper, medium-term
notes, senior or subordinated notes and classes of preferred stock
or common stock, as well as warrants to purchase shares of common
stock or convertible preferred stock. Upon the liquidation of the
Company, holders of our debt securities and shares of preferred
stock and lenders with respect to other borrowings will receive a
distribution of our available assets prior to the holders of our
common stock. Additional equity offerings by us may dilute the
holdings of our existing stockholders or reduce the market value of
our common stock, or both. Furthermore, our Board of Directors may,
without stockholder approval, amend our charter to increase the
aggregate number of our shares or the number of shares of any class
or series that we have the authority to issue, and to classify or
reclassify any unissued shares of common stock or preferred stock.
Because our decision to issue securities in any future offering
will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature
of our future offerings. Our stockholders are therefore subject to
the risk of our future securities offerings reducing the market
price of our common stock and diluting their common stock.
The market
value of our common stock may be volatile.
The market value of shares of our
common stock may be highly volatile and subject to wide price
fluctuations. In addition, the trading volume in our common stock
may fluctuate and cause significant price variations to occur. Some
of the factors that could negatively affect the share price or
trading volume of our common stock include:
•
|
actual or anticipated variations in our operating results or
distributions;
|
•
|
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
|
•
|
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.
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.
We are not party to any material
pending legal proceedings as described in Item 103 of Regulation
S-K.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not
Applicable.
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 27,
2020, we had 11,608,555 shares of Class A Common Stock issued
and outstanding, which were held by 170 shareholders of record
and 1,179 beneficial owners whose shares were held in “street
name” by brokers and depository institutions.
As of March 27, 2020, 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, so future distributions should not be expected.
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
On August 12, 2011, Bimini
Capital’s shareholders approved the 2011 Long Term Compensation
Plan (the “Plan”). The Plan is intended to permit the grant
of stock options, stock appreciation rights (“SARs”), stock awards,
performance units and other equity-based and incentive awards up to
an aggregate of 4,000,000 shares (but no more than 10% of the
number of shares of Class A Common Stock outstanding on any
particular grant date), subject to adjustments and limitations as
provided in the Plan. The following table provides
information as of December 31, 2019 concerning shares of our common
stock authorized for issuance under the Plan.
|
|
|
|
|
|
|
|
Number of
securities
|
|
|
|
|
|
|
|
|
|
remaining
available for
|
|
|
|
Total
number of securities
|
|
|
Weighted-average
|
|
|
future
issuance under
|
|
|
|
to be
issued upon exercise
|
|
|
exercise
price of
|
|
|
equity
compensation plans
|
|
|
|
of
outstanding options,
|
|
|
of
outstanding options,
|
|
|
(excluding
securities
|
|
|
|
warrants
and rights
|
|
|
warrants
and rights
|
|
|
reflected
in column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
|
|
Equity compensation plans approved
by
|
|
|
|
|
|
|
|
|
|
by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
2,621,667
|
(2)
|
Equity compensation plans not
approved
|
|
|
|
|
|
|
|
|
|
|
|
|
by security holders(1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
2,621,667
|
|
(1)
|
We do not have any equity compensation plans that have not
been approved by our stockholders.
|
(2)
|
Represents the maximum number of shares remaining available
for future issuance under the terms of the Incentive Plan
irrespective of the 10% limitation described above. Taking
into account the 10% limitation and the number of shares of Class A
Common Stock outstanding as of December 31, 2019, no shares are
available for future issuance under the terms of the Incentive Plan
as of December 31, 2019.
|
Unregistered Sales of Equity
Securities
None.
Issuer Purchases of Equity
Securities
On March 26, 2018, the Company's
Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Class A common stock. The maximum remaining
number of shares that may be repurchased under this authorization
is 429,596 shares. The authorization expires on November 15, 2020.
The Company did not repurchase any of its common stock during the
three months ended December 31, 2019.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
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"). Our investment strategy focuses on, and our
portfolio consists of, two categories of Agency MBS: (i)
traditional pass-through Agency MBS, such as mortgage pass-through
certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the
“GSEs”) and collateralized mortgage obligations (“CMOs”) issued by
the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as
interest only securities ("IOs"), inverse interest only securities
("IIOs") and principal only securities ("POs"), among other types
of structured Agency MBS. In addition, Royal Palm receives
dividends from its investment in Orchid common shares.
Stock Repurchase Plan
On March 26, 2018, the Board of
Directors of the Company approved a Stock Repurchase Plan
(“Repurchase Plan”). Pursuant to Repurchase Plan, we may
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. Share
repurchases may be executed through various means, including,
without limitation, open market transactions. The Repurchase
Plan does not obligate the Company to purchase any shares.
The Repurchase Plan was originally set to expire on November 15,
2018, but it has been extended twice by the Board of Directors,
first until November 15, 2019, and then until November 15, 2020.
The authorization for the Share Repurchase Plan may be terminated,
increased or decreased by the Company’s Board of Directors in its
discretion at any time.
Through December 31, 2019, we
repurchased a total of 70,404 shares at an aggregate cost of
approximately $166,945, including commissions and fees, for a
weighted average price of $2.37 per share.
Tender Offer
In July 2019, we completed a
“modified Dutch auction” tender offer and paid an aggregate of $2.2
million, excluding fees and related expenses, to repurchase 1.1
million shares of our Class A common stock at a price of $2.00 per
share.
Factors that Affect our Results of
Operations and Financial Condition
A variety of industry and economic
factors may impact our results of operations and financial
condition. These factors include:
•
|
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 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; 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 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, 2019, as
compared to the year ended December 31, 2018.
Net Income (Loss) Summary
Consolidated net income for the
year ended December 31, 2019 was $13.3 million, or $1.09 basic and
diluted income per share of Class A Common Stock, as compared to
consolidated net loss of $26.8 million, or $2.10 basic and diluted
loss per share of Class A Common Stock, for the year ended December
31, 2018.
The components of net income (loss)
for the years ended December 31, 2019 and 2018, along with the
changes in those components are presented in the table below:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Advisory services revenue
|
|
$
|
6,908
|
|
|
$
|
7,771
|
|
|
$
|
(863
|
)
|
Interest and dividend income
|
|
|
9,328
|
|
|
|
9,988
|
|
|
|
(660
|
)
|
Interest expense
|
|
|
(6,175
|
)
|
|
|
(5,520
|
)
|
|
|
(655
|
)
|
Net revenues
|
|
|
10,061
|
|
|
|
12,239
|
|
|
|
(2,178
|
)
|
Other expense
|
|
|
(603
|
)
|
|
|
(11,448
|
)
|
|
|
10,845
|
|
Expenses
|
|
|
(6,440
|
)
|
|
|
(6,442
|
)
|
|
|
2
|
|
Net income (loss) before income tax
(benefit) provision
|
|
|
3,018
|
|
|
|
(5,651
|
)
|
|
|
8,669
|
|
Income tax (benefit) provision
|
|
|
(10,282
|
)
|
|
|
21,127
|
|
|
|
(31,409
|
)
|
Net income (loss)
|
|
$
|
13,300
|
|
|
$
|
(26,778
|
)
|
|
$
|
40,078
|
|
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 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, 2019 and 2018 and for each quarter during
2019 and 2018.
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, 2019
|
|
$
|
287
|
|
|
$
|
(192
|
)
|
|
$
|
479
|
|
September 30, 2019
|
|
|
(483
|
)
|
|
|
(204
|
)
|
|
|
(279
|
)
|
June 30, 2019
|
|
|
(3,364
|
)
|
|
|
(734
|
)
|
|
|
(2,630
|
)
|
March 31, 2019
|
|
|
(2,258
|
)
|
|
|
(1,067
|
)
|
|
|
(1,191
|
)
|
December 31, 2018
|
|
|
(3,834
|
)
|
|
|
(1,213
|
)
|
|
|
(2,621
|
)
|
September 30, 2018
|
|
|
948
|
|
|
|
349
|
|
|
|
599
|
|
June 30, 2018
|
|
|
870
|
|
|
|
194
|
|
|
|
676
|
|
March 31, 2018
|
|
|
1,740
|
|
|
|
(524
|
)
|
|
|
2,264
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
(5,818
|
)
|
|
$
|
(2,197
|
)
|
|
$
|
(3,621
|
)
|
December 31, 2018
|
|
|
(276
|
)
|
|
|
(1,194
|
)
|
|
|
918
|
|
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, 2019
|
|
$
|
510
|
|
|
$
|
56
|
|
|
$
|
566
|
|
|
$
|
(50
|
)
|
|
$
|
(37
|
)
|
|
$
|
(87
|
)
|
|
$
|
479
|
|
September 30, 2019
|
|
|
(124
|
)
|
|
|
61
|
|
|
|
(63
|
)
|
|
|
(155
|
)
|
|
|
(61
|
)
|
|
|
(216
|
)
|
|
|
(279
|
)
|
June 30, 2019
|
|
|
(226
|
)
|
|
|
43
|
|
|
|
(183
|
)
|
|
|
(2,215
|
)
|
|
|
(232
|
)
|
|
|
(2,447
|
)
|
|
|
(2,630
|
)
|
March 31, 2019
|
|
|
5
|
|
|
|
65
|
|
|
|
70
|
|
|
|
(976
|
)
|
|
|
(285
|
)
|
|
|
(1,261
|
)
|
|
|
(1,191
|
)
|
December 31, 2018
|
|
|
133
|
|
|
|
68
|
|
|
|
201
|
|
|
|
(2,317
|
)
|
|
|
(505
|
)
|
|
|
(2,822
|
)
|
|
|
(2,621
|
)
|
September 30, 2018
|
|
|
(35
|
)
|
|
|
11
|
|
|
|
(24
|
)
|
|
|
513
|
|
|
|
110
|
|
|
|
623
|
|
|
|
599
|
|
June 30, 2018
|
|
|
(108
|
)
|
|
|
(19
|
)
|
|
|
(127
|
)
|
|
|
642
|
|
|
|
161
|
|
|
|
803
|
|
|
|
676
|
|
March 31, 2018
|
|
|
(153
|
)
|
|
|
(33
|
)
|
|
|
(186
|
)
|
|
|
2,002
|
|
|
|
448
|
|
|
|
2,450
|
|
|
|
2,264
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
165
|
|
|
$
|
225
|
|
|
$
|
390
|
|
|
$
|
(3,396
|
)
|
|
$
|
(615
|
)
|
|
$
|
(4,011
|
)
|
|
$
|
(3,621
|
)
|
December 31, 2018
|
|
|
(163
|
)
|
|
|
27
|
|
|
|
(136
|
)
|
|
|
840
|
|
|
|
214
|
|
|
|
1,054
|
|
|
|
918
|
|
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, 2019
|
|
$
|
1,899
|
|
|
$
|
948
|
|
|
$
|
510
|
|
|
$
|
438
|
|
|
$
|
951
|
|
|
$
|
1,461
|
|
September 30, 2019
|
|
|
1,646
|
|
|
|
1,002
|
|
|
|
(124
|
)
|
|
|
1,126
|
|
|
|
644
|
|
|
|
520
|
|
June 30, 2019
|
|
|
2,134
|
|
|
|
1,340
|
|
|
|
(226
|
)
|
|
|
1,566
|
|
|
|
794
|
|
|
|
568
|
|
March 31, 2019
|
|
|
2,190
|
|
|
|
1,313
|
|
|
|
5
|
|
|
|
1,308
|
|
|
|
877
|
|
|
|
882
|
|
December 31, 2018
|
|
|
2,227
|
|
|
|
1,234
|
|
|
|
133
|
|
|
|
1,101
|
|
|
|
993
|
|
|
|
1,126
|
|
September 30, 2018
|
|
|
2,054
|
|
|
|
1,049
|
|
|
|
(35
|
)
|
|
|
1,084
|
|
|
|
1,005
|
|
|
|
970
|
|
June 30, 2018
|
|
|
2,001
|
|
|
|
938
|
|
|
|
(108
|
)
|
|
|
1,046
|
|
|
|
1,063
|
|
|
|
955
|
|
March 31, 2018
|
|
|
2,080
|
|
|
|
809
|
|
|
|
(153
|
)
|
|
|
962
|
|
|
|
1,271
|
|
|
|
1,118
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
7,869
|
|
|
$
|
4,603
|
|
|
$
|
165
|
|
|
$
|
4,438
|
|
|
$
|
3,266
|
|
|
$
|
3,431
|
|
December 31, 2018
|
|
|
8,362
|
|
|
|
4,030
|
|
|
|
(163
|
)
|
|
|
4,193
|
|
|
|
4,332
|
|
|
|
4,169
|
|
(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, 2019
|
|
$
|
951
|
|
|
$
|
1,461
|
|
|
$
|
376
|
|
|
$
|
56
|
|
|
$
|
320
|
|
|
$
|
575
|
|
|
$
|
1,141
|
|
September 30, 2019
|
|
|
644
|
|
|
|
520
|
|
|
|
390
|
|
|
|
61
|
|
|
|
329
|
|
|
|
254
|
|
|
|
191
|
|
June 30, 2019
|
|
|
794
|
|
|
|
568
|
|
|
|
400
|
|
|
|
43
|
|
|
|
357
|
|
|
|
394
|
|
|
|
211
|
|
March 31, 2019
|
|
|
877
|
|
|
|
882
|
|
|
|
406
|
|
|
|
65
|
|
|
|
341
|
|
|
|
471
|
|
|
|
541
|
|
December 31, 2018
|
|
|
993
|
|
|
|
1,126
|
|
|
|
393
|
|
|
|
68
|
|
|
|
325
|
|
|
|
600
|
|
|
|
801
|
|
September 30, 2018
|
|
|
1,005
|
|
|
|
970
|
|
|
|
388
|
|
|
|
11
|
|
|
|
377
|
|
|
|
617
|
|
|
|
593
|
|
June 30, 2018
|
|
|
1,063
|
|
|
|
955
|
|
|
|
372
|
|
|
|
(19
|
)
|
|
|
391
|
|
|
|
691
|
|
|
|
564
|
|
March 31, 2018
|
|
|
1,271
|
|
|
|
1,118
|
|
|
|
337
|
|
|
|
(33
|
)
|
|
|
370
|
|
|
|
934
|
|
|
|
748
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
3,266
|
|
|
$
|
3,431
|
|
|
$
|
1,572
|
|
|
$
|
225
|
|
|
$
|
1,347
|
|
|
$
|
1,694
|
|
|
$
|
2,084
|
|
December 31, 2018
|
|
|
4,332
|
|
|
|
4,169
|
|
|
|
1,490
|
|
|
|
27
|
|
|
|
1,463
|
|
|
|
2,842
|
|
|
|
2,706
|
|
(1)
|
Calculated by adding the effect of derivative instrument
hedges attributed to the period presented to GAAP net portfolio
interest income.
|
(2)
|
Reflects the effect of derivative instrument hedges for only
the period presented.
|
(3)
|
Calculated by subtracting the effect of derivative instrument
hedges attributed to the period presented from GAAP interest
expense.
|
(4)
|
Calculated by adding the effect of derivative instrument
hedges attributed to the period presented to GAAP net interest
income.
|
Segment Information
We have two operating
segments. The asset management segment includes the investment
advisory services provided by Bimini Advisors to Orchid and Royal
Palm. The investment portfolio segment includes the investment
activities conducted by Royal Palm. Segment information for
the years ended December 31, 2019 and 2018 is as follows:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
Investment
|
|
|
|
|
Management
|
Portfolio
|
Corporate
|
Eliminations
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
|
Advisory services, external
customers
|
$
|
6,908
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,908
|
Advisory services, other operating
segments(1)
|
|
271
|
|
-
|
|
-
|
|
(271)
|
|
-
|
Interest and dividend income
|
|
-
|
|
9,327
|
|
1
|
|
-
|
|
9,328
|
Interest expense
|
|
-
|
|
(4,603)
|
|
(1,572)(2)
|
|
-
|
|
(6,175)
|
Net revenues
|
|
7,179
|
|
4,724
|
|
(1,571)
|
|
(271)
|
|
10,061
|
Other (expense) income
|
|
-
|
|
112
|
|
(715)(3)
|
|
-
|
|
(603)
|
Operating expenses(4)
|
|
(2,750)
|
|
(3,690)
|
|
-
|
|
-
|
|
(6,440)
|
Intercompany expenses(1)
|
|
-
|
|
(271)
|
|
-
|
|
271
|
|
-
|
Income (loss) before income
taxes
|
$
|
4,429
|
$
|
875
|
$
|
(2,286)
|
$
|
-
|
$
|
3,018
|
Assets
|
$
|
1,457
|
$
|
263,938
|
$
|
14,809
|
$
|
-
|
$
|
280,204
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
Investment
|
|
|
|
|
|
Management
|
Portfolio
|
Corporate
|
Eliminations
|
Total
|
2018
|
|
|
|
|
|
|
|
|
|
|
Advisory services, external
customers
|
$
|
7,771
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
7,771
|
Advisory services, other operating
segments(1)
|
|
251
|
|
-
|
|
-
|
|
(251)
|
|
-
|
Interest and dividend income
|
|
-
|
|
9,986
|
|
2
|
|
|
|
9,988
|
Interest expense
|
|
-
|
|
(4,029)
|
|
(1,491)(2)
|
|
|
|
(5,520)
|
Net revenues
|
|
8,022
|
|
5,957
|
|
(1,489)
|
|
(251)
|
|
12,239
|
Other (expense) income
|
|
-
|
|
(12,794)
|
|
1,346
(3)
|
|
|
|
(11,448)
|
Operating expenses(4)
|
|
(2,822)
|
|
(3,620)
|
|
-
|
|
|
|
(6,442)
|
Intercompany expenses(1)
|
|
-
|
|
(251)
|
|
-
|
|
251
|
|
-
|
Income (loss) before income
taxes
|
$
|
5,200
|
$
|
(10,708)
|
$
|
(143)
|
$
|
-
|
$
|
(5,651)
|
Assets
|
$
|
1,488
|
$
|
245,866
|
$
|
12,046
|
$
|
-
|
$
|
259,400
|
(1)
|
Includes advisory services revenue received by Bimini Advisors
from Royal Palm.
|
(2)
|
Includes interest on long-term debt.
|
(3)
|
Includes gains (losses) on Eurodollar futures contracts
entered into as a hedge on junior subordinated notes and fair value
adjustments on retained interests in securitizations.
|
(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 $500 million.
|
In addition, Orchid is obligated to
reimburse us for any direct expenses incurred on its behalf and to
pay to us an amount equal to Orchid's pro rata portion of certain
overhead costs set forth in the management agreement. The
management agreement has been renewed through February 2021 and
provides for automatic one-year extension options. Should Orchid
terminate the management agreement without cause, it will be
obligated to pay to us a termination fee equal to three times the
average annual management fee, as defined in the management
agreement, before or on the last day of the automatic renewal
term.
The following table summarizes the
advisory services revenue received from Orchid for the years ended
December 31, 2019 and 2018 and each quarter during 2019 and
2018.
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Advisory
Services
|
|
|
|
Orchid
|
|
|
Orchid
|
|
|
Management
|
|
|
Overhead
|
|
|
|
|
Three Months
Ended
|
|
MBS
|
|
|
Equity
|
|
|
Fee
|
|
|
Allocation
|
|
|
Total
|
|
December 31, 2019
|
|
$
|
3,705,920
|
|
|
$
|
414,018
|
|
|
$
|
1,477
|
|
|
$
|
379
|
|
|
$
|
1,856
|
|
September 30, 2019
|
|
|
3,674,087
|
|
|
|
394,788
|
|
|
|
1,440
|
|
|
|
351
|
|
|
|
1,791
|
|
June 30, 2019
|
|
|
3,307,885
|
|
|
|
363,961
|
|
|
|
1,326
|
|
|
|
327
|
|
|
|
1,653
|
|
March 31, 2019
|
|
|
3,051,509
|
|
|
|
363,204
|
|
|
|
1,285
|
|
|
|
323
|
|
|
|
1,608
|
|
December 31, 2018
|
|
|
3,264,230
|
|
|
|
395,911
|
|
|
|
1,404
|
|
|
|
434
|
|
|
|
1,838
|
|
September 30, 2018
|
|
|
3,601,776
|
|
|
|
431,962
|
|
|
|
1,482
|
|
|
|
391
|
|
|
|
1,873
|
|
June 30, 2018
|
|
|
3,717,690
|
|
|
|
469,682
|
|
|
|
1,606
|
|
|
|
361
|
|
|
|
1,967
|
|
March 31, 2018
|
|
|
3,745,298
|
|
|
|
488,906
|
|
|
|
1,712
|
|
|
|
381
|
|
|
|
2,093
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
3,434,850
|
|
|
$
|
383,993
|
|
|
$
|
5,528
|
|
|
$
|
1,380
|
|
|
$
|
6,908
|
|
December 31, 2018
|
|
|
3,582,249
|
|
|
|
446,615
|
|
|
|
6,204
|
|
|
|
1,567
|
|
|
|
7,771
|
|
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, 2019, we generated $3.3 million of net portfolio interest
income, consisting of $7.9 million of interest income from MBS
assets offset by $4.6 million of interest expense on repurchase
liabilities. For the year ended December 31, 2018, we
generated $4.3 million of net portfolio interest income, consisting
of $8.4 million of interest income from MBS assets offset by $4.0
million of interest expense on repurchase liabilities. The
$0.5 million decrease in interest income for the year ended
December 31, 2019 was due to a 19 basis point ("bp") decrease in
yields earned on the portfolio, combined with a $2.9 million
decrease in average MBS balances. The $0.6 million increase
in interest expense for the year ended December 31, 2019 was due to
a 34 bp increase in cost of funds, partially offset by a $3.5 million decrease in average
repurchase liabilities.
Our economic interest expense on
repurchase liabilities for the years ended December 31, 2019 and
2018 was $4.4 million and $4.2 million, respectively, resulting in
$3.4 million and $4.2 million of economic net portfolio interest
income, respectively.
The tables below provide
information on our portfolio average balances, interest income,
yield on assets, average repurchase agreement balances, interest
expense, cost of funds, net interest income and net interest rate
spread for each quarter in 2019 and 2018 and for the years ended
December 31, 2019 and 2018 on both a GAAP and economic basis.
($ 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, 2019
|
|
$
|
190,534
|
|
|
$
|
1,899
|
|
|
|
3.99
|
%
|
|
$
|
182,215
|
|
|
$
|
948
|
|
|
$
|
438
|
|
|
|
2.08
|
%
|
|
|
0.96
|
%
|
September 30, 2019
|
|
|
187,199
|
|
|
|
1,646
|
|
|
|
3.52
|
%
|
|
|
177,566
|
|
|
|
1,002
|
|
|
|
1,126
|
|
|
|
2.26
|
%
|
|
|
2.54
|
%
|
June 30, 2019
|
|
|
211,406
|
|
|
|
2,134
|
|
|
|
4.04
|
%
|
|
|
199,901
|
|
|
|
1,340
|
|
|
|
1,566
|
|
|
|
2.68
|
%
|
|
|
3.13
|
%
|
March 31, 2019
|
|
|
212,033
|
|
|
|
2,190
|
|
|
|
4.13
|
%
|
|
|
199,771
|
|
|
|
1,313
|
|
|
|
1,308
|
|
|
|
2.63
|
%
|
|
|
2.62
|
%
|
December 31, 2018
|
|
|
212,317
|
|
|
|
2,227
|
|
|
|
4.20
|
%
|
|
|
202,069
|
|
|
|
1,234
|
|
|
|
1,101
|
|
|
|
2.44
|
%
|
|
|
2.18
|
%
|
September 30, 2018
|
|
|
198,367
|
|
|
|
2,054
|
|
|
|
4.14
|
%
|
|
|
189,582
|
|
|
|
1,049
|
|
|
|
1,084
|
|
|
|
2.21
|
%
|
|
|
2.29
|
%
|
June 30, 2018
|
|
|
194,677
|
|
|
|
2,001
|
|
|
|
4.11
|
%
|
|
|
184,621
|
|
|
|
938
|
|
|
|
1,046
|
|
|
|
2.03
|
%
|
|
|
2.27
|
%
|
March 31, 2018
|
|
|
207,261
|
|
|
|
2,080
|
|
|
|
4.01
|
%
|
|
|
197,001
|
|
|
|
809
|
|
|
|
962
|
|
|
|
1.64
|
%
|
|
|
1.96
|
%
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
200,293
|
|
|
$
|
7,869
|
|
|
|
3.93
|
%
|
|
$
|
189,863
|
|
|
$
|
4,603
|
|
|
$
|
4,438
|
|
|
|
2.42
|
%
|
|
|
2.34
|
%
|
December 31, 2018
|
|
|
203,155
|
|
|
|
8,362
|
|
|
|
4.12
|
%
|
|
|
193,318
|
|
|
|
4,030
|
|
|
|
4,193
|
|
|
|
2.08
|
%
|
|
|
2.17
|
%
|
($ 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, 2019
|
|
$
|
951
|
|
|
$
|
1,461
|
|
|
|
1.91
|
%
|
|
|
3.03
|
%
|
September 30, 2019
|
|
|
644
|
|
|
|
520
|
|
|
|
1.26
|
%
|
|
|
0.98
|
%
|
June 30, 2019
|
|
|
794
|
|
|
|
568
|
|
|
|
1.36
|
%
|
|
|
0.91
|
%
|
March 31, 2019
|
|
|
877
|
|
|
|
882
|
|
|
|
1.50
|
%
|
|
|
1.51
|
%
|
December 31, 2018
|
|
|
993
|
|
|
|
1,126
|
|
|
|
1.76
|
%
|
|
|
2.02
|
%
|
September 30, 2018
|
|
|
1,005
|
|
|
|
970
|
|
|
|
1.93
|
%
|
|
|
1.85
|
%
|
June 30, 2018
|
|
|
1,063
|
|
|
|
955
|
|
|
|
2.08
|
%
|
|
|
1.84
|
%
|
March 31, 2018
|
|
|
1,271
|
|
|
|
1,118
|
|
|
|
2.37
|
%
|
|
|
2.05
|
%
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
3,266
|
|
|
$
|
3,431
|
|
|
|
1.51
|
%
|
|
|
1.59
|
%
|
December 31, 2018
|
|
|
4,332
|
|
|
|
4,169
|
|
|
|
2.04
|
%
|
|
|
1.95
|
%
|
(1)
|
Portfolio yields and costs of borrowings presented in the
tables above and the tables on pages 42 and 43 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 43
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 $7.9
million for the year ended December 31, 2019 and $8.4 million for
year ended December 31, 2018. Average MBS holdings were $200.3
million and $203.2 million for the years ended December 31, 2019
and 2018, respectively. The $0.5 million decrease in interest
income was due to a 19 bp decrease in yields, combined with a $2.9
million decrease in average MBS holdings.
The table below presents the
average portfolio size, income and yields of our respective
sub-portfolios, consisting of structured MBS and pass-through MBS
(“PT MBS”) for the years ended December 31, 2019 and 2018 and each
quarter during 2019 and 2018.
($ 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, 2019
|
|
$
|
188,884
|
|
|
$
|
1,650
|
|
|
$
|
190,534
|
|
|
$
|
1,870
|
|
|
$
|
29
|
|
|
$
|
1,899
|
|
|
|
3.96
|
%
|
|
|
6.90
|
%
|
|
|
3.99
|
%
|
September 30, 2019
|
|
|
185,309
|
|
|
|
1,890
|
|
|
|
187,199
|
|
|
|
1,652
|
|
|
|
(6
|
)
|
|
|
1,646
|
|
|
|
3.57
|
%
|
|
|
(1.15
|
)%
|
|
|
3.52
|
%
|
June 30, 2019
|
|
|
209,171
|
|
|
|
2,235
|
|
|
|
211,406
|
|
|
|
2,111
|
|
|
|
23
|
|
|
|
2,134
|
|
|
|
4.04
|
%
|
|
|
4.01
|
%
|
|
|
4.04
|
%
|
March 31, 2019
|
|
|
209,469
|
|
|
|
2,564
|
|
|
|
212,033
|
|
|
|
2,143
|
|
|
|
47
|
|
|
|
2,190
|
|
|
|
4.09
|
%
|
|
|
7.42
|
%
|
|
|
4.13
|
%
|
December 31, 2018
|
|
|
209,971
|
|
|
|
2,346
|
|
|
|
212,317
|
|
|
|
2,181
|
|
|
|
46
|
|
|
|
2,227
|
|
|
|
4.15
|
%
|
|
|
7.85
|
%
|
|
|
4.20
|
%
|
September 30, 2018
|
|
|
196,305
|
|
|
|
2,062
|
|
|
|
198,367
|
|
|
|
2,008
|
|
|
|
46
|
|
|
|
2,054
|
|
|
|
4.09
|
%
|
|
|
8.94
|
%
|
|
|
4.14
|
%
|
June 30, 2018
|
|
|
192,368
|
|
|
|
2,309
|
|
|
|
194,677
|
|
|
|
1,959
|
|
|
|
42
|
|
|
|
2,001
|
|
|
|
4.07
|
%
|
|
|
7.16
|
%
|
|
|
4.11
|
%
|
March 31, 2018
|
|
|
204,786
|
|
|
|
2,475
|
|
|
|
207,261
|
|
|
|
2,054
|
|
|
|
26
|
|
|
|
2,080
|
|
|
|
4.01
|
%
|
|
|
4.29
|
%
|
|
|
4.01
|
%
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
$
|
198,208
|
|
|
$
|
2,085
|
|
|
$
|
200,293
|
|
|
$
|
7,776
|
|
|
$
|
93
|
|
|
$
|
7,869
|
|
|
|
3.92
|
%
|
|
|
4.46
|
%
|
|
|
3.93
|
%
|
December 31, 2018
|
|
|
200,858
|
|
|
|
2,297
|
|
|
|
203,155
|
|
|
|
8,202
|
|
|
|
160
|
|
|
|
8,362
|
|
|
|
4.08
|
%
|
|
|
6.97
|
%
|
|
|
4.12
|
%
|
Interest Expense on Repurchase
Agreements and the Cost of Funds
Our average outstanding repurchase
agreements were $189.9 million and $193.3 million, generating
interest expense of $4.6 million and $4.0 million for the years
ended December 31, 2019 and 2018, respectively. Our
average cost of funds was 2.42% and 2.08% for years ended December
31, 2019 and 2018, respectively. There was an 34 bp
increase in the average cost of funds and a $3.5 million decrease
in average outstanding repurchase agreements during the year ended
December 31, 2019 as compared to the year ended December 31,
2018.
Our economic
interest expense was $4.4 million and $4.2 million for the years
ended December 31, 2019 and 2018, respectively. There was a 17 bp
increase in the average economic cost of funds to 2.34% for the
year ended December 31, 2019 from 2.17% for the previous year. The
$0.2 million increase in economic interest expense was due to the
34 bp increase in the average cost of funds noted above, offset by
the $3.5 million decrease in average outstanding repurchase
agreements during the year ended December 31, 2019 and the
favorable performance of our derivative agreements attributed to
the current period.
Since all of our repurchase
agreements are short-term, changes in market rates directly affect
our interest expense. Our average cost of funds calculated on
a GAAP basis was 18 bps above average one-month LIBOR and 10 bps
above average six-month LIBOR for the quarter ended December 31,
2019. Our average economic cost of funds was 94 bps below
average one-month LIBOR and 102 bps below average six-month LIBOR
for the quarter ended December 31, 2019. The average term to
maturity of the outstanding repurchase agreements decreased from 31
days at December 31, 2018 to 24 days at December 31, 2019.
The tables below present the
average outstanding balance under all repurchase agreements,
interest expense and average economic cost of funds, and average
one-month and six-month LIBOR rates for each quarter in 2019 and
2018 and for the years ended December 31, 2019 and 2018 on both a
GAAP and economic basis.
($ 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, 2019
|
|
$
|
182,215
|
|
|
$
|
948
|
|
|
$
|
438
|
|
|
|
2.08
|
%
|
|
|
0.96
|
%
|
September 30, 2019
|
|
|
177,566
|
|
|
|
1,002
|
|
|
|
1,126
|
|
|
|
2.26
|
%
|
|
|
2.54
|
%
|
June 30, 2019
|
|
|
199,901
|
|
|
|
1,340
|
|
|
|
1,566
|
|
|
|
2.68
|
%
|
|
|
3.13
|
%
|
March 31, 2019
|
|
|
199,771
|
|
|
|
1,313
|
|
|
|
1,308
|
|
|
|
2.63
|
%
|
|
|
2.62
|
%
|
December 31, 2018
|
|
|
202,069
|
|
|
|
1,234
|
|
|
|
1,101
|
|
|
|
2.44
|
%
|
|
|
2.18
|
%
|
September 30, 2018
|
|
|
189,582
|
|
|
|
1,049
|
|
|
|
1,084
|
|
|
|
2.21
|
%
|
|
|
2.29
|
%
|
June 30, 2018
|
|
|
184,621
|
|
|
|
938
|
|
|
|
1,046
|
|
|
|
2.03
|
%
|
|
|
2.27
|
%
|
March 31, 2018
|
|
|
197,001
|
|
|
|
809
|
|
|
|
962
|
|
|
|
1.64
|
%
|
|
|
1.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
of
|
|
|
Interest
Expense
|
|
|
Average
Cost of Funds
|
|
|
|
Repurchase
|
|
|
GAAP
|
|
|
Economic
|
|
|
GAAP
|
|
|
Economic
|
|
Years Ended
|
|
Agreements
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
|
Basis
|
|
December 31, 2019
|
|
$
|
189,863
|
|
|
$
|
4,603
|
|
|
|
4,438
|
|
|
|
2.42
|
%
|
|
|
2.34
|
%
|
December 31, 2018
|
|
|
193,318
|
|
|
|
4,030
|
|
|
|
4,193
|
|
|
|
2.08
|
%
|
|
|
2.17
|
%
|
|
|
|
|
|
|
|
|
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, 2019
|
|
|
1.90
|
%
|
|
|
1.98
|
%
|
|
|
0.18
|
%
|
|
|
0.10
|
%
|
|
|
(0.94
|
)%
|
|
|
(1.02
|
)%
|
September 30, 2019
|
|
|
2.22
|
%
|
|
|
2.18
|
%
|
|
|
0.04
|
%
|
|
|
0.08
|
%
|
|
|
0.32
|
%
|
|
|
0.36
|
%
|
June 30, 2019
|
|
|
2.45
|
%
|
|
|
2.49
|
%
|
|
|
0.23
|
%
|
|
|
0.19
|
%
|
|
|
0.68
|
%
|
|
|
0.64
|
%
|
March 31, 2019
|
|
|
2.50
|
%
|
|
|
2.77
|
%
|
|
|
0.13
|
%
|
|
|
(0.14
|
)%
|
|
|
0.12
|
%
|
|
|
(0.15
|
)%
|
December 31, 2018
|
|
|
2.39
|
%
|
|
|
2.74
|
%
|
|
|
0.05
|
%
|
|
|
(0.30
|
)%
|
|
|
(0.21
|
)%
|
|
|
(0.56
|
)%
|
September 30, 2018
|
|
|
2.17
|
%
|
|
|
2.55
|
%
|
|
|
0.04
|
%
|
|
|
(0.34
|
)%
|
|
|
0.12
|
%
|
|
|
(0.26
|
)%
|
June 30, 2018
|
|
|
1.99
|
%
|
|
|
2.48
|
%
|
|
|
0.04
|
%
|
|
|
(0.45
|
)%
|
|
|
0.28
|
%
|
|
|
(0.21
|
)%
|
March 31, 2018
|
|
|
1.69
|
%
|
|
|
2.11
|
%
|
|
|
(0.05
|
)%
|
|
|
(0.47
|
)%
|
|
|
0.27
|
%
|
|
|
(0.15
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
|
|
2.27
|
%
|
|
|
2.35
|
%
|
|
|
0.15
|
%
|
|
|
0.07
|
%
|
|
|
0.07
|
%
|
|
|
(0.01
|
)%
|
December 31, 2018
|
|
|
2.06
|
%
|
|
|
2.47
|
%
|
|
|
0.02
|
%
|
|
|
(0.39
|
)%
|
|
|
0.11
|
%
|
|
|
(0.30
|
)%
|
Dividend Income
At both December 31, 2019 and
2018, we owned 1,520,036 shares of Orchid common stock.
Orchid paid total dividends of $0.96 per share during 2019 and
$1.07 per share during 2018. During the years ended December
31, 2019 and 2018, we received dividends on this common stock
investment of approximately $1.5 million and $1.6 million,
respectively.
Long-Term
Debt
Junior Subordinated Debt
Interest expense on our junior
subordinated debt securities was approximately $1.6 million and
$1.5 for the years ended December 31, 2019 and 2018,
respectively. The average rate of interest paid for the year
ended December 31, 2019 was 5.94% compared to 5.65% for the year
ended December 31, 2018. 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, 2019, the interest rate was 5.39%.
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.
Gains or Losses
and Other Income
The table below presents our gains
or losses and other income for the years ended December 31, 2019
and 2018.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Realized gains (losses) on sales of
MBS
|
|
$
|
23
|
|
|
$
|
(577
|
)
|
|
$
|
600
|
|
Unrealized gains (losses) on MBS
|
|
|
6,338
|
|
|
|
(7,307
|
)
|
|
|
13,645
|
|
Total gains (losses) on MBS
|
|
|
6,361
|
|
|
|
(7,884
|
)
|
|
|
14,245
|
|
Losses on derivative instruments
|
|
|
(5,818
|
)
|
|
|
(276
|
)
|
|
|
(5,542
|
)
|
Gains on retained interests in
securitizations
|
|
|
315
|
|
|
|
1,103
|
|
|
|
(788
|
)
|
Unrealized losses on Orchid Island
Capital, Inc. common stock
|
|
|
(821
|
)
|
|
|
(4,393
|
)
|
|
|
3,572
|
|
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, 2019, we received proceeds of $44.0 million
from the sales of MBS compared to $60.4 million for the year ended
December 31, 2018.
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 2019 and 2018.
|
|
|
|
|
|
|
|
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, 2019
|
|
|
1.69
|
%
|
|
|
1.92
|
%
|
|
|
3.18
|
%
|
|
|
3.72
|
%
|
|
|
1.91
|
%
|
September 30, 2019
|
|
|
1.55
|
%
|
|
|
1.68
|
%
|
|
|
3.12
|
%
|
|
|
3.61
|
%
|
|
|
2.13
|
%
|
June 30, 2019
|
|
|
1.76
|
%
|
|
|
2.00
|
%
|
|
|
3.24
|
%
|
|
|
3.80
|
%
|
|
|
2.40
|
%
|
March 31, 2019
|
|
|
2.24
|
%
|
|
|
2.41
|
%
|
|
|
3.72
|
%
|
|
|
4.27
|
%
|
|
|
2.61
|
%
|
December 31, 2018
|
|
|
2.51
|
%
|
|
|
2.69
|
%
|
|
|
4.09
|
%
|
|
|
4.64
|
%
|
|
|
2.80
|
%
|
September 30, 2018
|
|
|
2.95
|
%
|
|
|
3.06
|
%
|
|
|
4.08
|
%
|
|
|
4.63
|
%
|
|
|
2.40
|
%
|
June 30, 2018
|
|
|
2.73
|
%
|
|
|
2.85
|
%
|
|
|
4.04
|
%
|
|
|
4.57
|
%
|
|
|
2.34
|
%
|
March 31, 2018
|
|
|
2.56
|
%
|
|
|
2.74
|
%
|
|
|
3.91
|
%
|
|
|
4.44
|
%
|
|
|
2.31
|
%
|
(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,
2019, our total operating expenses were approximately $6.4 million
compared to approximately $6.4 million for the year ended December
31, 2018. The table below presents a breakdown of operating
expenses for the years ended December 31, 2019 and 2018.
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Compensation and benefits
|
|
$
|
4,116
|
|
|
$
|
4,011
|
|
|
$
|
105
|
|
Legal fees
|
|
|
148
|
|
|
|
93
|
|
|
|
55
|
|
Accounting, auditing and other
professional fees
|
|
|
342
|
|
|
|
359
|
|
|
|
(17
|
)
|
Directors’ fees and liability
insurance
|
|
|
654
|
|
|
|
642
|
|
|
|
12
|
|
Administrative and other
expenses
|
|
|
1,180
|
|
|
|
1,338
|
|
|
|
(158
|
)
|
|
|
$
|
6,440
|
|
|
$
|
6,443
|
|
|
$
|
(3
|
)
|
In 2019, we recorded an income tax
benefit of $10.3 million, including a $11.1 million decrease in the
deferred tax asset valuation allowance as a result of management’s
reassessment, as of December 31, 2019, of the Company’s ability to
utilize tax net operating losses (“NOLs”) to offset future taxable
income. During 2019, Orchid raised capital, which is expected to
result in an increase in future management fee revenue. Because of
this increase in cash flows, and projections for future growth,
management has revised its estimated utilization of NOL
carryforwards in future periods, resulting in a decrease in the
deferred tax valuation asset allowance as of December 31,
2019.
In 2018, we recorded an income tax
provision of $21.1 million, including a $22.5 million increase in
the deferred tax asset valuation allowance as a result of
management’s reassessment, as of December 31, 2018, of the
Company’s ability to utilize NOLs to offset future taxable income.
During 2018, Orchid’s book value and monthly dividend decreased,
which caused decreases in management fee revenue and dividend
income on Orchid stock. Because of this decrease in cash flows in
2018, management revised its estimated utilization of NOL
carryforwards in future periods, which resulted in an increase in
the deferred tax valuation asset allowance recorded in 2018.
Financial Condition:
Mortgage-Backed
Securities
As of December 31, 2019, our MBS
portfolio consisted of $217.8 million of agency or government MBS
at fair value and had a weighted average coupon of 4.25%.
During the year ended December 31, 2019, we received principal
repayments of $22.7 million compared to $23.5 million for the year
ended December 31, 2018. The average prepayment speeds for
the quarters ended December 31, 2019 and 2018 were 15.6% and 6.6%,
respectively.
The following table presents the
3-month constant prepayment rate (“CPR”) experienced on our
structured and PT MBS sub-portfolios, on an annualized basis, for
the quarterly periods presented. CPR is a method of
expressing the prepayment rate for a mortgage pool that assumes
that a constant fraction of the remaining principal is prepaid each
month or year. Specifically, the CPR in the chart below represents
the three month prepayment rate of the securities in the respective
asset category. Assets that were not owned for the entire
quarter have been excluded from the calculation. The
exclusion of certain assets during periods of high trading activity
can create a very high, and often volatile, reliance on a small
sample of underlying loans.
|
|
|
|
|
Structured
|
|
|
|
|
|
|
PT
MBS
|
|
|
MBS
|
|
|
Total
|
|
Three Months
Ended
|
|
Portfolio
(%)
|
|
|
Portfolio
(%)
|
|
|
Portfolio
(%)
|
|
December 31, 2019
|
|
|
15.6
|
|
|
|
15.6
|
|
|
|
15.6
|
|
September 30, 2019
|
|
|
9.5
|
|
|
|
16.2
|
|
|
|
10.5
|
|
June 30, 2019
|
|
|
9.9
|
|
|
|
14.6
|
|
|
|
10.5
|
|
March 31, 2019
|
|
|
5.7
|
|
|
|
13.4
|
|
|
|
6.8
|
|
December 31, 2018
|
|
|
5.5
|
|
|
|
11.7
|
|
|
|
6.6
|
|
September 30, 2018
|
|
|
8.6
|
|
|
|
13.5
|
|
|
|
9.5
|
|
June 30, 2018
|
|
|
13.4
|
|
|
|
11.6
|
|
|
|
13.1
|
|
March 31, 2018
|
|
|
7.2
|
|
|
|
16.8
|
|
|
|
8.6
|
|
The following tables summarize
certain characteristics of our PT MBS and structured MBS as of
December 31, 2019 and 2018:
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Percentage
|
|
Average
|
|
|
|
|
of
|
Weighted
|
Maturity
|
|
|
|
Fair
|
Entire
|
Average
|
in
|
Longest
|
Asset
Category
|
|
Value
|
Portfolio
|
Coupon
|
Months
|
Maturity
|
December 31,
2019
|
|
|
|
|
|
|
Fixed Rate PT MBS
|
$
|
216,231
|
99.3%
|
4.25%
|
316
|
1-Nov-49
|
Interest-Only Securities
|
|
1,024
|
0.4%
|
3.65%
|
281
|
15-Jul-48
|
Inverse Interest-Only Securities
|
|
586
|
0.3%
|
4.77%
|
254
|
25-Apr-41
|
Total Mortgage Assets
|
$
|
217,841
|
100.0%
|
4.25%
|
316
|
1-Nov-49
|
December 31,
2018
|
|
|
|
|
|
|
Fixed Rate PT MBS
|
$
|
209,675
|
98.7%
|
4.26%
|
327
|
1-Aug-48
|
Interest-Only Securities
|
|
2,021
|
1.0%
|
3.69%
|
293
|
15-Jul-48
|
Inverse Interest-Only Securities
|
|
728
|
0.3%
|
4.06%
|
272
|
25-Apr-41
|
Total Mortgage Assets
|
$
|
212,424
|
100.0%
|
4.25%
|
327
|
1-Aug-48
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
|
|
Percentage
of
|
|
Agency
|
|
Fair
Value
|
|
|
Entire
Portfolio
|
|
|
Fair
Value
|
|
|
Entire
Portfolio
|
|
Fannie Mae
|
|
$
|
203,321
|
|
|
|
93.3
|
%
|
|
$
|
193,437
|
|
|
|
91.1
|
%
|
Freddie Mac
|
|
|
14,499
|
|
|
|
6.7
|
%
|
|
|
18,881
|
|
|
|
8.9
|
%
|
Ginnie Mae
|
|
|
21
|
|
|
|
0.0
|
%
|
|
|
106
|
|
|
|
0.0
|
%
|
Total Portfolio
|
|
$
|
217,841
|
|
|
|
100.0
|
%
|
|
$
|
212,424
|
|
|
|
100.0
|
%
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Weighted Average Pass-through Purchase
Price
|
|
$
|
107.12
|
|
|
$
|
106.81
|
|
Weighted Average Structured Purchase
Price
|
|
$
|
6.39
|
|
|
$
|
6.39
|
|
Weighted Average Pass-through Current
Price
|
|
$
|
108.77
|
|
|
$
|
103.87
|
|
Weighted Average Structured Current
Price
|
|
$
|
6.91
|
|
|
$
|
8.67
|
|
Effective Duration (1)
|
|
|
3.196
|
|
|
|
3.935
|
|
(1)
|
Effective duration is the approximate percentage change in
price for a 100 bp change in rates. An effective duration of
3.196 indicates that an interest rate increase of 1.0% would be
expected to cause a 3.196% decrease in the value of the MBS in our
investment portfolio at December 31, 2019. An effective
duration of 3.935 indicates that an interest rate increase of 1.0%
would be expected to cause a 3.935% decrease in the value of the
MBS in our investment portfolio at December 31, 2018. 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, 2019 and 2018.
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Total
Cost
|
|
|
Average
Price
|
|
|
Weighted
Average Yield
|
|
|
Total
Cost
|
|
|
Average
Price
|
|
|
Weighted
Average Yield
|
|
PT MBS
|
|
$
|
65,781
|
|
|
$
|
108.77
|
|
|
|
2.73
|
%
|
|
$
|
93,381
|
|
|
$
|
104.67
|
|
|
|
3.67
|
%
|
Structured MBS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,136
|
|
|
|
22.73
|
|
|
|
7.43
|
%
|
Our portfolio of PT MBS is
typically comprised of adjustable-rate MBS, fixed-rate MBS and
hybrid adjustable-rate MBS. We generally seek to acquire low
duration assets that offer high levels of protection from mortgage
prepayments provided that they are reasonably priced by the
market. The stated contractual final maturity of the mortgage
loans underlying our portfolio of PT MBS generally ranges up to
30 years. However, the effect of prepayments of the underlying
mortgage loans tends to shorten the resulting cash flows from our
investments substantially. Prepayments occur for various reasons,
including refinancing of underlying mortgages, loan payoffs in
connection with home sales, and borrowers paying more than their
scheduled loan payments, which accelerates the amortization of the
loans.
The duration of our IO and IIO
portfolio will vary greatly depending on the structural features of
the securities. While prepayment activity will always affect
the cash flows associated with the securities, the interest only
nature of IO’s may cause their durations to become extremely
negative when prepayments are high, and less negative when
prepayments are low. Prepayments affect the 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 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,
2019, 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)
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Fair
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$ Change
in Fair Value
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% Change
in Fair Value
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MBS Portfolio
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Value
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-100BPS
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+100BPS
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+200BPS
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-100BPS
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+100BPS
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+200BPS
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Fixed Rate MBS
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$
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216,23 |