BIMINI CAPITAL MANAGEMENT INC
For the period ended Dec 31, 2024. Filed Mar 7, 2025.
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A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Mar 7, 2025
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-03-08.
0001437749-24-007121
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-03-07.
0001437749-25-006605
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 133 previous paragraphs and 123 current paragraphs.
87 unchanged; 26 reworded; 10 added; 20 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 67 previous and 65 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (10)
Current report
The economic trajectory in place as the third quarter of 2024 came to an end has not changed as we enter 2025. Economic growth is above the level considered sustainable – the level that can persist without causing the economy to overheat and inflation to rise. The labor market no longer appears to be cooling, hiring has stabilized, and the unemployment rate remains in the low 4% area, which is indicative of a tighter labor market, if not an overheating one. Importantly, inflation readings have stabilized at levels clearly above the Fed’s target level of 2%. The strength of the economy has been supported by stimulative fiscal policy on the part of the federal government as budget deficits have consistently approached $2 trillion, representing unsustainably high percentages of gross domestic product. The impact of the deficits is partially offset by an expanded balance sheet of the Fed which remains above target levels, allowing the market to avoid having to fund the deficits in their entirety.
Current report
In November of 2024, the Republican party swept the U.S. national elections, and the pro-business agenda of the new president has enhanced market optimism for sustained growth at or above current levels. President Trump has stated that he intends to use tariffs to shift domestic consumption away from imports and towards domestic producers, at the potential cost of higher prices. The market anticipates that the combination of pro-growth policies on the part of the incoming administration, supported by Republican control of both houses of Congress, along with wide-spread tariffs on a host of imported goods, will both fuel growth and pressure inflation higher. To date in the first quarter of 2025, the near term impact of these developments appears to be pressuring economic growth, at least in the near term.
Current report
In response to the developments described above, interest rate movements during the fourth quarter of 2024 were significant. As the third quarter of 2024 came to a close, interest rates were declining in anticipation of the first interest rate cut by the Fed since 2020. The Fed began raising the overnight rate in March of 2022 and did not stop until July of 2023, when the target range for the Fed Funds rate was 5.25% to 5.50%. At the time the Fed lowered the overnight rate by 50 basis points on September 18, 2024, the market expected at least eight more cuts over the next 18 months. Rates reversed course early in the fourth quarter, triggered by the non-farm payroll report for September released in early October. Consequently, the markets outlook for the economy, inflation and future interest rate cuts by the Fed changed dramatically over the course of the fourth quarter and into 2025.
Current report
With respect to interest rates, the most significant development may have been the dramatic change in the shape of the U.S. Treasury Note yield curve. By the end of 2024, the Fed had lowered the target range for Fed Funds by 100 basis points. The 10-year U.S. Treasury Note yield curve increased by approximately 80 basis points over the quarter, causing the first dis-inversion of the yield curve between the Fed Funds rate and the 10-year U.S. Treasury Note since June 2022, and between the 2-year and 10-year U.S. Treasury Notes since November 2022. As federal deficits have remained historically high since the pandemic and the market does not anticipate the incoming administration is likely to be fiscally conservative, the market anticipates federal deficits to remain elevated and issuance of U.S. Treasury securities to continue to grow. This led swap spreads to become increasingly negative (as the market demands a higher yield for a greater supply of U.S. Treasury securities) such that the swap curve remains inverted – although the 18-month to 15-year point are upward sloping.
Current report
As a proxy for the performance of the Agency MBS market during the fourth quarter of 2024, the spread of the 30-year, fixed rate current coupon to the 10-year U.S. Treasury Note hit a multi-year low of approximately 109 basis points the day after the Fed lowered the Fed Funds rate on September 18, 2024. This is in contrast to the spread in May of 2023 of over 200 basis points. The developments described above led to higher interest rates and elevated levels of interest rate volatility. By the end of October of 2024, the spread had increased to approximately 147 basis points and ended the year at approximately 128 basis points. The Agency MBS index generated a negative return for the fourth quarter of -3.2% and a return of -0.6% versus comparable duration swaps, as compared to -2.8% and 0.9%, respectively, for the investment grade corporate index, and 0.2% and 1.4%, respectively for high yield debt. While total returns for U.S. Treasury securities were also negative, most sectors of the fixed income markets generated positive total returns for the quarter, as well as positive excess returns versus comparable duration swaps.
Current report
Within Agency MBS for the fourth quarter of 2024, conventional 30-year mortgages generated a negative total return of -3.5%, 15-year mortgages generated a negative total return of -2.2% and Ginnie Mae 30-year mortgages generated a negative total return of -2.7%. Versus comparable duration swaps the returns were -0.8%, -0.5% and -0.3% for 30-year conventional, 15-year conventional and Ginnie Mae 30-year mortgages, respectively. The Company invests predominantly in 30-year conventional mortgages. Returns with the 30-year stack of coupons were negatively correlated with the duration of the respective securities, as lower coupon, longer durations bonds generated the most negative total returns and the highest coupon – 7.0% - generated positive total returns. The range for the coupon stack was -4.8% for the 2.0% coupon to +0.9% for the 7.0% coupon during the fourth quarter of 2024. Excess returns versus comparable duration swaps were in the range of -0.6% to -0.9% for all coupons between 2.0% and 6.0% during the fourth quarter of 2024. Conversely, the excess return for the 6.5% coupon was -0.2% and +0.3% for the 7.0% coupon during the fourth quarter of 2024.
Current report
On July 27, 2023, the federal banking regulators, including the Office of the Comptroller of the Currency, (the "OCC") the FDIC and the Fed, jointly issued a proposed rule that would revise large bank capital requirements (the "Basel III Endgame"). The Basel III Endgame, if implemented as proposed, would significantly increase the credit weight risk for balance-sheet mortgages and for Agency MBS sold to the GSEs, which could disincentivize banks from originating mortgages for sale to the GSEs and impact pricing in the Agency MBS markets. The comment period for the Basel III Endgame closed on January 16, 2024, and the proposed rule was met with strong objections from the banking industry. In testimony before the United States Senate Committee on Banking, Housing and Urban Affairs in July 2024, Fed chairman Jerome Powell stated that the OCC, the FDIC and the Fed were in discussions to materially revise the proposed rule, and that there was consensus at the Fed to undergo another comment period. In remarks given on September 10, 2024, Michael Barr, the Fed's Vice Chair for Supervision, confirmed that the Basel III Endgame was being rewritten to, among other things, reduce the risk weights for residential real estate and retail exposures, extend the scope of the reduced risk weight for certain low-risk corporate debt, and eliminate the minimum haircut for securities financing transactions.
Current report
The outlook for the fixed income market pivoted early in the fourth quarter of 2024. As the third quarter came to an end, inflation was falling towards the Fed’s 2% target, the labor market was cooling as hiring levels moderated and the unemployment rate was slowly creeping higher, and the Fed had finally lowered the Fed Funds rate by 50 basis points. At the time, the market expected the Fed to lower the rate by over 200 basis points over the next 18 months. Beginning early in the fourth quarter, the incoming data turned. Readings on the labor market stabilized and hiring stopped slowing. The unemployment rate appeared to plateau, and most importantly, the decline in inflation rates previously in place seemed to lose momentum and inflation remained above the Fed’s 2% target level. In early November, the Republican party swept the U.S. national elections, and the new president has a very pro-growth agenda for the country. President Trump has stated that he favors using tariffs to shift domestic consumption away from imports and towards domestically produced goods. If successful, such a policy could ultimately support strong growth in domestic goods production and employment; however, it is likely to be a source of inflationary pressure in the short term, at a time when inflation is already too high.
Current report
As the economic outlook shifted, the Fed did lower the Fed Funds rate two more times during 2024 – by 25 basis points in each case. With the Fed Funds rate lowered by 100 basis points over the course of the quarter, the persistently strong economic outlook led to a dis-inversion of the yield curve between the Fed Funds rate and the 10-year U.S. Treasury Note, and between the 2-year U.S. Treasury Note and 10-year U.S. Treasury Note. The Agency MBS market generated negative total returns for the quarter and was one of the worst performing sectors of the fixed income markets. Returns for the Agency MBS market versus comparable durations swaps, a proxy for returns for levered bond investors such as the Company, were also negative, albeit far less so than the absolute returns. During the fourth quarter, the lowest coupon and longest duration securities generated the worst returns, and performance generally tracked these metrics as the highest coupon securities generated the best returns.
Current report
Looking forward, economic activity remains resilient if not strong, the labor market is quite healthy and inflation, while well off the peak seen in 2022, remains above the Fed’s 2% target. The Trump administration has rapidly implemented various policy objectives, and the process could pressure economic growth downward initially and inflation higher, as there remains considerable uncertainty regarding the ultimate impact of these actions on the economy.
Removed paragraphs (20)
Previous report
Overview
Previous report
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 Island Capital, Inc. ("Orchid") and to Royal Palm, and (b) the investment portfolio segment, which includes the investment activities conducted by Royal Palm.
Previous report
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.
Previous report
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. 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.
Previous report
Stock Repurchase Plans
Previous report
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 could 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 could be executed through various means, including, without limitation, open market transactions. The 2021 Repurchase Plan did not obligate the Company to purchase any shares, and it expired on September 16, 2023. From the commencement of the 2021 Repurchase Plan, through its expiration, we repurchased a total of 789,024 shares at an aggregate cost of approximately$1.2 million, including commissions and fees, for a weighted average price of$1.60 per share. During the year ended December 31, 2023, we repurchased a total of 14,431 shares at an aggregate cost of approximately$13,133, including commissions and fees, for a weighted average price of$0.91 per share.
Previous report
On March 7, 2024, the Board authorized a share repurchase plan pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934 (the “2024 Repurchase Plan”). Pursuant to the 2024 Repurchase Plan, we can 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 can be executed through various means, including, without limitation, open market transactions. The 2024 Repurchase Plan does not obligate the Company to purchase any shares and expires on March 7, 2026.
Previous report
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. While we may complete transactions subject to the new excise tax, we do not expect a material impact to our financial condition or result of operations.
Previous report
Effective August 30, 2022, Orchid effected a 1-for-5 reverse stock split, converting every five shares of issued and outstanding Orchid common stock into one share of common stock. All share and per share amounts reported in this annual report with respect to Orchid’s common stock have been adjusted to reflect this reverse stock split.
Previous report
The fourth quarter of 2023 may prove to be the pivotal quarter in the current interest rate cycle. As the third quarter came to a close and we moved into October, the trajectory of economic growth, interest rates and expectations for monetary policy were all heading higher. In addition to the usual stimulants for higher interest rates – persistent levels of elevated inflation and economic growth – and surging budget deficits – drove rate expectations even higher. Indeed, over the course of October, incoming economic data related to the labor market and inflation exceeded market expectations. Gross domestic product for the third quarter of 2023 was 4.9%, well above levels deemed consistent with price stability and the demand/supply balance sought by the Fed. The quarterly refunding announcement for the U.S. Treasury’s planned borrowing needs in the fourth quarter significantly exceeded expectations. Risk assets were impacted as sentiment eroded and the markets contemplated the impact of still higher levels of interest rates and the potential duration that rates might remain elevated.
Previous report
The market pivoted sharply in the fourth quarter of 2023, followed shortly thereafter by the Fed. The primary impetus for the change in the market’s outlook was the trend in inflation data. While incoming data often exceeded expectations on a relative basis – the trend in inflation was nonetheless downward. While service inflation remained elevated, goods inflation was trending negative, and the net effect was persistently lower levels of both headline and core inflation. The annualized 3- and 6-month trends were below 3% and appeared headed towards the Fed’s 2% target. FOMC member Christopher Waller stated that if the trend in inflation data continued, the FOMC would likely ease monetary policy soon. Coincidentally the incoming economic data began to come in below expectations and the U.S. Treasury revised their upcoming borrowing needs downward. The reversal in the market's outlook was cemented when, at the conclusion of the FOMC’s December meeting, Chairman Powell strongly hinted that the Fed was finished with their tightening cycle and the focus of discussions had turned to a removal of restrictive monetary policy in 2024. The interest rate market and all risk assets responded strongly to the reversal and rallied strongly into year-end.
Previous report
Starting at the end of the second quarter of 2023 interest rates began to move steadily higher, driven by the factors discussed above. In late October, rates across the curve appeared headed sustainably above 5% and the market anticipated the Fed would keep the Fed funds rate above 5% through the end of 2024. The yield on the 2-year U.S. Treasury came within 9 basis points of the level of Fed funds on October 18, 2023, implying the market was pricing Fed funds to remain essentially unchanged for the next two years. Frequent comments by Fed officials supported this thinking, as they continually pushed back against market pricing of rate cuts in early 2024. The message was consistent – rates will need to be higher for longer until the Fed was assured inflation was headed sustainably lower towards their 2% target.
Previous report
The market’s apparent anxiousness for the Fed to ease monetary policy became particularly acute when the data turned in the fourth quarter of 2023, and inflation appeared headed towards the Fed’s target. When Governor Waller made his comments about the possibility of easing in the near future, which were reinforced by Chairman Powell’s comments at the Fed meeting in December, interest rates moved decisively lower. By year end, market pricing reflected six 25 basis point rate cuts by the end of 2024. However, as we move into 2024 the inflation data has not maintained the trend in place described above. Further, the labor market data remains strong, and most measures of economic growth have not softened. In fact, gross domestic product for the fourth quarter of 2023 was 3.3% on an annualized basis. Comments by Fed officials have consistently pushed back on market pricing of the timing and extent of interest rate cuts for 2024. Financial conditions have also eased since early fourth quarter and the federal government is still running stimulative deficits with little to no evidence that policy will change in the near term. The risk that inflation could re-accelerate has been mentioned by many Fed officials. To date in 2024 the market has reversed yet again, and rates have retraced some of the decline seen in November and December.
Previous report
As with interest rates across the curve, Agency MBS spreads to comparable duration U.S. Treasuries or swaps continued widening into October as the outlook continued to deteriorate. By late October the spread of the current coupon 30-year Agency MBS to a comparable duration U.S. Treasury security reached its widest point for the current cycle. As the market reversed and risk appetite rapidly recovered the spread contracted quickly – declining by over 50 basis points by year-end. Since year end, the sector, as reflected by the spread of the current coupon Agency MBS, has reversed yet again, albeit modestly. The recovery in risk sentiment, coupled with the decline in interest rates, appears to have stimulated bank demand for the Agency MBS sector. The regional banking crisis of March of 2023, a result of the severe decline in valuations of Agency MBS acquired by banks prior to the Fed rate hiking cycle and subsequent increase in rates across the curve, may not be fully over. A funding program put in place in March of 2023 that allows such institutions to cheaply fund MBS positions at par and avoid having to sell them and realize significant losses, expires in March of 2024. However, the partial recovery in Agency MBS prices that occurred in November and December has erased some of their unrealized losses. The attractiveness of the asset class, coupled with softening loan demand, appears to have enticed banks to resume purchases.
Previous report
Based on ICE Bank of America data for the fixed income indices, for the fourth quarter of 2023 Agency MBS generated a return of 7.4% and 1.7% versus comparable duration swaps, respectively. The 30-year fixed rate sector generated returns of 7.8% and 1.8% versus comparable duration swaps, respectively. With respect to individual sectors of the Agency MBS index, longer duration sectors and coupons outperformed owing to the significant rally of interest rates. Across the 30-year fixed rate coupon stack returns varied from 8.5% for 2.0% coupons to 3.0% for 7.0% coupons. Excess returns for the same coupons were 2.1% and 0.4%, respectively, and the distribution of returns followed the durations of the various coupons in a consistent fashion.
Previous report
The Agency MBS sector outperformed investment grade corporates on an absolute basis but trailed sub-investment grade corporates, again on an absolute basis. Relative to comparable duration swaps for the fourth quarter, Agency MBS trailed investment grade corporates by 120 basis points but outperformed sub-investment grades corporates by 20 basis points. Note prior to the sharp reversal in the markets at the end of October total returns for all three sectors were negative year to date, and all three sectors – Agency MBS, investment grade and sub-investment grade corporates – generated positive absolute and excess returns for the year.
Previous report
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 continued reduction of its balance sheet could negatively impact our investment portfolio.
Previous report
As the fourth quarter of 2023 began, the financial markets, especially the fixed income markets in the U.S. were under duress. The U.S. economy proved incredibly resilient in the face of continued rate increases by the Fed since March of 2022 of 500 basis points. Growth for the third quarter was a surprising 4.9%, as measured by GDP. The preliminary growth rate for the fourth quarter was 3.2%, still above what is deemed to be a sustainable rate. Fiscal deficits in the U.S. continue to grow and are expected to remain at elevated levels for the next few years. The combination of these factors, among others, drove U.S. Treasury rates higher as the market expected the Fed, while at or near the end of their tightening cycle, was not going to lower rates until well into 2024.
Previous report
A series of events in November and December triggered a violent reversal in the market outlook, the level of interest rates, the performance of risk assets and the outlook for monetary policy. The primary development was incoming inflation data. While the inflation data was at times above consensus expectations by economists, it was nonetheless steadily declining. Most measures of inflation exhibited a clear downward trend towards the Fed’s 2% target. While there were some instances of labor market and/or growth data that was soft released during the fourth quarter, generally the data remains firm, and the labor market has yet to materially weaken. Yet, it appeared the Fed was willing to contemplate reducing rates if the inflation trend continued. Comments by various Fed officials, including Chairman Powell, hinted at a pending shift in the outlook for monetary policy. The market quickly responded to this development. Interest rates declined by over 100 basis points in the case of the 10-year U.S. Treasury note, from late October to late December. Fed funds futures pricing implied the market expected the Fed to lower rates by over 150 basis points in 2024. Risk assets of every type performed strongly over the last two months of the year, in many cases reversing year-to-date negative returns as of November 1, 2023, into strong positive returns for the year.
Previous report
However, as we move into 2024 the inflation data has not maintained the trend in place described above. Further, the labor market data remains strong, and most measures of economic growth have not softened. In fact, gross domestic product for the fourth quarter of 2023 was 3.2% on an annualized basis. Comments by Fed officials have consistently pushed back on market pricing of the timing and extent of interest rate cuts for 2024. Financial conditions have also eased since early fourth quarter and the federal government is still running stimulative deficits with little to no evidence that policy will change in the near term. The risk that inflation could re-accelerate has been mentioned by many Fed officials. To date in 2024 the interest rate market has reversed yet again, and rates have retraced some of the decline seen in November and December. Accordingly, the outlook for the balance of 2024 is quite uncertain. The evolution of economic data over the balance of the year will guide monetary policy decisions by the Fed and in turn significantly influence the performance of the Agency MBS market. It is also likely to impact the performance of Orchid Island Capital and its ability to raise additional capital to deploy into the sector, and thus advisory service revenues and Bimini Advisors.
Reworded paragraphs (26)
Previous wording
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 8 of this Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Current wording
The following discussion of our consolidated financial condition, cash flows and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 8 of this Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Previous wording
Consolidated netloss for the year ended December 31, 2023 was$4.0 million, or$0.40 basic and diluted loss per share of Class A Common Stock, as compared to consolidated netloss of$19.8 million, or$1.90 basic and diluted loss per share of Class A Common Stock, for the year ended December 31, 2022.
Current wording
Consolidated netloss for the year ended December 31, 2024 was$1.3 million, or$0.13 basic and diluted loss per share of Class A Common Stock, as compared to consolidated netloss of$4.0 million, or$0.40 basic and diluted loss per share of Class A Common Stock, for the year ended December 31, 2023.
Previous wording
We use derivative instruments, primarily U.S. Treasury Note (“T-Note”) and SOFR futures contracts and TBA short positions to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Current wording
We use derivative instruments, primarily T-Note and SOFR futures contracts to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Previous wording
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 reflected of the future periods covered by the derivative instrument, not just the current period.
Current wording
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.
Previous wording
We have two operating segments. The asset management segment includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm. The investment portfolio segment includes the investment activities conducted by Royal Palm. Segment information for the years ended December 31, 2023 and 2022 is as follows:
Current wording
We have two operating segments: (a) the asset management segment, which includes the investment advisory services provided by Bimini Advisors to Orchid and Royal Palm; and (b) the investment portfolio segment, which includes the investment activities conducted by Royal Palm. Segment information for the years ended December 31, 2024 and 2023 is as follows:
Previous wording
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:
Current wording
The Company also provides certain repurchase agreement trading, clearing and administrative services to Orchid. In consideration for such services, Orchid pays the following fees to the Company:
Previous wording
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the year ended December 31, 2023, we generated$0.2 million of net portfolio interest income, consisting of$3.3 million of interest income from MBS assets offset by$3.1 million of interest expense on repurchase liabilities. For the year ended December 31, 2022, we generated$1.1 million of net portfolio interest income, consisting of$1.9 million of interest income from MBS assets offset by$0.7 million of interest expense on repurchase liabilities. The$1.4 million increase in interest income for the year ended December 31, 2023 was due to a$18.2 million increase in average MBS balances, combined with a 113 basis point ("bp")increase in yields earned on the portfolio. The$2.4 million increase in interest expense for the year ended December 31, 2023 was due to a 339 bpincrease in cost of funds, combined with a$16.0 million increase in average repurchase liabilities.
Current wording
We define net portfolio interest income as interest income on MBS less interest expense on repurchase agreement funding. During the year ended December 31, 2024, we generated$0.7 million of net portfolio interest income, consisting of$5.8 million of interest income from MBS assets offset by$5.1 million of interest expense on repurchase liabilities. For the year ended December 31, 2023, we generated$0.2 million of net portfolio interest income, consisting of$3.3 million of interest income from MBS assets offset by$3.1 million of interest expense on repurchase liabilities. The$2.5 million increase in interest income for the year ended December 31, 2024 was primarily due to a$34.4 million increase in average MBS balances, combined with a 79 basis point ("bp")increase in yields earned on the portfolio. The$2.1 million increase in interest expense for the year ended December 31, 2024 was primarily due to a 45 bpincrease in cost of funds, combined with a$33.0 million increase in average repurchase liabilities.
Previous wording
Our economic interest expense on repurchase liabilities for the years ended December 31, 2023 and 2022 was$3.2 million and$1.5 million, respectively, resulting in$0.1 million and$0.4 million of economic net portfolio interest income (expense), respectively.
Current wording
Our economic interest expense on repurchase liabilities for the years ended December 31, 2024 and 2023 was$5.1 million and$3.2 million, respectively, resulting in$0.7 million and$0.1 million of economic net portfolio interest income (expense), respectively.
Previous wording
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 17 bpsbelow the one-month average SOFR and 7 bpsabove the six-month average SOFR for the year ended December 31, 2023. Our average economic cost of funds was 4 bpsbelow the one-month average SOFR and 20 bpsabove the six-month average SOFR for the year ended December 31, 2023. The average term to maturity of the outstanding repurchase agreements increased to 29 days at December 31, 2023 from 15 days at December 31, 2022.
Current wording
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 28 bpsabove the one-month average SOFR and 7 bpsabove the six-month average SOFR for the year ended December 31, 2024. Our average economic cost of funds was 25 bpsabove the one-month average SOFR and 4 bpsabove the six-month average SOFR for the year ended December 31, 2024. The average term to maturity of the outstanding repurchase agreements increased to 49 days at December 31, 2024 from 29 days at December 31, 2023.
Previous wording
We owned 569,071 shares of Orchid common stock as of both December 31, 2023 and 2022. Orchid paid total dividends of $1.80 per share during 2023 and $2.475 per share during 2022. During the years ended December 31, 2023 and 2022, we received dividends on this common stock investment of approximately $1.0 million and $1.3 million, respectively.
Current wording
We owned 569,071 shares of Orchid common stock as of both December 31, 2024 and 2023. Orchid paid total dividends of $1.44 per share during 2024 and $1.80 per share during 2023. During the years ended December 31, 2024 and 2023, we received dividends on our Orchid common stock of approximately $0.8 million and $1.0 million, respectively.
Previous wording
Prior to June 30, 2023, the junior subordinated debt securities paid interest at a floating rate, adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. Starting June 30, 2023, the underlying index converted from three-month LIBOR to CME Term SOFR plus a tenor spread adjustment of 0.26161%. The interest rate for subsequent accrual periods will be CME Term SOFR on the applicable reset date plus the tenor spread adjustment of 0.26161% plus the coupon spread of 3.50%. The CME Term SOFR index is in effect for all interest rate resets after July 3, 2023. The LIBOR and CME Term SOFR rate increases since January 2022 have negatively impacted our interest expense. Interest expense on our junior subordinated debt securities was approximately$2.3 million and$1.4 million for the years ended December 31, 2023 and 2022, respectively. The average rate of interest paid for the year ended December 31, 2023 was 8.76% compared to 5.25% for the year ended December 31, 2022. As of December 31, 2023, the interest rate was 9.15%.
Current wording
Prior to June 30, 2023, our junior subordinated debt securities paid interest at a floating rate, adjusted quarterly and set at a spread of 3.50% over the prevailing three-month LIBOR rate on the determination date. Starting June 30, 2023, the underlying index converted from three-month LIBOR to CME Term SOFR plus a tenor spread adjustment of 0.26161%. The interest rate for subsequent accrual periods will be CME Term SOFR on the applicable reset date plus the tenor spread adjustment of 0.26161% plus the coupon spread of 3.50%. The LIBOR and CME Term SOFR rate increases since January 2022 have increased our interest expense. Interest expense on our junior subordinated debt securities was approximately$2.4 million and$2.3 million for the years ended December 31, 2024 and 2023, respectively. The average rate of interest paid for the year ended December 31, 2024 was 8.97% compared to 8.76% for the year ended December 31, 2023. As of December 31, 2024, the interest rate was 8.12%.
Previous wording
On October 30, 2019, the Company borrowed $680,000 from a bank. The note is payable in equal monthly principal and interest installments of approximately $4,500 through October 30, 2039. Interest accrues at 4.89% through October 30, 2024. Thereafter, interest accrues based on the weekly average yield to the United States Treasury securities adjusted to a constant maturity of 5 years, plus 3.25%. The note is secured by a mortgage on the Company’s office building.
Current wording
On October 30, 2019, the Company borrowed $680,000 from a bank. Through October 30, 2024, interest accrued at 4.89%. 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%. As of December 31, 2024, the interest rate was 7.37%. The note is secured by a mortgage on the Company’s office building.
Previous wording
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the year ended December 31, 2023, we received proceeds of $18.2 million from the sales of MBS compared to $23.1 million for the year ended December 31, 2022.
Current wording
We invest in MBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from trading in these securities. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the year ended December 31, 2024, we received proceeds of $46.3 million from the sales of MBS compared to $18.2 million for the year ended December 31, 2023.
Previous wording
For the year ended December 31, 2023, our total operating expenses were approximately $10.5 million compared to approximately $9.8 million for the year ended December 31, 2022. The table below presents a breakdown of operating expenses for the years ended December 31, 2023 and 2022.
Current wording
For the year ended December 31, 2024, our total operating expenses were approximately $11.3 million compared to approximately $10.5 million for the year ended December 31, 2023. The table below presents a breakdown of operating expenses for the years ended December 31, 2024 and 2023.
Previous wording
In 2023, we recorded an income tax provision of $4.1 million, including a $2.7 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2023, of the Company’s ability to utilize tax net operating losses (“NOLs”) to offset future taxable income. In 2022, we recorded an income tax provision of $11.9 million, including a $12.2 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2022, of the Company’s ability to utilize NOLs to offset future taxable income. The Company is unable to reliably estimate an annual effective tax rate; therefore, it uses the discrete-period computation method for determining its income tax (benefit) provision. Our income tax (benefit) provision could be affected by numerous factors, including the projected utilization of net operating loss carryovers and changes in our deferred tax assets and liabilities and their valuations, and can result in significant variations in the customary relationship between pretax income and income tax expense. In that regard, the income tax provision for the year ended December 31, 2023 included a increase of $2.7 million in the deferred tax asset valuation allowance, while the income tax provision for the year ended December 31, 2022 included an increase of $12.2 million in the deferred tax asset valuation allowance.
Current wording
In 2024, we recorded an income tax provision of $3.1 million, including a $1.3 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2024, of the Company’s ability to utilize tax NOLs to offset future taxable income. In 2023, we recorded an income tax provision of $4.1 million, including a $2.7 million increase in the deferred tax asset valuation allowance as a result of management’s reassessment, as of December 31, 2023, of the Company’s ability to utilize NOLs to offset future taxable income. The Company uses the discrete-period computation method for determining its income tax (benefit) provision. Our income tax provision is affected by numerous factors, including non-deductible expenses, the projected utilization of net operating loss carryovers and changes in our deferred tax assets and liabilities and their valuations, and can result in significant variations in the customary relationship between pretax income and income tax expense. Non-deductible expenses, including executive compensation in excess of Section 162(m) limitations increased the income tax provision by $0.9 million and $1.4 million for the years ended December 31, 2024 and 2023, respectively.
Previous wording
As of December 31, 2023, our MBS portfolio consisted of $92.7 million of agency or government MBS at fair value and had a weighted average coupon of 5.44%. During the year ended December 31, 2023, we received principal repayments of $5.4 million compared to $8.2 million for the year ended December 31, 2022. The average prepayment speeds for the quarters ended December 31, 2023 and 2022 were 8.0% and 8.3%, respectively.
Current wording
As of December 31, 2024, our MBS portfolio consisted of $122.3 million of agency or government MBS at fair value and had a weighted average coupon of 5.26%. During the year ended December 31, 2024, we received principal repayments of $13.4 million compared to $5.4 million for the year ended December 31, 2023. The average prepayment speeds for the quarters ended December 31, 2024 and 2023 were 11.1% and 8.0%, respectively.
Previous wording
As of December 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 the Company. These borrowings are secured by our MBS and cash.
Current wording
As of December 31, 2024, 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 six of these counterparties. We believe these facilities provide borrowing capacity in excess of our needs. None of these lenders are affiliated with the Company. These borrowings are secured by our MBS and cash.
Previous wording
As of December 31, 2023, we had obligations outstanding under the repurchase agreements of approximately$86.9 million with a net weighted average borrowing cost of 5.56%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 4 to 60 days, with a weighted average maturity of 29 days. Securing the repurchase agreement obligation as of December 31, 2023 are MBS with an estimated fair value, including accrued interest, of$93.1 million. Through March 8, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2023 with maturities through April 29, 2024.
Current wording
As of December 31, 2024, we had obligations outstanding under the repurchase agreements of approximately$117.2 million with a net weighted average borrowing cost of 4.68%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 13 to 139 days, with a weighted average maturity of 49 days. Securing the repurchase agreement obligation as of December 31, 2024 are MBS with an estimated fair value, including accrued interest, of$122.7 million. Through March 7, 2025, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2024 with maturities through June 30, 2025.
Previous wording
Liquidity is our ability to turn non-cash assets into cash to fund our operations and to meet our obligations in both the short-term (one year or less) and long-term (greater than one year). Our material cash requirements include the purchase of additional investments, repay principal and interest on repurchase agreements and long-term debt (see Note 9 to the consolidated financial statements for more information related to the timing of principal payments and maturities of our long-term debt.), 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.
Current wording
Liquidity is our ability to turn non-cash assets into cash to fund our operations and to meet our obligations in both the short-term (one year or less) and long-term (greater than one year). Our material cash requirements include the purchase of additional investments, repay principal and interest on repurchase agreements and long-term debt (see Note 9 to the consolidated financial statements included in Item 8 of Part II of this Report for more information related to the timing of principal payments and maturities of our long-term debt.), 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.
Previous wording
In future periods we expect to continue to finance our activities through repurchase agreements and through revenues from our advisory services business. As of December 31, 2023, we had cash and cash equivalents of $3.7 million. We generated cash flows of $8.5 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $62.6 million during the year ended December 31, 2023. In addition, during the year ended December 31, 2023, we received approximately $13.6 million in management fees and expense reimbursements as manager of Orchid and approximately $1.0 million in dividends from our investment in Orchid common stock.
Current wording
In future periods we expect to continue to finance our activities through repurchase agreements and through revenues from our advisory services business. As of December 31, 2024, we had cash and cash equivalents of $5.7 million. We generated cash flows of $19.1 million from principal and interest payments on our MBS portfolio and had average repurchase agreements outstanding of $95.6 million during the year ended December 31, 2024. In addition, during the year ended December 31, 2024, we received approximately $12.8 million in management fees and expense reimbursements as manager of Orchid and approximately $0.8 million in dividends from our investment in Orchid common stock.
Previous wording
Orchid Island Capital reported net income for the fourth quarter 2023 of $27.1 million and its shareholders equity increased from $466.8 million to $469.9 million. The market conditions described below led to these results as Orchid reported realized and unrealized gains on its MBS portfolio of $183.0 million, exceeding realized and unrealized losses on hedge instruments of $149.0 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.
Current wording
Orchid reported net income for the fourth quarter 2024 of $5.6 million and its shareholders equity increased from $656.0 million to $668.5 million. The market conditions described below led to these results as Orchid reported realized and unrealized gains on hedge instruments of $160.4 million, exceeding realized and unrealized losses on its MBS portfolio of $158.7 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.
Previous wording
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, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September 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. As interest rates have increased and prepayment speeds have slowed, the actual balance sheet reduction of Agency MBS has trended well below the cap during 2023. Recently the Fed has indicated they may taper their quantitative tightening by slowing the rate of run-off of their portfolio, although it is likely they will allow their holdings of Agency MBS to continue at the current pace and slow the run-off of U.S. Treasuries in a way that achieves their desired rate of portfolio run-off.
Current wording
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, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September 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 its balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency MBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $25 billion of U.S. Treasuries and remove the cap on Agency MBS reduction, with any amounts in excess of $35 billion per month being reinvested in U.S. Treasury securities. Relatively high interest rates and slow prepayment speeds have kept the balance sheet reduction for Agency MBS below $20 billion per month throughout 2024. As of December 31, 2024, the Fed had reduced its balance sheet for Agency MBS by approximately $507 billion from the peak to $2.2 trillion, shedding approximately 37% of the Agency MBS added during the quantitative easing related to the pandemic and representing the lowest level since May 2021.
Previous wording
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 the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprises 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 Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises *will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to then current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises 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 Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would 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 Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, to become effective April 1, 2024, which will, amo…
Excerpt shortened here; the source contains the full paragraph.
Current wording
On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the Enterprise capital framework established in December 2020, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties (the "September 2021 Provisions"). Effective April 26, 2022, the FHFA further amended this framework by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would 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 Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, which became effective April 1, 2024, which reduced the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replaced the current exposure methodology with the standardized approach for counterparty credit risk as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions; updated the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduced a risk weight of 20% for guarantee assets. On January 2, 2025, the U.S. Treasury and FHFA entered into a letter agreement deleting the September 2021 Provisions entirely, as well as providing additional guidance on the process for a potential end to the conservatorship of the Enterprises.
Previous wording
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 Fed Funds, SOFR and T-Note futures contracts or interest rate swaptions.
Current wording
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 Fed Funds, SOFR and T-Note futures contracts, dual digital options or interest rate swaptions.
Previous wording
As discussed in Note 14 to the financial statements, our MBS are valued using Level 2 valuations, and such valuations currently are determined based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our positions in MBS determined by either an independent third-party or do so internally. In managing our portfolio, the Company employs the following four-step process at each valuation date to determine the fair value of our MBS.
Current wording
As discussed in Note 14 to our consolidated financial statements included in Item 8 of Part II of this Report, our MBS are valued using Level 2 valuations, and such valuations currently are determined based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our positions in MBS determined by either an independent third-party or do so internally. In managing our portfolio, the Company employs the following four-step process at each valuation date to determine the fair value of our MBS.
Previous wording
Management believes its pricing methodology to be consistent with the definition of fair value described in Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements.
Current wording
Management believes its pricing methodology to be consistent with the definition of fair value described in Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements.