Bimini Capital Management, Inc 10-Q for FY2023 Q1
Bimini Capital Management, Inc. (BMNM)
About this 10-Q
Bimini Capital Management, Inc filed this 10-Q on May 12, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.21M
- up 6.1% from $3.97M a year earlier
- Net income
- $1.01M
- compared with a net loss of $3.48M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number:
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| Bimini Capital Management, Inc. |
| (Exact name of registrant as specified in its charter) |
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
| Title of each Class | Latest Practicable Date | Shares Outstanding |
| Class A Common Stock, $0.001 par value | May 12, 2023 | |
| Class B Common Stock, $0.001 par value | May 12, 2023 | |
| Class C Common Stock, $0.001 par value | May 12, 2023 | |
BIMINI CAPITAL MANAGEMENT, INC.
TABLE OF CONTENTS
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (Unaudited) |
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| March 31, 2023 | December 31, 2022 | |||||||
| ASSETS: |
||||||||
| Mortgage-backed securities, at fair value: |
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| Pledged to counterparties |
$ | $ | ||||||
| Unpledged |
||||||||
| Total mortgage-backed securities |
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| Cash and cash equivalents |
||||||||
| Restricted cash |
||||||||
| Orchid Island Capital, Inc. common stock, at fair value |
||||||||
| Accrued interest receivable |
||||||||
| Property and equipment, net |
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| Deferred tax assets |
||||||||
| Due from affiliates |
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| Other assets |
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| Total Assets |
$ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY |
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| LIABILITIES: |
||||||||
| Repurchase agreements |
$ | $ | ||||||
| Long-term debt |
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| Accrued interest payable |
||||||||
| Other liabilities |
||||||||
| Total Liabilities |
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| COMMITMENTS AND CONTINGENCIES (Note 9) |
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| STOCKHOLDERS' EQUITY: |
||||||||
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; 100,000 shares designated Series A Junior Preferred Stock, 9,900,000 shares undesignated; no shares issued and outstanding as of March 31, 2023 and December 31, 2022 |
||||||||
| Class A Common stock, $0.001 par value; 98,000,000 shares designated: 10,019,888 shares issued and outstanding as of March 31, 2023 and December 31, 2022 |
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| Class B Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2023 and December 31, 2022 |
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| Class C Common stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2023 and December 31, 2022 |
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| Additional paid-in capital |
||||||||
| Accumulated deficit |
( |
) | ( |
) | ||||
| Stockholders’ Equity |
||||||||
| Total Liabilities and Stockholders' Equity |
$ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
|||||||||
| (Unaudited) |
|||||||||
| For the Three Months Ended March 31, 2023 and 2022 |
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Advisory services | $ | $ | ||||||
| Interest income | ||||||||
| Dividend income from Orchid Island Capital, Inc. common stock | ||||||||
| Total revenues | ||||||||
| Interest expense | ||||||||
| Repurchase agreements | ( | ) | ( | ) | ||||
| Long-term debt | ( | ) | ( | ) | ||||
| Net revenues | ||||||||
| Other income (expense): | ||||||||
| Unrealized gains (losses) on mortgage-backed securities | ( | ) | ||||||
| Unrealized gains (losses) on Orchid Island Capital Inc. common stock | ( | ) | ||||||
| Losses on derivative instruments | ( | ) | ||||||
| Other income | ||||||||
| Total other income (expense) | ( | ) | ||||||
| Expenses: | ||||||||
| Compensation and related benefits | ||||||||
| Direct advisory services costs | ||||||||
| Directors' fees and liability insurance | ||||||||
| Audit, legal and other professional fees | ||||||||
| Administrative and other expenses | ||||||||
| Total expenses | ||||||||
| Net income (loss) before income tax provision (benefit) | ( | ) | ||||||
| Income tax provision (benefit) | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Basic and Diluted Net Income (Loss) Per Share of: | ||||||||
| CLASS A COMMON STOCK | ||||||||
| Basic and Diluted | $ | $ | ( | ) | ||||
| CLASS B COMMON STOCK | ||||||||
| Basic and Diluted | $ | $ | ( | ) | ||||
| Weighted Average Shares Outstanding: | ||||||||
| CLASS A COMMON STOCK | ||||||||
| Basic and Diluted | ||||||||
| CLASS B COMMON STOCK | ||||||||
| Basic and Diluted | ||||||||
See Notes to Condensed Consolidated Financial Statements
| CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
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| (Unaudited) |
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| For the Three Months Ended March 31, 2023 and 2022 |
| Stockholders' Equity |
||||||||||||||||||||
| Common Stock |
Additional |
Accumulated |
||||||||||||||||||
| Shares |
Par Value |
Paid-in Capital |
Deficit |
Total |
||||||||||||||||
| Balances, January 1, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Net income |
- | |||||||||||||||||||
| Balances, March 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Balances, January 1, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Net loss |
- | ( |
) | ( |
) | |||||||||||||||
| Class A common shares repurchased and retired |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Balances, March 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|||||
| (Unaudited) |
|||||
| For the Three Months Ended March 31, 2023 and 2022 |
| 2023 |
2022 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net income (loss) |
$ | $ | ( |
) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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| Depreciation |
||||||||
| Deferred income tax provision (benefit) |
( |
) | ||||||
| Unrealized (gains) losses on mortgage-backed securities |
( |
) | ||||||
| Unrealized (gains) losses on Orchid Island Capital, Inc. common stock |
( |
) | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accrued interest receivable |
||||||||
| Due from affiliates |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ||||||
| Accrued interest payable |
||||||||
| Other liabilities |
( |
) | ( |
) | ||||
| NET CASH USED IN OPERATING ACTIVITIES |
( |
) | ( |
) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| From mortgage-backed securities investments: |
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| Principal repayments |
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| Purchases of property and equipment |
( |
) | ||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES |
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| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from repurchase agreements |
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| Principal repayments on repurchase agreements |
( |
) | ( |
) | ||||
| Principal repayments on long-term debt |
( |
) | ( |
) | ||||
| Class A common shares repurchased and retired |
( |
) | ||||||
| NET CASH USED IN FINANCING ACTIVITIES |
( |
) | ( |
) | ||||
| NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
( |
) | ( |
) | ||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period |
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| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period |
$ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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| Cash paid during the period for: |
||||||||
| Interest expense |
$ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2023
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business Description
Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital” or the “Company”) formed in September 2003, is a holding company. The Company operates in
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), are collectively referred to as "Bimini Advisors." Bimini Advisors manages a residential mortgage-backed securities (“MBS”) portfolio for Orchid Island Capital, Inc. ("Orchid") and receives fees for providing these services. Effective April 1, 2022, Bimini Advisors started providing certain repurchase agreement trading, clearing and administrative services to Orchid that were previously provided by a third party. Bimini Advisors also manages the MBS portfolio of Royal Palm Capital, LLC.
Royal Palm Capital, LLC maintains an investment portfolio, consisting primarily of MBS investments and shares of Orchid common stock, for its own benefit. Royal Palm Capital, LLC and its wholly-owned subsidiaries are collectively referred to as "Royal Palm."
Segment Reporting
The Company’s operations are classified into
Consolidation
The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and Royal Palm. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they may not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
The consolidated balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include determining the fair values of MBS and derivatives, the value of Orchid Common Stock, determining the amounts of asset valuation allowances, and the computation of the income tax provision or benefit and the deferred tax asset allowances recorded for each accounting period.
Variable Interest Entities (“VIEs”)
A variable interest entity ("VIE") is consolidated by an enterprise if it is deemed the primary beneficiary of the VIE. The Company obtains interests in VIEs through its investments in mortgage-backed securities. The interests in these VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future. As a result, the Company does not consolidate these VIEs and accounts for the interest in these VIEs as mortgage-backed securities. See Note 3 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities. Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital's junior subordinated notes, see Note 7.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and derivative instruments. The following table presents the Company’s cash, cash equivalents and restricted cash as of March 31, 2023 and December 31, 2022.
| March 31, 2023 | December 31, 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
The Company maintains cash balances at several banks and excess margin with an exchange clearing member. At times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash balances are uninsured, but are held in separate accounts that are segregated from the general funds of the counterparty. The Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.
Advisory Services
Orchid is externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. Under the terms of the management agreement, Orchid is obligated to pay Bimini Advisors a monthly management fee and a pro rata portion of certain overhead costs and to reimburse the Company for any direct expenses incurred on its behalf. Revenues from management fees are recognized over the period of time in which the service is performed in accordance with FASB Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Further information regarding the management agreement is presented in Note 2 to the consolidated financial statements.
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through (“PT”) mortgage-backed securities issued by Freddie Mac, Fannie Mae or Ginnie Mae (“MBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans. The Company refers to MBS and CMOs as PT MBS and IO and IIO securities as structured MBS. The Company has elected to account for its investment in MBS under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management’s view, more appropriately reflects the results of the Company’s operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.
The Company records MBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the MBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on independent pricing sources and/or third-party broker quotes, when available.
Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains and losses on MBS in the consolidated statements of operations. For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations. The amount reported as unrealized gains or losses on mortgage-backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period. Realized gains and losses on sales of MBS and U.S. Treasury Notes, using the specific identification method, are reported as a separate component of net portfolio income on the statement of operations.
Orchid Island Capital, Inc. Common Stock
The Company accounts for its investment in Orchid common shares at fair value. The change in the fair value and dividends received on this investment are reflected in the consolidated statements of operations. We estimate the fair value of Orchid’s common shares on a market approach using “Level 1” inputs based on the quoted market price of Orchid’s common stock on a national stock exchange.
Retained Interests in Securitizations
The Company holds retained interests in the subordinated tranches of securities created in securitization transactions. These retained interests currently have a recorded fair value of zero, as the prospect of future cash flows being received is uncertain. Any cash received from the retained interests is reflected as a gain in the consolidated statements of operations.
Derivative Financial Instruments
The Company has historically used derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used are interest rate futures contracts, and “to-be-announced” (“TBA”) securities transactions. The Company accounts for TBA securities as derivative instruments. Other types of derivative instruments may be used in the future. Gains and losses associated with derivative transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations.
During the three months ended March 31, 2023, the Company only held T-Note futures contracts. The Company recorded losses of approximately $
Derivative instruments are carried at fair value, and changes in fair value are recorded in the consolidated operations for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities. Gains and losses on derivatives, except those that result in cash receipts or payments, are included in operating activities on the statements of cash flows. Cash payments and cash receipts from settlement of derivatives, including current period net cash settlements on interest rate swaps, are classified as an investing activity on the statements of cash flows. The Company's derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, related assets and liabilities are reported on a gross basis in the Company's consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in the consolidated balance sheets.
Holding derivatives creates exposure to credit risk related to the potential for failure by counterparties to honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required. The Company’s futures contracts are exchange traded contracts that are valued based on exchange pricing with daily margin requirements. The margin requirement varies based on the market value of the open position and the equity retained in the account. Margin posted is treated as settlement of the outstanding value of the futures contract. Any margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s balance sheets. The Company realizes gains and losses on these contracts upon expiration equal to the difference between the current fair value of the underlying asset and the contractual price of the futures contract.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the consolidated financial statements or in the accompanying notes. MBS, Orchid common stock and derivative assets and liabilities are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 12 of the consolidated financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as Level 2 assets under the fair value hierarchy as of March 31, 2023 and December 31, 2022, due to the short-term nature of these financial instruments.
The fair value of the Company’s junior subordinated debt approximates its carrying value. The carrying value is a reasonable estimate of fair value since the instrument carries a floating rate that resets frequently. Further information regarding this instrument is presented in Note 7 to the consolidated financial statements.
Property and Equipment, net
Property and equipment, net, consists of computer equipment with a depreciable life of
Repurchase Agreements
The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Earnings Per Share
Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.
Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared, if any, on each share of Class A Common Stock. Accordingly, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.
The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class B and Class C Common Stock are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.
Income Taxes
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on the Company’s evaluation, it is more likely than not that they will not be realized.
The Company’s U.S. federal income tax returns for years ended on or after December 31, 2019 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company. For tax filing purposes, Bimini Capital and its includable subsidiaries, and Royal Palm and its includable subsidiaries, file as separate tax paying entities.
The Company assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change. The Company recognizes tax positions in the consolidated financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit and is recorded as a liability in the consolidated balance sheets. The Company records income tax-related interest and penalties, if applicable, within the income tax provision.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank Offered Rate (“LIBOR,”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. In December 2022, the FASB issued ASU 2022-06 “Reference Rate Reform (Topic 848)," deferring the sunset date provided in ASU 2020-04 from December 31, 2022 to December 31, 2024. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848)”. ASU 2021-01 expands the scope of ASC 848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for margining, discounting or contract price alignment of certain derivatives as a result of reference rate reform initiatives and extends optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. The guidance in ASU 2021-01 is effective immediately and available generally through December 31, 2024, as reference rate reform activities occur. The Company does not believe the adoption of this ASU will have a material impact on its consolidated financial statements.
NOTE 2. ADVISORY SERVICES
Bimini Advisors serves as the manager and advisor for Orchid pursuant to the terms of a management agreement. As Manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it. Bimini Advisors receives a monthly management fee in the amount of:
| ● | One- of |
| ● | One- of |
| ● | One- of |
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been previously provided by a third party. In consideration for such services, Orchid will pay the following fees to the Company:
| ● | A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by |
| ● | A fee for the clearing and operational services provided by personnel of the Manager equal to $ |
Orchid is obligated to reimburse Bimini Advisors for any direct expenses incurred on its behalf and to pay to Bimini Advisors an amount equal to Orchid's pro rata portion of certain overhead costs set forth in the management agreement. Orchid is required to pay Bimini Advisors by the 15th day of the month following the month the services are performed. The management agreement has been renewed through February 20, 2024 and provides for automatic -year extension options thereafter. Should Orchid terminate the management agreement without cause, it will be obligated to pay Bimini Advisors a termination fee equal to
The following table summarizes the advisory services revenue from Orchid for the three months ended March 31, 2023 and 2022.
| (in thousands) | ||||||||
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Management fee | $ | $ | ||||||
| Allocated overhead | ||||||||
| Repurchase, Clearing and Administrative Fee | ||||||||
| Total | $ | $ | ||||||
At March 31, 2023 and December 31, 2022, the net amount due from Orchid was approximately $
NOTE 3. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s MBS portfolio as of March 31, 2023 and December 31, 2022:
| (in thousands) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Fixed-rate MBS | $ | $ | ||||||
| Structured MBS | ||||||||
| Total | $ | $ | ||||||
NOTE 4. REPURCHASE AGREEMENTS
The Company pledges certain of its MBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of March 31, 2023, the Company had met all margin call requirements.
As of March 31, 2023 and December 31, 2022, the Company’s repurchase agreements had remaining maturities as summarized below:
| ($ in thousands) | ||||||||||||||||||||
| OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
| (1 DAY OR | AND | AND | THAN | |||||||||||||||||
| LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||
| Fair value of securities pledged, including accrued interest receivable | $ | $ | $ | $ | $ | |||||||||||||||
| Repurchase agreement liabilities associated with these securities | $ | $ | $ | $ | $ | |||||||||||||||
| Net weighted average borrowing rate | % | % | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Fair value of securities pledged, including accrued interest receivable | $ | $ | $ | $ | $ | |||||||||||||||
| Repurchase agreement liabilities associated with these securities | $ | $ | $ | $ | $ | |||||||||||||||
| Net weighted average borrowing rate | % | % | % | |||||||||||||||||
In addition, cash pledged to counterparties for repurchase agreements was approximately $
If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any. At March 31, 2023 and December 31, 2022, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $
NOTE 5. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes Bimini’s assets pledged as collateral under its repurchase agreements and derivative agreements as of March 31, 2023 and December 31, 2022.
| ($ in thousands) | ||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
| Agreements | Agreements | Total | Agreements | Agreements | Total | |||||||||||||||||||
| PT MBS - at fair value | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Structured MBS - at fair value | ||||||||||||||||||||||||
| Accrued interest on pledged securities | ||||||||||||||||||||||||
| Restricted cash | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Assets Pledged from Counterparties
The table below summarizes cash pledged to Bimini from counterparties under repurchase agreements as of March 31, 2023 and December 31, 2022. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements in the consolidated balance sheets.
| ($ in thousands) | ||||||||
| Assets Pledged to Bimini | March 31, 2023 | December 31, 2022 | ||||||
| Cash | $ | $ | ||||||
| Total | $ | $ | ||||||
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of March 31, 2023 and December 31, 2022.
| (in thousands) | ||||||||||||||||||||||||
| Offsetting of Liabilities | ||||||||||||||||||||||||
| Gross Amount Not Offset in the | ||||||||||||||||||||||||
| Net Amount | Consolidated Balance Sheet | |||||||||||||||||||||||
| Gross Amount | of Liabilities | Financial | ||||||||||||||||||||||
| Gross Amount | Offset in the | Presented in the | Instruments | Cash | ||||||||||||||||||||
| of Recognized | Consolidated | Consolidated | Posted as | Posted as | Net | |||||||||||||||||||
| Liabilities | Balance Sheet | Balance Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted for, or received against, repurchase obligations and derivative instruments.
NOTE 7. LONG-TERM DEBT
Long-term debt at March 31, 2023 and December 31, 2022 is summarized as follows:
| (in thousands) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Junior subordinated debt | $ | $ | ||||||
| Secured note payable | ||||||||
| Total | $ | $ | ||||||
Junior Subordinated Debt
During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) of which
As of March 31, 2023 and December 31, 2022, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $
The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to BCTII as a liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets). For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.
Secured Note Payable
On October 30, 2019, the Company borrowed $
The table below presents the future scheduled principal payments on the Company’s long-term debt.
| (in thousands) | ||||
| Last nine months of 2023 | $ | |||
| For the years ended: | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| After 2027 | ||||
| Total | $ |
NOTE 8. COMMON STOCK
There were
Stock Repurchase Plans
On March 26, 2018, the Board of Directors of the Company (the “Board”) approved a Stock Repurchase Plan (the “2018 Repurchase Plan”). Pursuant to the 2018 Repurchase Plan, the Company could purchase up to
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $
The Inflation Reduction Act of 2022 signed into law during in August 2022 includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and provisions. The excise tax is effective beginning in 2023.
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.
In April 2020 and November 2021, the Company received demands for payment from Citigroup, Inc. in the total amount of $
Management is not aware of any other significant reported or unreported contingencies at March 31, 2023.
NOTE 10. INCOME TAXES
The total income tax provision (benefit) recorded for the three months ended March 31, 2023 and 2022 was $
The Company’s tax provision is based on a projected effective rate based on annualized amounts applied to actual income to date and includes the expected realization of a portion of the tax benefits of federal and state net operating losses carryforwards (“NOLs”). In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of capital loss and NOL carryforwards is dependent upon the generation of future capital gains and taxable income in periods prior to their expiration. The Company currently provides a valuation allowance against a portion of the NOLs since the Company believes that it is more likely than not that some of the benefits will not be realized in the future. The Company will continue to assess the need for, and the amount of, the valuation allowance at each reporting date.
NOTE 11. EARNINGS PER SHARE
Shares of Class B common stock, participating and convertible into Class A common stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A common stock if, and when, authorized and declared by the Board of Directors. The Class B common stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A common stock. Shares of Class B common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at March 31, 2023 and 2022.
Shares of Class C common stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C common stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A common stock were not met at March 31, 2023 and 2022.
The table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2023 and 2022.
| (in thousands, except per-share information) | ||||||||
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Basic and diluted EPS per Class A common share: | ||||||||
| Income (loss) attributable to Class A common shares: | ||||||||
| Basic and diluted | $ | $ | ( | ) | ||||
| Weighted average common shares: | ||||||||
| Class A common shares outstanding at the balance sheet date | ||||||||
| Effect of weighting | ||||||||
| Weighted average shares-basic and diluted | ||||||||
| Income (loss) per Class A common share: | ||||||||
| Basic and diluted | $ | $ | ( | ) | ||||
| (in thousands, except per-share information) | ||||||||
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Basic and diluted EPS per Class B common share: | ||||||||
| Income (loss) attributable to Class B common shares: | ||||||||
| Basic and diluted | $ | $ | ( | ) | ||||
| Weighted average common shares: | ||||||||
| Class B common shares outstanding at the balance sheet date | ||||||||
| Weighted average shares-basic and diluted | ||||||||
| Income (loss) per Class B common share: | ||||||||
| Basic and diluted | $ | $ | ( | ) | ||||
NOTE 12. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:
| ● | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), |
| ● | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and |
| ● | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
MBS, Orchid common stock, retained interests and TBA securities were all recorded at fair value on a recurring basis during the three months ended March 31, 2023 and 2022. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.
The Company's MBS and TBA securities are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third party broker quotes. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds), spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA security), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2 valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model. Retained interests have a recorded fair value of
The following table presents financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
| (in thousands) | ||||||||||||||||
| Quoted Prices | ||||||||||||||||
| in Active | Significant | |||||||||||||||
| Markets for | Other | Significant | ||||||||||||||
| Identical | Observable | Unobservable | ||||||||||||||
| Fair Value | Assets | Inputs | Inputs | |||||||||||||
| Measurements | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| March 31, 2023 | ||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
| Orchid Island Capital, Inc. common stock | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
| Orchid Island Capital, Inc. common stock | ||||||||||||||||
During the three months ended March 31, 2023 and 2022, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.
NOTE 13. SEGMENT INFORMATION
The Company’s operations are classified into
The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. As discussed in Note 2, the revenues of the asset management segment consist of management fees and overhead reimbursements received pursuant to a management agreement with Orchid. Total revenues received under this management agreement for the three months ended March 31, 2023 and 2022, were approximately $
The investment portfolio segment includes the investment activities conducted by Royal Palm. The investment portfolio segment receives revenue in the form of interest and dividend income on its investments.
Segment information for the three months ended March 31, 2023 and 2022 is as follows:
| (in thousands) | ||||||||||||||||||||
| Asset | Investment | |||||||||||||||||||
| Management | Portfolio | Corporate | Eliminations | Total | ||||||||||||||||
| 2023 | ||||||||||||||||||||
| Advisory services, external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Advisory services, other operating segments(1) | ( | ) | ||||||||||||||||||
| Interest and dividend income | ||||||||||||||||||||
| Interest expense(2) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net revenues | ( | ) | ( | ) | ||||||||||||||||
| Other revenue | ||||||||||||||||||||
| Operating expenses(3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Intercompany expenses(1) | ( | ) | ||||||||||||||||||
| Income (loss) before income taxes | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Asset | Investment | |||||||||||||||||||
| Management | Portfolio | Corporate | Eliminations | Total | ||||||||||||||||
| 2022 | ||||||||||||||||||||
| Advisory services, external customers | $ | $ | $ | $ | $ | |||||||||||||||
| Advisory services, other operating segments(1) | ( | ) | ||||||||||||||||||
| Interest and dividend income | ||||||||||||||||||||
| Interest expense(2) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net revenues | ( | ) | ( | ) | ||||||||||||||||
| Other revenue (expenses) | ( | ) | ( | ) | ||||||||||||||||
| Operating expenses(3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Intercompany expenses(1) | ( | ) | ||||||||||||||||||
| Income (loss) before income taxes | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||
| (1) | Includes fees paid by Royal Palm to Bimini Advisors for advisory services. |
| (2) | Includes interest on repurchase agreements in the Investment Portfolio column and long-term debt in the Corporate column. |
| (3) | Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
Assets in each reportable segment as of March 31, 2023 and December 31, 2022 were as follows:
| (in thousands) | ||||||||||||||||
| Asset | Investment | |||||||||||||||
| Management | Portfolio | Corporate | Total | |||||||||||||
| March 31, 2023 | $ | $ | $ | |||||||||||||
| December 31, 2022 | ||||||||||||||||
NOTE 14. RELATED PARTY TRANSACTIONS
Relationships with Orchid
At both March 31, 2023 and December 31, 2022, the Company owned
Robert Cauley, the Chief Executive Officer and Chairman of the Board of Directors of the Company, also serves as Chief Executive Officer and Chairman of the Board of Directors of Orchid, is eligible to receive compensation from Orchid, and owns shares of common stock of Orchid. In addition, Hunter Haas, the Chief Financial Officer, Chief Investment Officer and Treasurer of the Company, also serves as Chief Financial Officer, Chief Investment Officer and Secretary of Orchid, is a member of Orchid’s Board of Directors, receives compensation from Orchid, and owns shares of common stock of Orchid. Robert J. Dwyer and Frank E. Jaumot, who are the Company's independent directors, each own shares of common stock of Orchid.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Overview
Bimini Capital Management, Inc. ("Bimini Capital" or the "Company") is a holding company that was formed in September 2003. The Company’s principal wholly-owned operating subsidiary is Royal Palm Capital, LLC. We operate in two business segments: the asset management segment, which includes (a) the investment advisory services provided by Royal Palm’s wholly-owned subsidiary, Bimini Advisors Holdings, LLC, to Orchid, and (b) the investment portfolio segment, which includes the investment activities conducted by Royal Palm.
Bimini Advisors Holdings, LLC and its wholly-owned subsidiary, Bimini Advisors, LLC (an investment advisor registered with the Securities and Exchange Commission), are collectively referred to as “Bimini Advisors.” Bimini Advisors serves as the external manager of the portfolio of Orchid Island Capital, Inc. ("Orchid"). From this arrangement, the Company receives management fees and expense reimbursements. As manager, Bimini Advisors is responsible for administering Orchid's business activities and day-to-day operations and, commencing April 1. 2022, provides certain repurchase agreement trading, clearing and administrative services. Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel. Bimini Advisors is at all times subject to the supervision and oversight of Orchid's board of directors and has only such functions and authority as delegated to it.
Royal Palm Capital, LLC (collectively with its wholly-owned subsidiaries referred to as “Royal Palm”) maintains an investment portfolio, consisting primarily of residential mortgage-backed securities ("MBS") issued and guaranteed by a federally chartered corporation or agency ("Agency MBS"). We also invest in the common stock of Orchid. Our investment strategy focuses on, and our portfolio consists of, two categories of Agency MBS: (i) traditional pass-through Agency MBS, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT MBS”) and (ii) structured Agency MBS, such as interest only securities ("IOs"), inverse interest only securities ("IIOs") and principal only securities ("POs"), among other types of structured Agency MBS. In addition, Royal Palm receives dividends from its investment in Orchid common shares.
Stock Repurchase Plan
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, we may purchase shares of our Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million. Share repurchases may be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan does not obligate the Company to purchase any shares, and it expires on September 16, 2023. The authorization for the 2021 Repurchase Plan may be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. From the commencement of the 2021 Repurchase Plan, through March 31, 2023, we repurchased a total of 774,593 shares at an aggregate cost of approximately $1.2 million, including commissions and fees, for a weighted average price of $1.61 per share.
The Inflation Reduction Act of 2022, signed into law in August 2022, includes a provision for an excise tax equal to 1% of the fair market value of any stock repurchased by covered corporations during a taxable year, subject to certain limits and other provisions. The excise tax is effective beginning in 2023. While we may complete transactions subject to the new excise tax, we do not expect this tax to have a material impact to our financial condition or result of operations.
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:
| ● |
interest rate trends; |
|
| ● | increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Fed that occurred in 2022 and continue into 2023; | |
| ● |
the difference between Agency MBS yields and our funding and hedging costs; |
|
| ● |
competition for, and supply of, investments in Agency MBS; |
|
| ● |
actions taken by the U.S. government, including the presidential administration, the U.S. Federal Reserve (the “Fed”), the Federal Open Market Committee (the “FOMC”), the Federal Housing Finance Agency (the “FHFA”) and the U.S. Treasury; |
|
| ● |
prepayment rates on mortgages underlying our Agency MBS, and credit trends insofar as they affect prepayment rates; |
|
| ● |
the equity markets and the ability of Orchid to raise additional capital; |
|
| ● |
geo-political events that affect the U.S. and international economies; and |
|
| ● |
other market developments. |
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:
| ● |
our degree of leverage; |
|
| ● |
our access to funding and borrowing capacity; |
|
| ● |
our borrowing costs; |
|
| ● |
our hedging activities; |
|
| ● |
the market value of our investments; |
|
| ● |
the requirements to qualify for a registration exemption under the Investment Company Act; |
|
| ● |
our ability to use net operating loss carryforwards and other tax attributes to reduce our taxable income; |
|
| ● |
the impact of possible future changes in tax laws or tax rates; |
|
| ● |
our ability to manage the portfolio of Orchid and maintain our role as manager; and |
|
| ● |
the financial performance of Orchid and resulting changes in Orchid’s shareholders equity, the carrying value of our investment, dividend income and our advisory services revenue. |
Results of Operations
Described below are the Company’s results of operations for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
Net Income (Loss) Summary
Consolidated net income for the three months ended March 31, 2023 was $1.0 million, or $0.10 basic and diluted loss per share of Class A Common Stock, as compared to a consolidated net loss of $3.5 million, or $0.33 basic and diluted income per share of Class A Common Stock, for the three months ended March 31, 2022.
The components of net income (loss) for the three months ended March 31, 2023 and 2022, along with the changes in those components are presented in the table below.
| (in thousands) |
||||||||||||
| Three Months Ended March 31, |
||||||||||||
| 2023 |
2022 |
Change |
||||||||||
| Advisory services revenues |
$ | 3,382 | $ | 3,075 | $ | 307 | ||||||
| Interest and dividend income |
831 | 894 | (63 | ) | ||||||||
| Interest expense |
(1,054 | ) | (287 | ) | (767 | ) | ||||||
| Net revenues |
3,159 | 3,682 | (523 | ) | ||||||||
| Other revenue (expense) |
515 | (6,358 | ) | 6,873 | ||||||||
| Expenses |
(2,329 | ) | (2,025 | ) | (304 | ) | ||||||
| Net income (loss) before income tax provision (benefit) |
1,345 | (4,701 | ) | 6,046 | ||||||||
| Income tax provision (benefit) |
340 | (1,221 | ) | 1,561 | ||||||||
| Net income (loss) |
$ | 1,005 | $ | (3,480 | ) | $ | 4,485 | |||||
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
We have not designated our derivative financial instruments as hedge accounting relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense, as reflected in our consolidated statements of operations, is adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses that pertain to each period presented. We believe that adjusting our GAAP interest expense for the periods presented by the gains or losses on these derivative instruments may not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the derivative instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, which changes are reflective of the future periods covered by the derivative instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.
We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our consolidated statements of operations are not necessarily representative of the total interest expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments discussed above to interest expense shown for each period relative to our derivative instruments, and the consolidated statements of operations line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter in 2023 and 2022.
Gains (Losses) on Derivative Instruments
| (in thousands) |
||||||||||||||||||||||||||||
| Attributed to Current Period (Non-GAAP) |
Attributed to Future Periods (Non-GAAP) |
|||||||||||||||||||||||||||
| Repurchase |
Long-Term |
Repurchase |
Long-Term |
Statement of |
||||||||||||||||||||||||
| Three Months Ended |
Agreements |
Debt |
Total |
Agreements |
Debt |
Total |
Operations |
|||||||||||||||||||||
| March 31, 2023 |
$ | (33 | ) | $ | - | $ | (33 | ) | $ | (241 | ) | $ | - | $ | (241 | ) | $ | (274 | ) | |||||||||
| December 31, 2022 |
(185 | ) | (48 | ) | (233 | ) | 192 | 48 | 240 | 7 | ||||||||||||||||||
| September 30, 2022 |
(184 | ) | (48 | ) | (232 | ) | 1,028 | 48 | 1,076 | 844 | ||||||||||||||||||
| June 30, 2022 |
(186 | ) | (48 | ) | (234 | ) | 136 | 48 | 184 | (50 | ) | |||||||||||||||||
| March 31, 2022 |
(185 | ) | (48 | ) | (233 | ) | 185 | 48 | 233 | - | ||||||||||||||||||
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) |
||||||||||||||||||
| March 31, 2023 |
$ | 557 | $ | 508 | $ | 33 | $ | 541 | $ | 49 | $ | 16 | ||||||||||||
| December 31, 2022 |
534 | 401 | 185 | 586 | 133 | (52 | ) | |||||||||||||||||
| September 30, 2022 |
445 | 210 | 184 | 394 | 235 | 51 | ||||||||||||||||||
| June 30, 2022 |
392 | 73 | 186 | 259 | 319 | 133 | ||||||||||||||||||
| March 31, 2022 |
491 | 31 | 185 | 216 | 460 | 275 | ||||||||||||||||||
| (1) |
Reflects the effect of derivative instrument hedges for only the period presented. |
| (2) |
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
| (3) |
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
Economic Net Interest Income
| (in thousands) |
||||||||||||||||||||||||||||
| Net Portfolio |
Interest Expense on Long-Term Debt |
|||||||||||||||||||||||||||
| Interest Income |
Effect of |
Net Interest Income (Loss) |
||||||||||||||||||||||||||
| GAAP |
Economic |
GAAP |
Non-GAAP |
Economic |
GAAP |
Economic |
||||||||||||||||||||||
| Three Months Ended |
Basis |
Basis(1) |
Basis |
Hedges(2) |
Basis(3) |
Basis |
Basis(4) |
|||||||||||||||||||||
| March 31, 2023 |
$ | 49 | $ | 16 | $ | 546 | $ | - | $ | 546 | $ | (497 | ) | $ | (530 | ) | ||||||||||||
| December 31, 2022 |
133 | (52 | ) | 477 | 48 | 525 | (344 | ) | (577 | ) | ||||||||||||||||||
| September 30, 2022 |
235 | 51 | 379 | 48 | 427 | (144 | ) | (376 | ) | |||||||||||||||||||
| June 30, 2022 |
319 | 133 | 304 | 48 | 352 | 15 | (219 | ) | ||||||||||||||||||||
| March 31, 2022 |
460 | 275 | 256 | 48 | 304 | 204 | (29 | ) | ||||||||||||||||||||
| (1) |
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net portfolio interest income. |
| (2) |
Reflects the effect of derivative instrument hedges for only the period presented. |
| (3) |
Calculated by subtracting the effect of derivative instrument hedges attributed to the period presented from GAAP interest expense. |
| (4) |
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. |
Segment Information
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm.
Segment information for the three months ended March 31, 2023 and 2022 is as follows:
| (in thousands) |
||||||||||||||||||||
| Asset |
Investment |
|||||||||||||||||||
| Management |
Portfolio |
Corporate |
Eliminations |
Total |
||||||||||||||||
| 2023 |
||||||||||||||||||||
| Advisory services, external customers |
$ | 3,382 | $ | - | $ | - | $ | - | $ | 3,382 | ||||||||||
| Advisory services, other operating segments(1) |
27 | - | - | (27 | ) | - | ||||||||||||||
| Interest and dividend income |
- | 831 | - | - | 831 | |||||||||||||||
| Interest expense(2) |
- | (508 | ) | (546 | ) | - | (1,054 | ) | ||||||||||||
| Net revenues |
3,409 | 323 | (546 | ) | (27 | ) | 3,159 | |||||||||||||
| Other revenue |
- | 515 | - | - | 515 | |||||||||||||||
| Operating expenses(3) |
(1,837 | ) | (492 | ) | - | - | (2,329 | ) | ||||||||||||
| Intercompany expenses(1) |
- | (27 | ) | - | 27 | - | ||||||||||||||
| Income (loss) before income taxes |
$ | 1,572 | $ | 319 | $ | (546 | ) | $ | - | $ | 1,345 | |||||||||
| Asset |
Investment |
|||||||||||||||||||
| Management |
Portfolio |
Corporate |
Eliminations |
Total |
||||||||||||||||
| 2022 |
||||||||||||||||||||
| Advisory services, external customers |
$ | 3,075 | $ | - | $ | - | $ | - | $ | 3,075 | ||||||||||
| Advisory services, other operating segments(1) |
30 | - | - | (30 | ) | - | ||||||||||||||
| Interest and dividend income |
- | 894 | - | - | 894 | |||||||||||||||
| Interest expense(2) |
- | (31 | ) | (256 | ) | - | (287 | ) | ||||||||||||
| Net revenues |
3,105 | 863 | (256 | ) | (30 | ) | 3,682 | |||||||||||||
| Other revenue (expenses) |
- | (6,358 | ) | - | - | (6,358 | ) | |||||||||||||
| Operating expenses(3) |
(1,543 | ) | (483 | ) | - | - | (2,026 | ) | ||||||||||||
| Intercompany expenses(1) |
- | (30 | ) | - | 30 | - | ||||||||||||||
| Income (loss) before income taxes |
$ | 1,562 | $ | (6,008 | ) | $ | (256 | ) | $ | - | $ | (4,702 | ) | |||||||
| (1) |
Includes advisory services revenue received by Bimini Advisors from Royal Palm. |
| (2) |
Includes interest expense on repurchase agreements in the Investment Portfolio column and long-term debt in the Corporate column. |
| (3) |
Corporate expenses are allocated based on each segment’s proportional share of total revenues. |
Assets in each reportable segment were as follows:
| (in thousands) |
||||||||||||||||
| Asset |
Investment |
|||||||||||||||
| Management |
Portfolio |
Corporate |
Total |
|||||||||||||
| March 31, 2023 |
$ | 2,228 | $ | 75,309 | 6,852 | $ | 84,389 | |||||||||
| December 31, 2022 |
1,970 | 77,483 | 6,864 | 86,317 | ||||||||||||
Asset Management Segment
Advisory Services Revenue
Advisory services revenue consists of management fees and overhead reimbursements charged to Orchid for the management of its portfolio pursuant to the terms of a management agreement. We receive a monthly management fee in the amount of:
| ● |
One-twelfth of 1.50% of the first $250 million of Orchid’s month-end equity, as defined in the management agreement, |
| ● |
One-twelfth of 1.25% of Orchid’s month-end equity that is greater than $250 million and less than or equal to $500 million, and |
| ● |
One-twelfth of 1.00% of Orchid’s month-end equity that is greater than $500 million. |
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Company began providing certain repurchase agreement trading, clearing and administrative services to Orchid that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, Orchid pays the following fees to the Company:
| ● |
A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and |
| ● |
A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. |
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 2024 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 applicable renewal term.
The following table summarizes the advisory services revenue received from Orchid in each quarter during 2023 and 2022.
| (in thousands) |
||||||||||||||||||||||||
| Advisory Services |
||||||||||||||||||||||||
| Repurchase, |
||||||||||||||||||||||||
| Average |
Average |
Clearing and |
||||||||||||||||||||||
| Orchid |
Orchid |
Management |
Overhead |
Administrative |
||||||||||||||||||||
| Three Months Ended |
MBS |
Equity |
Fee |
Allocation |
Fees |
Total |
||||||||||||||||||
| March 31, 2023 |
$ | 3,769,954 | $ | 865,722 | $ | 2,641 | $ | 576 | $ | 165 | $ | 3,382 | ||||||||||||
| December 31, 2022 |
3,370,608 | 823,516 | 2,566 | 560 | 150 | 3,276 | ||||||||||||||||||
| September 30, 2022 |
3,571,037 | 839,935 | 2,616 | 522 | 174 | 3,312 | ||||||||||||||||||
| June 30, 2022 |
4,260,727 | 866,539 | 2,631 | 519 | 183 | 3,333 | ||||||||||||||||||
| March 31, 2022 |
5,545,844 | 853,577 | 2,634 | 441 | - | 3,075 | ||||||||||||||||||
Investment Portfolio Segment
Net Portfolio Interest Income
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the three months ended March 31, 2023, we generated $49,000 of net portfolio interest income, consisting of $557,000 of interest income from MBS assets offset by $508,000 of interest expense on repurchase liabilities. For the comparable period ended March 31, 2022, we generated $460,000 of net portfolio interest income, consisting of $491,000 of interest income from MBS assets offset by $31,000 of interest expense on repurchase liabilities. The $66,000 increase in interest income was due to a 147 basis point ("bp") increase in yields, which was partially offset by a $12.0 million decrease in average MBS holdings. There was a $477,000 increase in interest expense for the three months ended March 31, 2023 that was due to a 446 bp increase in cost of funds which was partially offset by a $13.4 million decrease in average repurchase liabilities.
Our economic interest expense on repurchase liabilities for the three months ended March 31, 2023 and 2022 was $541,000 and $216,000, respectively, resulting in $16,000 and $275,000 of economic net portfolio interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spread for the three months ended March 31, 2023 and 2022 and each quarter in 2023 and 2022 on both a GAAP and economic basis.
| ($ 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 |
MBS |
Agreements(1) |
Basis |
Basis(2) |
Basis |
Basis(3) |
||||||||||||||||||||||||
| March 31, 2023 |
$ | 45,767 | $ | 557 | 4.87 | % | $ | 43,455 | $ | 508 | $ | 541 | 4.68 | % | 4.98 | % | ||||||||||||||||
| December 31, 2022 |
45,081 | 534 | 4.74 | % | 43,656 | 401 | 586 | 3.68 | % | 5.37 | % | |||||||||||||||||||||
| September 30, 2022 |
41,402 | 445 | 4.30 | % | 40,210 | 210 | 394 | 2.09 | % | 3.92 | % | |||||||||||||||||||||
| June 30, 2022 |
46,607 | 392 | 3.36 | % | 45,870 | 73 | 259 | 0.63 | % | 2.25 | % | |||||||||||||||||||||
| March 31, 2022 |
57,741 | 491 | 3.40 | % | 56,846 | 31 | 216 | 0.22 | % | 1.52 | % | |||||||||||||||||||||
| ($ in thousands) |
||||||||||||||||
| Net Portfolio |
Net Portfolio |
|||||||||||||||
| Interest Income |
Interest Spread |
|||||||||||||||
| GAAP |
Economic |
GAAP |
Economic |
|||||||||||||
| Three Months Ended |
Basis |
Basis(2) |
Basis |
Basis(4) |
||||||||||||
| March 31, 2023 |
$ | 49 | $ | 16 | 0.19 | % | (0.11 | )% | ||||||||
| December 31, 2022 |
133 | (52 | ) | 1.06 | % | (0.63 | )% | |||||||||
| September 30, 2022 |
235 | 51 | 2.21 | % | 0.38 | % | ||||||||||
| June 30, 2022 |
319 | 133 | 2.73 | % | 1.11 | % | ||||||||||
| March 31, 2022 |
460 | 275 | 3.18 | % | 1.88 | % | ||||||||||
| (1) |
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 32 and 33 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances. |
| (2) |
Economic interest expense and economic net interest income presented in the tables above and the tables on page 33 include the effect of derivative instrument hedges for only the period presented. |
| (3) |
Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period related to hedging activities divided by average MBS. |
| (4) |
Economic net interest spread is calculated by subtracting average economic cost of funds from yield on average MBS. |
Interest Income and Average Earning Asset Yield
Our interest income was approximately $557,000 for the three months ended March 31, 2023 and $491,000 for the three months ended March 31, 2022. Average MBS holdings were $45.8 million and $57.7 million for the three months ended March 31, 2023 and 2022, respectively. The $66,000 increase in interest income was due to a 147 bp increase in yields, which was partially offset by a $12.0 million decrease in average MBS holdings.
The tables below present the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and PT MBS, for the three months ended March 31, 2023 and 2022, and for each quarter during 2023 and 2022.
| ($ 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 |
|||||||||||||||||||||||||||
| March 31, 2023 |
$ | 42,912 | $ | 2,855 | $ | 45,767 | $ | 500 | $ | 57 | $ | 557 | 4.66 | % | 8.09 | % | 4.87 | % | ||||||||||||||||||
| December 31, 2022 |
42,125 | 2,956 | 45,081 | 473 | 61 | 534 | 4.49 | % | 8.31 | % | 4.74 | % | ||||||||||||||||||||||||
| September 30, 2022 |
38,384 | 3,018 | 41,402 | 383 | 62 | 445 | 3.99 | % | 8.17 | % | 4.30 | % | ||||||||||||||||||||||||
| June 30, 2022 |
43,568 | 3,039 | 46,607 | 333 | 59 | 392 | 3.06 | % | 7.75 | % | 3.36 | % | ||||||||||||||||||||||||
| March 31, 2022 |
54,836 | 2,905 | 57,741 | 472 | 19 | 491 | 3.45 | % | 2.61 | % | 3.40 | % | ||||||||||||||||||||||||
Interest Expense on Repurchase Agreements and the Cost of Funds
Our average outstanding balances under repurchase agreements were $43.5 million and $56.9 million, generating interest expense of approximately $508,000 and $31,000 for the three months ended March 31, 2023 and 2022, respectively. Our average cost of funds was 4.68% and 0.22% for three months ended March 31, 2023 and 2022, respectively. There was a 446 bp increase in the average cost of funds and a $13.4 million decrease in average outstanding repurchase agreements during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
Our economic interest expense was $541,000 and $216,000 for the three months ended March 31, 2023 and 2022, respectively. There was a 346 bp increase in the average economic cost of funds to 4.98% for the three months ended March 31, 2023 from 1.52% for the three months ended March 31, 2022. The $325,000 increase in economic interest expense was due to the $13.4 million decrease in average outstanding repurchase agreements, combined with the increase in economic cost of funds during the three months ended March 31, 2023.
Because all of our repurchase agreements are short-term, changes in market rates have a more immediate impact on our interest expense. Our average cost of funds calculated on a GAAP basis was 5 bps above the average one-month SOFR and 59 bps above the average six-month SOFR for the quarter ended March 31, 2023. Our average economic cost of funds was 35 bps above the average one-month SOFR and 89 bps above the average six-month SOFR for the quarter ended March 31, 2023. The average term to maturity of the outstanding repurchase agreements was 15 days at both December 31, 2022 and March 31, 2023.
The tables below present the average outstanding balances under our repurchase agreements, interest expense and average economic cost of funds, and average one-month and six-month SOFR rates for the three months ended March 31, 2023 and 2022, and for each quarter in 2023 and 2022, on both a GAAP and economic basis.
| ($ in thousands) |
||||||||||||||||||||
| Average |
||||||||||||||||||||
| Balance of |
Interest Expense |
Average Cost of Funds |
||||||||||||||||||
| Repurchase |
GAAP |
Economic |
GAAP |
Economic |
||||||||||||||||
| Three Months Ended |
Agreements |
Basis |
Basis |
Basis |
Basis |
|||||||||||||||
| March 31, 2023 |
$ | 43,455 | $ | 508 | $ | 541 | 4.68 | % | 4.98 | % | ||||||||||
| December 31, 2022 |
43,656 | 401 | 586 | 3.68 | % | 5.37 | % | |||||||||||||
| September 30, 2022 |
40,210 | 210 | 394 | 2.09 | % | 3.92 | % | |||||||||||||
| June 30, 2022 |
45,870 | 73 | 259 | 0.63 | % | 2.25 | % | |||||||||||||
| March 31, 2022 |
56,846 | 31 | 216 | 0.22 | % | 1.52 | % | |||||||||||||
| Average GAAP Cost of Funds |
Average Economic Cost of Funds |
|||||||||||||||||
| Relative to Average |
Relative to Average |
|||||||||||||||||
| Average SOFR |
One-Month |
Six-Month |
One-Month |
Six-Month |
||||||||||||||
| Three Months Ended |
One-Month |
Six-Month |
SOFR |
SOFR |
SOFR |
SOFR |
||||||||||||
| March 31, 2023 |
4.63 | % | 4.09 | % | 0.05 | % | 0.59 | % | 0.35 | % | 0.89 | % | ||||||
| December 31, 2022 |
4.06 | % | 2.89 | % | (0.38 | )% | 0.79 | % | 1.31 | % | 2.48 | % | ||||||
| September 30, 2022 |
2.47 | % | 1.43 | % | (0.38 | )% | 0.66 | % | 1.45 | % | 2.49 | % | ||||||
| June 30, 2022 |
1.09 | % | 0.39 | % | (0.46 | )% | 0.24 | % | 1.16 | % | 1.86 | % | ||||||
| March 31, 2022 |
0.16 | % | 0.07 | % | 0.06 | % | 0.15 | % | 1.36 | % | 1.45 | % | ||||||
Dividend Income from Orchid
During the three months ended March 31, 2023 and 2022, we owned 569,071 and 519,071 shares of Orchid common stock, respectively. Orchid paid total dividends of $0.480 and $0.775 per share during the three months ended March 31, 2023 and 2022, respectively, resulting in dividend income on this common stock investment of approximately $0.3 million and 0.4 million, respectively.
Long-Term Debt
Junior Subordinated Debt
Interest expense on our junior subordinated debt securities was $0.5 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The average rate of interest paid for the three months ended March 31, 2023 was 8.29% compared to 3.82% for the comparable period in 2022.
The junior subordinated debt securities pay interest at a floating rate. The rate is adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. As of March 31, 2023, the interest rate was 8.37%. After June 30, 2023, the interest rate on the junior subordinated notes will be determined based on SOFR.
Note Payable
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $5,000 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Gains or Losses and Other Income
The table below presents our gains or losses and other income for the three months ended March 31, 2023 and 2022.
| (in thousands) |
||||||||||||
| Three Months Ended March 31, |
||||||||||||
| 2023 |
2022 |
Change |
||||||||||
| Unrealized gains (losses) on MBS |
$ | 658 | $ | (3,114 | ) | $ | 3,772 | |||||
| Losses on derivative instruments |
(274 | ) | - | (274 | ) | |||||||
| Unrealized gains (losses) on Orchid Island Capital, Inc. common stock |
131 | (3,244 | ) | $ | 3,375 | |||||||
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 three months ended March 31, 2023 and March 31, 2022, we did not sell any MBS.
The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are driven by changes in yields and interest rates, the spreads that MBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for MBS. The table below presents historical interest rate data as of the end of quarter during 2023 and 2022
The fair value of our MBS portfolio and derivative instruments, and the gains (losses) reported on those financial instruments, are driven in part by changes in yields and interest rates, the spreads that MBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for MBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on MBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent MBS are carried at a discount to par, unrealized gains or losses on MBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 2023 to date and 2022.
| 5 Year |
10 Year |
15 Year |
30 Year |
Three |
|||||||||||
| U.S. Treasury |
U.S. Treasury |
Fixed-Rate |
Fixed-Rate |
Month |
|||||||||||
| Rate(1) |
Rate(1) |
Mortgage Rate(2) |
Mortgage Rate(2) |
SOFR(3) |
|||||||||||
| March 31, 2023 |
3.61% |
3.49% |
5.56% |
6.32% |
4.51% |
||||||||||
| December 31, 2022 |
4.00% |
3.88% |
5.68% |
6.42% |
3.62% |
||||||||||
| September 30, 2022 |
4.04% |
3.80% |
5.96% |
6.70% |
2.13% |
||||||||||
| June 30, 2022 |
3.00% |
2.97% |
4.83% |
5.70% |
0.70% |
||||||||||
| March 31, 2022 |
2.42% |
2.33% |
3.83% |
4.67% |
0.09% |
| (1) |
Historical 5 Year and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange. |
| (2) |
Historical 15 Year and 30 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey. |
| (3) |
Historical SOFR is obtained from the Federal Reserve Bank of New York. |
Operating Expenses
For the three months ended March 31, 2023, our total operating expenses were approximately $2.3 million, compared to approximately $2.0 million for the three months ended March 31, 2022. The table below presents a breakdown of operating expenses for the three months ended March 31, 2023 and 2022.
| (in thousands) |
||||||||||||
| Three Months Ended March 31, |
||||||||||||
| 2023 |
2022 |
Change |
||||||||||
| Compensation and related benefits |
$ | 1,364 | $ | 1,344 | $ | 20 | ||||||
| Direct advisory services costs |
453 | 208 | 245 | |||||||||
| Legal fees |
18 | 35 | (17 | ) | ||||||||
| Accounting, auditing and other professional fees |
111 | 110 | 1 | |||||||||
| Directors’ fees and liability insurance |
206 | 196 | 10 | |||||||||
| Administrative and other expenses |
176 | 133 | 43 | |||||||||
| $ | 2,328 | $ | 2,026 | $ | 302 | |||||||
Beginning with the second quarter of 2022, Bimini began providing certain repurchase agreement trading, clearing and administrative services to Orchid. Providing these services required Bimini to increase staffing and other resources, causing an increase in direct advisory services costs of approximately $255,000 for the three month period ended March 31, 2023, as compared to the three months ended March 31, 2022.
Income Tax Provision
We recorded an income tax provision (benefit) for the three months ended March 31, 2023 and 2022 of approximately $0.3 million and $(1.2) million, respectively, on consolidated pre-tax book income (loss) of $1.4 million and $(4.7) million, respectively.
Financial Condition:
Mortgage-Backed Securities
As of March 31, 2023, our MBS portfolio consisted of $45.6 million of agency or government MBS at fair value and had a weighted average coupon of 3.67%. During the three months ended March 31, 2023, we received principal repayments of $0.9 million compared to $3.0 million for the comparable period ended March 31, 2022. The average prepayment speeds for the quarters ended March 31, 2023 and 2022 were 5.0% and 20.9%, respectively.
The following table presents the three-month constant prepayment rate (“CPR”) experienced on our structured and PT MBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three-month prepayment rate of the securities in the respective asset category.
| Structured |
|||||||||
| PT MBS |
MBS |
Total |
|||||||
| Three Months Ended |
Portfolio (%) |
Portfolio (%) |
Portfolio (%) |
||||||
| March 31, 2023 |
2.4 | 10.3 | 5.0 | ||||||
| December 31, 2022 |
8.2 | 8.4 | 8.3 | ||||||
| September 30, 2022 |
13.1 | 7.5 | 10.8 | ||||||
| June 30, 2022 |
17.2 | 22.9 | 20.0 | ||||||
| March 31, 2022 |
18.5 | 25.6 | 20.9 |
The following tables summarize certain characteristics of our PT MBS and structured MBS as of March 31, 2023 and December 31, 2022:
| ($ in thousands) |
|||||||||||||||||
| Weighted |
|||||||||||||||||
| Percentage |
Average |
||||||||||||||||
| of |
Weighted |
Maturity |
|||||||||||||||
| Fair |
Entire |
Average |
in |
Longest |
|||||||||||||
| Asset Category |
Value |
Portfolio |
Coupon |
Months |
Maturity |
||||||||||||
| March 31, 2023 |
|||||||||||||||||
| Fixed Rate MBS |
$ | 42,849 | 93.9 | % | 4.07 | % | 327 | 1-Aug-52 |
|||||||||
| Structured MBS |
2,791 | 6.1 | % | 2.85 | % | 297 | 15-May-51 |
||||||||||
| Total MBS Portfolio |
$ | 45,640 | 100.0 | % | 3.67 | % | 325 | 1-Aug-52 |
|||||||||
| December 31, 2022 |
|||||||||||||||||
| Fixed Rate MBS |
$ | 42,974 | 93.6 | % | 4.07 | % | 329 | 1-Aug-52 |
|||||||||
| Structured MBS |
2,919 | 6.4 | % | 2.84 | % | 300 | 15-May-51 |
||||||||||
| Total MBS Portfolio |
$ | 45,893 | 100.0 | % | 3.67 | % | 327 | 1-Aug-52 |
|||||||||
| ($ in thousands) |
||||||||||||||||
| March 31, 2023 |
December 31, 2022 |
|||||||||||||||
| Percentage of |
Percentage of |
|||||||||||||||
| Agency |
Fair Value |
Entire Portfolio |
Fair Value |
Entire Portfolio |
||||||||||||
| Fannie Mae |
$ | 33,862 | 74.2 | % | $ | 33,883 | 73.8 | % | ||||||||
| Freddie Mac |
11,778 | 25.8 | % | 12,010 | 26.2 | % | ||||||||||
| Total Portfolio |
$ | 45,640 | 100.0 | % | $ | 45,893 | 100.0 | % | ||||||||
| March 31, 2023 |
December 31, 2022 |
|||||||
| Weighted Average Pass-through Purchase Price |
$ | 105.30 | $ | 105.30 | ||||
| Weighted Average Structured Purchase Price |
$ | 4.48 | $ | 4.48 | ||||
| Weighted Average Pass-through Current Price |
$ | 97.06 | $ | 95.58 | ||||
| Weighted Average Structured Current Price |
$ | 13.23 | $ | 13.37 | ||||
| Effective Duration (1) |
4.387 | 4.323 | ||||||
| (1) |
Effective duration is the approximate percentage change in price for a 100 basis point change in rates. An effective duration of 4.387 indicates that an interest rate increase of 1.0% would be expected to cause a 4.387% decrease in the value of the MBS in our investment portfolio at March 31, 2023. An effective duration of 4.323 indicates that an interest rate increase of 1.0% would be expected to cause a 4.323% decrease in the value of the MBS in our investment portfolio at December 31, 2022. These figures include the structured securities in the portfolio but do include the effect of our hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. |
Our portfolio of PT MBS is typically comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages, loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolio will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IO’s may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the duration of IIO’s similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes their price movements - and model duration - to be affected by changes in both prepayments and one month LIBOR - both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying our MBS can alter the timing of the cash flows received by us. As a result, we gauge the interest rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT MBS assets will increase or decrease at different rates than that of our structured MBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration and effective duration using various third-party models or obtain these quotes from third parties. However, empirical results and various third-party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of March 31, 2023, assuming rates instantaneously fall 100 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency MBS’ effective duration to movements in interest rates.
| $ in thousands) |
||||||||||||||||||||||||||||
| Fair |
$ Change in Fair Value |
% Change in Fair Value |
||||||||||||||||||||||||||
| MBS Portfolio |
Value |
-100BPS |
+100BPS |
+200BPS |
-100BPS |
+100BPS |
+200BPS |
|||||||||||||||||||||
| Fixed Rate MBS |
$ | 42,849 | $ | 1,955 | $ | (2,195 | ) | $ | (4,548 | ) | 4.56 | % | (5.12 | )% | (10.61 | )% | ||||||||||||
| Structured MBS |
2,791 | (124 | ) | 60 | 70 | (4.44 | )% | 2.15 | % | 2.51 | % | |||||||||||||||||
| Total MBS Portfolio |
$ | 45,640 | $ | 1,831 | $ | (2,135 | ) | $ | (4,478 | ) | 4.01 | % | (4.68 | )% | (9.81 | )% | ||||||||||||
| Notional |
$ Change in Fair Value |
% Change in Fair Value |
||||||||||||||||||||||||||
| Repurchase Agreement Hedges |
Amount(1) |
-100BPS |
+100BPS |
+200BPS |
-100BPS |
+100BPS |
+200BPS |
|||||||||||||||||||||
| Treasury Futures Contracts |
14,400 | (1,153 | ) | 1,033 | 2,010 | (8.01 | )% | 7.17 | % | 13.96 | % | |||||||||||||||||
| Gross Totals |
$ | 678 | $ | (1,102 | ) | $ | (2,468 | ) | ||||||||||||||||||||
| (1) |
Represents the average contract/notional amount of U.S. Treasury futures contracts. |
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.
Repurchase Agreements
As of March 31, 2023, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with five of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with us. These borrowings are secured by our MBS.
As of March 31, 2023, we had obligations outstanding under the repurchase agreements of approximately $43.1 million with a net weighted average borrowing cost of 4.87%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 3 to 28 days, with a weighted average maturity of 15 days. Securing the repurchase agreement obligation as of March 31, 2023 are MBS with an estimated fair value, including accrued interest, of $45.7 million and a weighted average maturity of 326 months. Through May 12, 2023, we have been able to maintain our repurchase facilities with comparable terms to those that existed at March 31, 2023 with maturities through June 28, 2023.
The table below presents information about our period-end, maximum and average repurchase agreement obligations for each quarter in 2023 and 2022.
| Ending |
Maximum |
Average |
Difference Between Ending |
|||||||||||||||||
| Balance |
Balance |
Balance |
Repurchase Agreements and |
|||||||||||||||||
| of Repurchase |
of Repurchase |
of Repurchase |
Average Repurchase Agreements |
|||||||||||||||||
| Three Months Ended |
Agreements |
Agreements |
Agreements |
Amount |
Percent |
|||||||||||||||
| March 31, 2023 |
$ | 43,092 | $ | 43,936 | $ | 43,455 | $ | (363 | ) | (0.84 | )% | |||||||||
| December 31, 2022 |
43,818 | 44,780 | 43,656 | 162 | 0.37 | % | ||||||||||||||
| September 30, 2022 |
43,494 | 46,977 | 40,210 | 3,284 | 8.17 | % | ||||||||||||||
| June 30, 2022 |
36,926 | 53,289 | 45,870 | (8,944 | ) | (19.50 | )% | |||||||||||||
| March 31, 2022 |
54,815 | 58,772 | 56,846 | (2,031 | ) | (3.57 | )% | |||||||||||||
Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead and fulfill margin calls. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our MBS portfolio and dividends we receive on our investment in Orchid common stock.
Internal Sources of Liquidity
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance sheet also generated liquidity on an ongoing basis through payments of principal and interest we receive on our MBS portfolio and dividends we receive on our investment in Orchid common stock.
We employ a hedging strategy that typically involves taking short positions in Eurodollar futures, T-Note futures, TBAs or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash through margin calls to offset the Eurodollar related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
External Sources of Liquidity
Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements and (ii) use the TBA security market. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repo transaction basis. We did not experience any significant margin call activity in the quarter ended March 31, 2023.
We invest a portion of our capital in structured MBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repo market. This structured MBS strategy has been a core element of the Company’s overall investment strategy since 2008. However, we have and may continue to pledge a portion of our structured MBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.
In future periods we expect to continue to finance our activities through repurchase agreements and through revenues from our advisory services business. As of March 31, 2023, we had cash and cash equivalents of $4.7 million. We generated cash flows of $1.5 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $43.5 million during the three months ended March 31, 2023. In addition, during the three months ended March 31, 2023, we received approximately $3.4 million in management fees and expense reimbursements as manager of Orchid and approximately $0.3 million in dividends from our investment in Orchid common stock.
Outlook
Orchid Island Capital Inc.
Orchid Island Capital reported a first quarter 2023 net income $3.5 million and its shareholders equity increased from $438.8 million to $451.4 million. The market conditions described below led to the gains as Orchid reported gains on its MBS of $53.9 million, outperforming its derivative losses of $41.2 million. Orchid is obligated to reimburse us for direct expenses paid on its behalf and to pay to us Orchid’s pro rata share of overhead as defined in the management agreement. As a stockholder of Orchid, we will also continue to share in distributions, if any, paid by Orchid to its stockholders. Our operating results are also impacted by changes in the market value of our holdings of Orchid common shares, although these market value changes do not impact our cash flows from Orchid.
Economic Summary
As 2022 came to a close and the calendar turned to 2023, there was clear divergence in the outlook for monetary policy between the Federal Reserve (the “Fed”) and the market. Market pricing in the Fed Funds futures market implied the Fed would increase the Fed Funds rate by 25 bps one or possibly two more times in early 2023 and then begin to lower the Fed Funds rate in late 2023 and continue doing so in 2024 as inflation moderated towards the Fed’s 2% target rate and the economy slowed. The Fed, as reflected in their “dot plot” and frequent public statements, implied they would hold the Fed Funds rate steady throughout 2023 after the expected hikes early in the year. The divergence persisted through January of 2023 and into early February until the incoming economic data began to change and clearly supported the Fed’s case that inflation was not slowing and that monetary policy would need to be restrictive until the data warranted such a change.
The January non-farm payroll report released on February 3, 2023 indicated the economy added over 500,000 jobs in January. The inflation data released in late 2022 was revised higher. It was becoming clear that market pricing of future Fed Funds levels was too optimistic and that the Fed had more work to do. Measures of inflation related to goods had clearly slowed, reflecting the easing of supply constraints brought about by the pandemic, coupled with a shift in consumption patterns away from goods and towards services. However, the Fed’s focus was on service-related inflation, particularly service-related inflation excluding shelter related costs. This measure of inflation was not declining. In fact, data released in the first months of 2023 for this measure, what is now referred to as “super core” inflation, appears to have accelerated. Further, the Fed sees service inflation as being strongly influenced by wage pressures. With the unemployment rate near historical lows and wage inflation high, there was no reason to believe service-related inflation was about to abruptly slow. Strong job growth will only exacerbate the problem. The market pricing for Fed Funds futures moved higher starting in early February and the terminal rate for Fed Funds moved above 5.5% in early March.
This was not the last time the outlook for the economy, inflation and Fed Funds levels would change during the first quarter. In early March there were two large regional bank failures that required the Federal Deposit Insurance Corporation (“FDIC”) to intervene. The speed with which the banks failed caught the market by surprise and required rapid responses by monetary authorities. The Fed introduced a bank term lending facility (“BTLF”) and the FDIC announced they would guarantee all deposits at both banks, regardless of size. The cause for both failures was deposit withdrawals. With short-term rates having risen by nearly 500 bps in approximately 1 year, the banks that could not afford to pay correspondingly high rates on their deposits were vulnerable to losing previously cheap funding. The market expected further problems across the industry and anticipated the Fed would not be able to continue to increase rates and risk exacerbating the problem. Market pricing in the Fed Funds futures market moved from a terminal rate above 5.5% to pricing in multiple cuts to the Fed Funds rate by year-end. Interest rates across the curve moved quickly lower.
As the first quarter of 2023 came to a close it appeared the macroprudential policies imposed by the FDIC, U.S. Treasury and Fed were containing the deposit problem in the banking industry. Once again, the market outlook shifted and the outlook for monetary pricing has shifted as well. Economic data, particularly labor market and inflation related data has remained supportive of the notion that the Fed would have to move policy to more restrictive levels and keep it there longer. Even the near collapse of another large regional bank in late April did not meaningfully alter market expectations for Fed monetary policy. The Fed raised the target range for the Fed Funds rate again in early May, such that the high end of the range is now 5.25% - exactly 500 basis points above its target range at the commencement of the tightening cycle in March of 2022. While this may be the last rate hike this cycle the Fed continues to maintain that they expect monetary policy to be maintained at this level throughout 2023. At present market pricing for the Fed funds rate at the end of 2023 is lower than the current level by approximately 70 basis points.
Interest Rates
The two-year U.S. Treasury note is the most sensitive to anticipated Fed Funds levels. The yield on the 2-year U.S. Treasury note was approximately 4.43% on December 31, 2022, declined to just above 4% in early February, increased rapidly after the payroll report on February 3, 2023, to a high of 5.07% on March 8, 2023, then declined to a low of approximately 3.77% on March 24, 2023, after the two bank failures occurred. Since the first quarter ended, the 2-year yield has continued to move significantly from day to day as data and headlines dictate. The daily volatility in the rates market was near historical highs, particularly short-term rates. Based solely on levels at the beginning and end of the quarter interest rates – nominal rates or SOFR swap levels – did not move materially. All movements along the curve were plus or minus approximately 40 bps. Rates/swaps were higher on shorter maturities (six-month maturities or less) and higher for 2-year maturities and longer. However, this masks the extreme volatility during the quarter where daily movements of 20 bps occurred for several days at a time. Interest rate volatility is a significant driver of Agency MBS prices and performance. With volatility so high during the quarter, performance was negatively impacted, particularly in March.
Mortgage rates available to borrowers for Agency MBS were more stable during the first quarter of 2023. The Mortgage Bankers Association 30-year survey rate averaged 6.45% for the quarter, with a high of 6.79% and a low of 6.18% for the quarter. Note the first quarter is typically the seasonal trough for housing activity and, with rates still generally far above levels available to borrowers a year or more ago, refinancing activity during the first quarter was barely above the level that occurred in December of 2022, which in turn was the lowest level observed since the very early 2000s.
The Agency MBS Market
Treasuries and Agency MBS, and selling these would represent another source of downward pressure on Agency MBS. The relative performance across the Agency MBS universe was skewed in favor of higher coupon, 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large amounts by the Fed, and which may eventually be sold by the Fed, have performed the worst. These results are consistent with the relative duration of the securities, as higher coupons have shorter durations, or less sensitivity to movements in interest rates.
The Agency MBS market generated a total return of 2.5% for the first quarter of 2023. The sector underperformed comparable duration SOFR swaps by 0.2% for the first quarter. Performance for the quarter was meaningfully impacted by the extreme volatility in March. For the month of March, the sector returns were 2.0% and -1.2% versus comparable duration SOFR swaps. Performance across the 30-year sector versus comparable duration SOFR swaps was uneven, as lower (2.0% and 2.5% securities) and higher coupons (5.0% and 5.5% securities) underperformed intermediate coupon securities.
Recent Legislative and Regulatory Developments
In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November of 2021, it began tapering its net asset purchases each month and ended net asset purchases entirely by early March of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency MBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S Treasuries and $35 billion of Agency MBS per month.
On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons put in place by the CARES Act through March 31, 2021. The FHFA subsequently extended the foreclosure moratorium for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate owned by Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development Department subsequently extended the FHA foreclosure and eviction moratoria to July 31, 2021, and September 30, 2021, respectively. Despite the expirations of these foreclosure moratoria, a final rule adopted by the CFPB on June 28, 2021, effectively prohibited servicers from initiating a foreclosure before January 1, 2022, in most instances. Foreclosure activity has risen since the end of the moratorium, with foreclosure starts in the third quarter of 2022 up 167% from the comparable period in 2021, but still remaining slightly below pre-pandemic levels.
In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the development of a policy for comprehensive housing finance reform soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform. On June 30, 2020, the FHFA released a proposed rule on a new regulatory framework for the GSEs which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. The final rule on the new capital framework for the GSEs was published in the federal register in December 2020. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the GSE has common equity Tier 1 capital of at least 3% of its assets, (ii) the GSEs will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs in the U.S. mortgage market. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the GSE capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of a GSE’s adjusted total assets with a dynamic leverage buffer equal to 50% of a GSE’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the GSEs must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the GSEs announced that they will each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the GSE capital framework. Industry groups have expressed concern that this poses a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”), which could negatively impact liquidity and pricing in the market for TBA securities.
In 2017, policymakers announced that LIBOR will be replaced by December 31, 2021.
On December 7, 2021, the CFPB released a final rule that amends Regulation Z, which implemented the Truth in Lending Act, aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and open-end (e.g., home equity line of credit) products. The rule, which mostly became effective in April of 2022, establishes requirements for the selection of replacement indices for existing LIBOR-linked consumer loans. Although the rule does not mandate the use of SOFR as the alternative rate, it identifies SOFR as a comparable rate for closed-end products and states that for open-end products, the CFPB has determined that ARRC’s recommended spread-adjusted indices based on SOFR for consumer products to replace the one-month, three-month, or six-month USD LIBOR index “have historical fluctuations that are substantially similar to those of the LIBOR indices that they are intended to replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement index to replace the one-year USD LIBOR until it obtained additional information.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the Consolidated Appropriations Act, 2022 (H.R. 2471). The LIBOR Act provides for a statutory replacement benchmark rate for contracts that use LIBOR as a benchmark and do not contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR Act, SOFR becomes the new benchmark rate by operation of law for any such contract. The LIBOR Act establishes a safe harbor from litigation for claims arising out of or related to the use of SOFR as the recommended benchmark replacement. The LIBOR Act makes clear that it should not be construed to disfavor the use of any benchmark on a prospective basis.
On July 28, 2022, the Fed published a proposed rule to implement the LIBOR Act, which was adopted on December 16, 2022. The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and 12-month LIBOR contracts and provides mechanisms for converting most existing LIBOR contracts, including Agency MBS, to SOFR no later than June 30, 2023.
The LIBOR Act also attempts to forestall challenges that it is impairing contracts. It provides that the discontinuance of LIBOR and the automatic statutory transition to a replacement rate neither impairs or affects the rights of a party to receive payment under such contracts, nor allows a party to discharge their performance obligations or to declare a breach of contract. It amends the Trust Indenture Act of 1939 to state that the “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security shall not be deemed to be impaired or affected” by application of the LIBOR Act to any indenture security.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve.
Because of these exceptions, the GSEs believe based on prevailing assumptions and market conditions this change will have only a marginal impact on prepayment speeds, in aggregate. Cohort level impacts may vary. For example, more than half of loans referred to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on delinquency levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
Effects on our Assets
A change in or elimination of the guarantee structure of Agency MBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency MBS may cause us to change our investment strategy to focus on non-Agency MBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency MBS in a number of ways. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency MBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.
If prepayment levels increase, the value of our Agency MBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency MBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency MBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency MBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency MBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency MBS declines. Some of the instruments the Company uses to hedge our Agency MBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency MBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency MBS.
As described above, the Agency MBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency MBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency MBS market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its balance sheet could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions described above will likely delay potential defaults on loans that would otherwise be bought out of Agency MBS pools as described above. Depending on the ultimate resolution of the foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. To the extent the Company’s Agency MBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in question. To the extent they were acquired at a discount, this will tend to decrease the realized yield on the asset in question.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency MBS with shorter durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT MBS, particularly PT MBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT MBS portfolio and a portion of our structured Agency MBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. Increases in the Fed Funds rate, SOFR or LIBOR typically increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency MBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The economy and the outlook for monetary policy during the first quarter were very volatile. While it is likely we are nearing the end of the accelerated policy removal period that began last March the outlook for monetary policy over the course of 2023 and beyond changed multiple times during the quarter, generating significant interest rate volatility, particularly in March.
As the first quarter began the market, as reflected in Fed Funds futures pricing, anticipated the Fed would hike the Fed Funds rate one or possibly two more times in early 2023 and then pivot to easing later in the year as inflation moderated towards their long-term goal of 2%. The incoming economic data in early February and for the balance of the quarter was strong, especially with respect to inflation, the labor market and wages. The Fed, cognizant that goods inflation has already moderated significantly, is focused on services inflation, particularly services excluding housing or shelter related costs (what is currently referred to as “super core” inflation). Readings on “super core” inflation accelerated during the quarter. As the data was released over the balance of the quarter market pricing for Fed Funds over the course of the year continued to increase and the projected terminal rate eventually exceeded 5.5%. Consistent with a policy rate that was likely to remain elevated for a considerable period, the yield on the 2-year U.S. Treasury reached 5.07% in early March.
The volatility continued, and in fact increased, when a brief banking crisis occurred in early March. Two banks failed and were taken over by the FDIC. The FDIC, U.S. Treasury and Fed responded quickly and as we enter the second quarter it seems the macroprudential steps taken appear to have contained the crisis. That being said, in the immediate aftermath of these developments, the market reaction was rapid and significant. The two-year U.S. Treasury yield decreased by approximately 130 bps in a little over two weeks. Market pricing of Fed Funds at the end of 2023 reflected three or four 25 bps cuts. The December 2023 contract price moved nearly 175 bps in the week after the first failure of Silicon Valley Bank. In sum, volatility across the entire rates market was extremely elevated, surpassing all previous periods since the 2008 financial crisis.
The performance for the Agency MBS market was in line with most sectors of the fixed income markets during the first quarter of 2023 with the exception of investment grade and sub-investment grade corporate bonds. However, the volatility described above, which peaked during March, meaningfully impacted performance for the sector in March. The return for the sector versus comparable duration SOFR swaps was -1.2%. Across the 30-year, fixed rate sector of the Agency MBS market returns were uneven, as higher and lower coupons – over 4.5% and below 3.0% - trailed returns for the intermediate coupons.
The failure of Silicon Valley Bank and Signature Bank led to their takeover by the FDIC. The FDIC took possession of approximately $114 billion of securities held by the two banks that the FDIC needs to liquidate. These sales will occur over the balance of 2023. The magnitude of these sales in proportion to typical supply levels in the current rate environment represents a formidable risk to the performance of the sector over the near term. The Agency MBS expected to be sold – predominantly lower coupon 30, 20 and 15-year securities, have underperformed higher coupon securities since the proposed liquidations were announced. The liquidation sales commenced on April 18, 2023, and are expected to continue for 30 to 40 more weeks. Both the Company’s and Orchid’s portfolios contain a significant allocation to some of the securities to be sold. These securities have performed poorly since the announcement date of the liquidations and their poor relative performance may continue. To the extent this trend continues the Company’s MBS portfolio performance will be affected absent changes in the construction of the portfolio or hedges. Likewise, Orchid’s MBS portfolio will also be affected. This in turn could affect Orchid’s operating results, shareholders’ equity and thus the level of the management fees paid to Bimini Advisors. A continuation of this trend could also affect Orchid’s ability to raise additional capital, which also affects the level of management fees paid to Bimini Advisors. The positive aspect of the recent poor performance of Agency MBS resulting from the liquidations is that such securities currently offer very attractive returns over a long-term horizon and therefore the potential for very attractive returns for both Royal Palm and Orchid.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments which can have a material impact on reported assets, liabilities, revenues and expenses, and these decisions and assessments can change each reporting period. There have been no changes to the processes used to determine our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2022.
Capital Expenditures
At March 31, 2023, we had no material commitments for capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide disclosure pursuant to this Item. However, we have elected to include much of the information in Item 7 above.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company and its subsidiaries is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information we must disclose in our periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no material changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In April 2020 and November 2021, the Company received demands for payment from Citigroup, Inc. in the total amount of $33.3 million related to the indemnification provisions of various mortgage loan purchase agreements entered into prior to the date Royal Palm’s mortgage origination operations ceased in 2007. The Company believes the demands are without merit and intends to defend against the demands vigorously if pursued by Citigroup. No provision or accrual has been recorded related to the Citigroup demands.
We are not party to any other material pending legal proceedings as described in Item 103 of Regulation S-K.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 10, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 16, 2021, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2021 Repurchase Plan”). Pursuant to the 2021 Repurchase Plan, the Company may purchase shares of its Class A Common Stock from time to time for an aggregate purchase price not to exceed $2.5 million.
The Company did not repurchase shares of its common stock during the three months ended March 31, 2023.
The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
None.
Exhibit No
| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 3.5 |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
| Exhibit 101.INS XBRL |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*** |
| Exhibit 101.SCH XBRL |
Taxonomy Extension Schema Document*** |
| Exhibit 101.CAL XBRL |
Taxonomy Extension Calculation Linkbase Document*** |
| Exhibit 101.DEF XBRL |
Additional Taxonomy Extension Definition Linkbase Document*** |
| Exhibit 101.LAB XBRL |
Taxonomy Extension Label Linkbase Document*** |
| Exhibit 101.PRE XBRL |
Taxonomy Extension Presentation Linkbase Document*** |
| Exhibit 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
** Furnished herewith
*** Submitted electronically herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BIMINI CAPITAL MANAGEMENT, INC. |
| Date: May 12, 2023 |
By: |
/s/ Robert E. Cauley |
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| Robert E. Cauley Chairman and Chief Executive Officer |
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| Date: May 12, 2023 |
By: |
/s/ G. Hunter Haas, IV |
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| G. Hunter Haas, IV President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 31.1
CERTIFICATIONS
I, Robert E. Cauley, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant"); |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
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a) |
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: May 12, 2023 | |
| /s/ Robert E. Cauley | |
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Robert E. Cauley Chairman of the Board and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, G. Hunter Haas, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Bimini Capital Management, Inc. (the "registrant"); |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): |
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a) |
all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
| Date: May 12, 2023 | |
| /s/ G. Hunter Haas, IV | |
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G. Hunter Haas, IV President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
I, Robert E. Cauley, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023 (the “Report”) filed with the Securities and Exchange Commission:
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1. |
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934
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/s/ Robert E.Cauley |
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Robert E. Cauley, Chairman of the Board and Chief Executive Officer |
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Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
I, G. Hunter Haas, in compliance 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023 (the “Report”) filed with the Securities and Exchange Commission:
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1. |
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934
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/s/ G. Hunter Haas, IV |
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G. Hunter Haas, IV President and Chief Financial Officer |
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