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BMNM > SEC Filings for BMNM > Form 10-K on 2-Nov-2012All Recent SEC Filings

Show all filings for BIMINI CAPITAL MANAGEMENT, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for BIMINI CAPITAL MANAGEMENT, INC.


2-Nov-2012

Annual Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").

These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those described or incorporated by reference in "Part II - Item 1A - Risk Factors" of this Form 10-Q. These and other risks, uncertainties and factors, including those described in reports that the Company files from time to time with the SEC, could cause the Company's actual results to differ materially from those reflected in such forward-looking statements. All forward-looking statements speak only as of the date they are made and the Company does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

The following discussion of the financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report.

INTRODUCTION

As used in this document, references to "Bimini Capital," the parent company, the registrant, and to real estate investment trust ("REIT") qualifying activities or the general management of Bimini Capital's portfolio of MBS refer to Bimini Capital Management, Inc. and its wholly-owned qualified REIT subsidiary, Orchid Island Capital, Inc. ("Orchid"). Further, references to Bimini Capital's taxable REIT subsidiaries or non-REIT eligible assets refer to Bimini Advisors, Inc. ("Bimini Advisors") and to MortCo TRS, LLC ("MortCo") and its consolidated subsidiaries. MortCo, which was previously named Opteum Financial Services, LLC, (referred to as "OFS") was renamed Orchid Island TRS, LLC (referred to as "OITRS") effective July 3, 2007 and then renamed MortCo TRS, LLC effective March 8, 2011. Hereinafter, any historical mention, discussion or references to Opteum Financial Services, LLC, Orchid Island TRS, LLC, OFS or to OITRS (such as in previously filed documents or Exhibits) now means MortCo. References to the "Company" refer to the consolidated entity which is the combination of Bimini Capital, Orchid, Bimini Advisors, MortCo and MortCo's consolidated subsidiaries.

Bimini Capital was formed in September 2003 to invest primarily in but not limited to, residential mortgage related securities issued by the Federal National Mortgage Association (more commonly known as Fannie Mae), the Federal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) and the Government National Mortgage Association (more commonly known as Ginnie Mae). Bimini Capital will deploy its capital into two core strategies. The two strategies are a levered MBS portfolio and an unlevered structured MBS portfolio. The leverage applied to the MBS portfolio will typically be less than twelve to one. Bimini Capital manages its portfolio of agency MBS and structured MBS to generate income derived from the net interest margin of its MBS portfolio, levered predominantly under repurchase agreement funding, net of associated hedging costs, and the interest income derived from its unlevered portfolio of structured MBS. Bimini Capital treats its remaining junior subordinated notes as an equity capital equivalent. Bimini Capital is self-managed and self-advised and has elected to be taxed as a REIT for U.S. federal income tax purposes.

-25-

On April 18, 2007, the Company and MortCo decided to close MortCo's wholesale and conduit mortgage loan origination channels. Both channels ceased accepting new applications for mortgage loans on April 20, 2007. On May 7, 2007, MortCo signed a binding agreement, later amended, to sell its retail mortgage loan origination channel to a third party. The transaction closed on June 30, 2007, and MortCo has not operated a mortgage loan origination business since that date. From the second quarter of 2007 through September 30, 2010, MortCo was reported as a discontinued operation following applicable accounting standards, since most of the remaining assets and liabilities were considered to be contingent and were held by MortCo pursuant to the terms of the disposal of the operations. The disposal of the retained interests asset was not achieved as a result of the lingering effects of the financial market crisis and a significant lack of investor interest in such securities, even though the Company made efforts to market such securities to previously active market participants. Because MortCo continued to hold these net assets, the remnants of the old mortgage banking business were no longer classified as discontinued operations effective October 1, 2010, and the related assets and liabilities previously classified as held for sale were reclassified to held and used for all periods presented.

DIVIDENDS TO STOCKHOLDERS

In order to maintain its qualification as a REIT, Bimini Capital is required (among other provisions) to annually distribute dividends to its stockholders in an amount at least equal to, generally, 90% of Bimini Capital's REIT taxable income. REIT taxable income is a term that describes Bimini Capital's operating results calculated in accordance with rules and regulations promulgated pursuant to the Internal Revenue Code.

Bimini Capital's REIT taxable income is computed differently from net income as computed in accordance with generally accepted accounting principles ("GAAP net income"), as reported in the Company's accompanying consolidated financial statements. Depending on the number and size of the various items or transactions being accounted for differently, the differences between REIT taxable income and GAAP net income can be substantial and each item can affect several reporting periods. Generally, these items are timing or temporary differences between years; for example, an item that may be a deduction for GAAP net income in the current year may not be a deduction for REIT taxable income until a later year. The most significant differences are as follows: the results of the Company's taxable REIT subsidiaries do not impact REIT taxable income, unrealized gains or losses on the investment securities portfolio do not impact REIT taxable income, and interest income on MBS securities is computed differently for REIT taxable income and GAAP.

As a REIT, Bimini Capital may be subject to a federal excise tax if it distributes less than 85% of its REIT taxable income by the end of the calendar year. Accordingly, Bimini Capital's dividends are based on its REIT taxable income (after considering the possible impact of applying NOLs to the income as described below in "Net Operating Losses"), as determined for federal income tax purposes, as opposed to its net income computed in accordance with GAAP (as reported in the accompanying consolidated financial statements).

During the three months ended September 30, 2012, the Company made no dividend distributions. All distributions are made at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial conditions, maintenance of REIT status, availability of net operating losses and other factors that may be deemed relevant. The Company declared a special dividend in December 2009 and a regular dividend in each of the six quarters thereafter. In August 2011, the Company announced that it would suspend its quarterly dividend until at least early 2012. The Company continues to evaluate its dividend payment policy. However, as more fully described below, due to net operating losses incurred in prior periods, the Company is unlikely to declare and pay dividends to stockholders until such net operating losses have been consumed.

-26-

NET OPERATING LOSSES

As described above, a REIT may be subject to a federal excise tax if it distributes less than 85% of its REIT taxable income by the end of a calendar year. In calculating the amount of excise tax payable in a given year, if any, Bimini Capital reduces REIT taxable income by distributions made to stockholders in the form of dividends and/or net operating losses ("NOL's") carried-over from prior years, to the extent any are available. Since income subject to excise tax is REIT taxable income less qualifying dividends and the application of NOL's (in that order), a REIT may avoid excise taxes solely by application of available NOL's without paying qualifying dividends to stockholders. Because Bimini Capital had an estimated $10.7 million of NOL's available as of December 31, 2011, in the future it could avoid excise taxes by applying such NOL's to offset REIT taxable income without making any distributions to stockholders. Further, the REIT could avoid the obligation to pay excise taxes through a combination of qualifying dividends and the application of NOL's. In any case, future distributions to stockholders are expected to be less than REIT taxable income until the existing NOL's are consumed.

RESULTS OF OPERATIONS

Described below are the Company's results of operations for the nine and three months ended September 30, 2012, as compared to the Company's results of operations for the nine and three months ended September 30, 2011.

Net Loss Summary

Consolidated net loss for the nine months ended September 30, 2012 was $0.1 million, or $0.01 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net loss of $0.2 million, or $0.02 basic and diluted loss per share of Class A Common Stock, for the nine months ended September 30, 2011.

Consolidated net loss for the three months ended September 30, 2012 was $0.8 million, or $0.07 basic and diluted loss per share of Class A Common Stock, as compared to consolidated net loss of $1.9 million, or $0.19 basic and diluted loss per share of Class A Common Stock, for the three months ended September 30, 2011.

The components of net loss for the nine and three months ended September 30, 2012 and 2011, along with the changes in those components are presented in the table below:

(in thousands)
                                  Nine Months Ended                          Three Months Ended
                                    September 30,                              September 30,
                          2012          2011         Change           2012           2011         Change
Net portfolio
interest                $   3,203     $   3,835     $    (632 )   $      1,061     $   1,081     $     (20 )
Interest expense on
junior subordinated
notes                        (792 )        (750 )         (42 )           (266 )        (250 )         (16 )
Losses on MBS and
Eurodollar futures         (1,994 )      (1,520 )        (474 )            (19 )      (2,801 )       2,782
Net portfolio income
(deficiency)                  417         1,565        (1,148 )            776        (1,970 )       2,746
Other income                4,241         3,840           401              796         2,436        (1,640 )
Expenses                   (4,772 )      (5,620 )         848           (2,334 )      (2,379 )          45
Net loss                $    (114 )   $    (215 )   $     101     $       (762 )   $  (1,913 )   $   1,151

-27-

Net Portfolio Income

During the nine months ended September 30, 2012, the REIT generated $3.2 million of net portfolio interest income, consisting of $3.5 million of interest income from MBS assets offset by $0.3 million of interest expense on repurchase liabilities. For the comparable period ended September 30, 2011, the REIT generated $3.8 million of net portfolio interest income, consisting of $4.0 million of interest income from MBS assets offset by $0.2 million of interest expense on repurchase liabilities.

For the three months ended September 30, 2012, the REIT generated $1.1 million of net portfolio interest income, consisting of $1.2 million of interest income from MBS assets offset by $0.1 million of interest expense on repurchase liabilities. For the comparable period ended September 30, 2011, the REIT generated $1.1 million of net portfolio interest income, consisting of $1.1 million of interest income from MBS assets offset by $0.1 million of interest expense on repurchase liabilities.

The table below provides 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 for each quarter in 2012 and 2011 and for the nine month periods ended September 30, 2012 and 2011.

(dollars in thousands)
                           Average                         Yield on                                                          Net
                             MBS                           Average          Average                        Average        Portfolio         Net
                          Securities       Interest          MBS           Repurchase       Interest       Cost of        Interest        Interest
                             Held           Income        Securities       Agreements       Expense         Funds          Income          Spread
Three Months Ended,
September 30, 2012       $    118,820     $    1,164             3.92 %   $     99,473     $      104           0.42 %   $     1,060           3.50 %
June 30, 2012                 116,753          1,084             3.71 %         96,778            108           0.45 %           976           3.26 %
March 31, 2012                106,374          1,238             4.66 %         85,629             73           0.34 %         1,165           4.32 %
December 31, 2011              89,670          1,039             4.64 %         68,462             59           0.35 %           980           4.29 %
September 30, 2011            101,102          1,133             4.48 %         79,750             53           0.26 %         1,080           4.22 %
June 30, 2011                 115,521          1,301             4.51 %         93,516             72           0.31 %         1,229           4.20 %
March 31, 2011                126,084          1,608             5.10 %        104,259             87           0.33 %         1,521           4.77 %
Nine Months Ended,
September 30, 2012       $    113,983     $    3,486             4.08 %   $     93,960     $      285           0.40 %   $     3,201           3.68 %
September 30, 2011            114,236          4,042             4.72 %         92,509            212           0.30 %         3,830           4.42 %

Interest income presented in the table above includes only interest earned on the Company's MBS investments and excludes interest earned on cash balances. Interest income and net portfolio interest income may not agree with the information presented in the income statement. Portfolio yields and costs of borrowings presented in the table above and the tables on pages 29 and 30 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the quarterly periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances.

Interest Income and Average Earning Asset Yield

Interest income was $3.5 million for the nine months ended September 30, 2012 and $4.0 million for the nine months ended September 30, 2011 on yields of 4.08% and 4.72%, respectively. Average MBS holdings were $114.0 million and $114.2 million for the nine months ended September 30, 2012 and 2011, respectively. The $0.6 million decrease in interest income was due to a 64 basis point decrease in yields, combined with a $0.3 million decrease in average MBS holdings.

-28-

Interest income was $1.2 million for the three months ended September 30, 2012 and $1.1 million for the three months ended September 30, 2011 on yields of 3.92% and 4.48%, respectively. Average MBS holdings were $118.8 million and $101.1 million for the three months ended September 30, 2012 and 2011, respectively. The $0.03 million increase in interest income was due to a $17.7 million increase in average MBS holdings, partially offset by a 56 basis point decrease in yields.

The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and PT MBS for each quarter in 2012 and 2011 and for the nine month periods ended September 30, 2012 and 2011.

(dollars
in
thousands)
                         Average MBS Held                            Interest Income                       Realized Yield on Average MBS
                PT          Structured                       PT         Structured                      PT            Structured
                MBS            MBS            Total         MBS            MBS           Total          MBS              MBS           Total
Three Months Ended,
September
30, 2012     $ 105,190     $     13,630     $ 118,820     $    696     $        468     $  1,164          2.65 %            13.75 %       3.92 %
June 30,
2012           101,991           14,762       116,753          863              221        1,084          3.38 %             6.00 %       3.71 %
March 31,
2012            90,026           16,348       106,374          774              464        1,238          3.44 %            11.35 %       4.66 %
December
31, 2011        71,230           18,440        89,670          596              443        1,039          3.35 %             9.60 %       4.64 %
September
30, 2011        83,004           18,098       101,102          588              545        1,133          2.84 %            12.03 %       4.48 %
June 30,
2011            98,060           17,461       115,521          755              546        1,301          3.08 %            12.52 %       4.51 %
March 31,
2011           108,382           17,702       126,084          927              681        1,608          3.42 %            15.39 %       5.10 %
Nine Months Ended,
September
30, 2012     $  99,069     $     14,914     $ 113,983     $  2,333     $      1,153     $  3,486          3.14 %            10.31 %       4.08 %
September
30, 2011        96,482           17,754       114,236        2,270            1,772        4,042          3.14 %            13.31 %       4.72 %

Interest Expense on Repurchase Agreements and the Cost of Funds

Average outstanding repurchase agreements were $94.0 million and total interest expense was $0.3 million for the nine months ended September 30, 2012. During the nine months ended September 30, 2011, average outstanding repurchase agreements were $92.5 million and total interest expense was $0.2 million. Our average cost of funds was 0.40% and 0.30% for the nine months ended September 30, 2012 and 2011, respectively. There was a $0.1 million increase in interest expense for the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. This change was due to a 10 basis point increase in borrowing costs, combined with a $1.5 million increase in average outstanding repurchase agreements for the nine months ended September 30, 2012 when compared to the same period ended September 30, 2011.

For the three month period ended September 30, 2012, average outstanding repurchase agreements were $99.5 million and total interest expense was $0.1 million. During the three months ended September 30, 2011, average outstanding repurchase agreements were $79.8 million and total interest expense was $0.1 million. Our average cost of funds was 0.42% and 0.26% for the three months ended September 30, 2012 and 2011, respectively. There was a $0.1 million increase in interest expense for the three months ended September 30, 2012 when compared to the three months ended September 30, 2011. This change was due to a $19.7 million increase in average outstanding repurchase agreements combined with a 16 basis point increase in borrowing costs for the three months ended September 30, 2012 when compared to the same period ended September 30, 2011.

-29-

Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds was 19 basis points above average one-month LIBOR and 28 basis points below average six-month LIBOR for the quarter ended September 30, 2012. The average term to maturity of the outstanding repurchase agreements decreased from 25 days at December 31, 2011 to 18 days at September 30, 2012.

The Company has not elected to designate its derivative holdings, specifically, its investment in Eurodollar futures contracts, for hedge accounting treatment under the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging. Changes in fair value of these investments are presented in a separate line item in the Company's Consolidated Statements of Operations. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the Company's investment in Eurodollar futures contracts.

The table below presents the average repurchase agreements outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2012 and 2011 and for the nine month periods ended September 30, 2012 and 2011.

(dollars in
thousands)
                                                                                                        Average             Average
                  Average                                                                            Cost of Funds       Cost of Funds
                 Balance of                                           Average         Average         Relative to         Relative to
                 Repurchase       Interest          Average          One-Month       Six-Month       Average One-        Average Six-
                 Agreements       Expense        Cost of Funds         LIBOR           LIBOR          Month LIBOR         Month LIBOR
Three Months
Ended,
September 30,
2012            $     99,473     $      104                0.42 %          0.23 %          0.70 %              0.19 %             (0.28 )%
June 30, 2012         96,778            108                0.45 %          0.24 %          0.74 %              0.21 %             (0.29 )%
March 31,
2012                  85,629             73                0.34 %          0.26 %          0.76 %              0.08 %             (0.42 )%
December 31,
2011                  68,462             59                0.35 %          0.26 %          0.65 %              0.09 %             (0.30 )%
September 30,
2011                  79,750             53                0.26 %          0.21 %          0.46 %              0.05 %             (0.20 )%
June 30, 2011         93,516             72                0.31 %          0.22 %          0.43 %              0.09 %             (0.12 )%
March 31,
2011                 104,259             87                0.33 %          0.26 %          0.46 %              0.07 %             (0.13 )%
Years Ended,
September 30,
2012            $     93,960     $      285                0.40 %          0.25 %          0.73 %              0.15 %             (0.33 )%
September 30,
2011                  92,509            212                0.30 %          0.23 %          0.45 %              0.07 %             (0.15 )%

Junior Subordinated Notes

The junior subordinated debt securities had a fixed-rate of interest until December 15, 2010 of 7.86%, and thereafter, through maturity in 2035, the rate floats at a spread of 3.50% over the prevailing three-month LIBOR rate. As of September 30, 2012, the interest rate was 3.89%.

Interest expense on the Company's junior subordinated debt securities was $0.79 million and $0.75 million for the nine months ended September 30, 2012 and 2011, respectively. The average rate of interest for the nine months ended September 30, 2012 was 4.06% compared to 3.84% for the comparable period in 2011. Interest expense increased $0.04 million for the nine months ended September 30, 2012 when compared to the same period in 2011 due to the 22 basis point increase in interest rates.

Interest expense on the Company's junior subordinated debt securities was $0.27 million and $0.25 million for the three months ended September 30, 2012 and 2011, respectively. The average rate of interest for the three months ended September 30, 2012 was 4.09% compared to 3.85% for the comparable period in 2011. Interest expense increased $0.02 million for the three months ended September 30, 2012 when compared to the same period in 2011 due to the 24 basis point increase in interest rates.

-30-

Gains and Losses

The table below presents the Company's gains and losses for the nine months
ended September 30, 2012 and 2011.

(in thousands)
                               Nine Months Ended September 30,                  Three Months Ended September 30,
                            2012               2011           Change          2012              2011          Change
Realized gains on
sales of MBS            $        174       $        937     $     (763 )   $        3       $        394     $    (391 )
Fair value
adjustments on MBS            (1,405 )           (1,280 )         (125 )          316             (2,373 )       2,689
Total losses on MBS           (1,231 )             (343 )         (888 )          319             (1,979 )       2,298
Losses on Eurodollar
futures                         (763 )           (1,178 )          415           (338 )             (822 )         484
Gains on residual
interests                      4,205              3,892            313            738              2,451        (1,713 )

During the nine months ended September 30, 2012 and 2011, the Company received proceeds of $127.7 million and $73.3 million, respectively, from the sales of MBS.

The retained interests in securitizations represent residual interests in loans originated or purchased by MortCo prior to securitization. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve) and loss estimates on the underlying mortgage loans. During the nine and three months ended September 30, 2012, the Company recorded gains on retained interests of $4.2 million and $0.7 million, respectively, primarily because the loans underlying the securitizations performed better than expected.

Operating Expenses

For the nine and three months ended September 30, 2012, Bimini Capital's total operating expenses were approximately $4.8 million and $2.3 million, compared to approximately $5.6 million and $2.4 million for the nine and three months ended September 30, 2011.

. . .

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