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BMNM > SEC Filings for BMNM > Form 10-K on 20-Mar-2013All 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.


20-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

When used in this Annual Report on Form 10-K, 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 I - Item 1A - Risk Factors" of this Form 10-K. These and other risks, uncertainties and factors, including those described in reports that the Company files from time to time with the Commission, 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 the "Part I - Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations", 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 Orchid Island Capital, Inc. ("Orchid"), which at all times during 2012 was a wholly-owned qualified REIT subsidiary of Bimini Capital. As of the closing of Orchid's initial public offering on February 20, 2013, Bimini Capital owns approximately 29.38% of Orchid's common stock. Further, references to Bimini Capital's taxable REIT subsidiaries or non-REIT eligible assets refer to Bimini Advisors, Inc. and its wholly-owned subsidiary, Bimini Advisors, LLC (together as "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 is self-managed and self-advised and has elected to be taxed as a REIT for U.S. federal income tax purposes.

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 year ended December 31, 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 and no distributions have been made since that date. 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.


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") applied 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, a REIT may avoid excise taxes solely by application of available NOL's without paying qualifying dividends to stockholders. Because Bimini Capital currently has approximately $13.8 million of NOL's available, 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 may be less than taxable income until the existing NOL's are consumed.

RESULTS OF OPERATIONS

Described below are the Company's results of operations for the year ended December 31, 2012, as compared to the Company's results of operations for the year ended December 31, 2011.

Net Loss Summary

Consolidated net loss for the year ended December 31, 2012 was $2.0 million, or
$0.20 basic and diluted loss per share of Class A Common Stock, as compared to
consolidated net loss of $2.6 million, or $0.26 basic and diluted loss per share
of Class A Common Stock, for the year ended December 31, 2011.

The components of net loss for the years ended December 31, 2012 and 2011, along
with the changes in those components are presented in the table below:

(in thousands)
                                                     Years Ended December 31,
                                                  2012         2011        Change
Net portfolio interest                          $  3,803     $  4,816     $ (1,013 )
Interest expense on junior subordinated notes     (1,049 )     (1,008 )        (41 )
Losses on MBS and Eurodollar futures              (3,067 )     (1,939 )     (1,128 )
Net portfolio (deficiency) income                   (313 )      1,869       (2,182 )
Other income                                       4,360        3,125        1,235
Expenses                                          (6,077 )     (7,616 )      1,539
Net loss                                        $ (2,030 )   $ (2,622 )   $    592

GAAP and Non-GAAP Reconciliation

To date, we have used derivatives, specifically Eurodollar futures contracts, to hedge interest rate risk on repurchase agreements and junior subordinated notes in a rising rate environment. We have not elected to designate our derivative holdings 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 instruments are presented in a separate line item in our Statements of Operations. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the Eurodollar futures contracts. In the future, we may use other derivative instruments to hedge our interest expense and/or elect to designate our derivative holdings for hedge accounting treatment.


For the purpose of computing net interest income and ratios relating to cost of funds measures throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations, interest expense includes gains and losses on a Eurodollar futures contracts. Presenting the effects of the Eurodollar positions with the interest expense on interest-bearing liabilities reflects total economic interest expense on these obligations and the economic effect of our hedging strategy. Interest expense, including gains and losses on Eurodollar futures contracts, is referred to as economic interest expense. Net interest income, including gains and losses on Eurodollar futures contracts, is referred to as economic net interest income.

We believe that economic interest expense and economic net interest income provides meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help us to evaluate our financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations.

Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.

The following table presents the effect of our hedging strategy on interest expense and net interest income for each quarter in 2012 and 2011 and for the years ended December 31, 2012 and 2011.

(dollars in thousands)
                                                         Interest Expense
                        Interest Expense on                 on Junior                   Net Portfolio
                       Repurchase Agreements            Subordinated Notes             Interest Income             Net Interest Income
                        GAAP          Economic         GAAP          Economic        GAAP        Economic         GAAP           Economic
                       Basis            Basis          Basis          Basis         Basis         Basis          Basis            Basis
Three Months Ended,
December 31, 2012    $      151       $     155     $       257     $      256     $    600     $      596     $      343       $      340
September 30, 2012          104             203             266            504        1,060            961            794       $      457
June 30, 2012               108             139             261            493          976            945            715       $      452
March 31, 2012               73             174             265            327        1,165          1,064            900       $      737
December 31, 2011            59             (22 )           258            255          980          1,061            722       $      806
September 30, 2011           53             404             250            721        1,080            729            830       $        8
June 30, 2011                72             164             250            522        1,229          1,137            979       $      615
March 31, 2011               87              76             250            252        1,521          1,532          1,271       $    1,280
Years Ended,
December 31, 2012    $      436       $     671     $     1,049     $    1,580     $  3,801     $    3,566     $    2,752       $    1,986
December 31, 2011           271             622           1,008          1,750        4,810          4,459          3,802       $    2,709

Net Portfolio Income

During the year ended December 31, 2012, the REIT generated $3.6 million of economic net portfolio interest income, consisting of $4.2 million of interest income from MBS assets offset by $0.7 million of economic interest expense on repurchase liabilities. For the comparable period ended December 31, 2011, the REIT generated $4.5 million of economic net portfolio interest income, consisting of $5.1 million of interest income from MBS assets offset by $0.6 million of economic interest expense on repurchase liabilities.


The table below provides information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, economic interest expense, cost of funds, economic net interest income and net interest rate spread for each quarter in 2012 and 2011 and for the years ended December 31, 2012 and 2011.

(dollars in thousands)
                                                                                                                                 Economic
                           Average                         Yield on                                              Average           Net          Economic
                             MBS                           Average            Average           Economic        Economic        Portfolio         Net
                          Securities       Interest          MBS            Repurchase          Interest         Cost of         Interest       Interest
                           Held(1)        Income(2)       Securities       Agreements(1)       Expense(3)         Funds         Income(3)        Spread
Three Months Ended,
December 31, 2012        $    146,947     $      751             2.04 %   $       128,708     $        155            0.48 %    $      596           1.56 %
September 30, 2012            118,820          1,164             3.92 %            99,473              203            0.82 %           961           3.10 %
June 30, 2012                 116,753          1,084             3.71 %            96,778              139            0.58 %           945           3.13 %
March 31, 2012                106,374          1,238             4.66 %            85,629              174            0.81 %         1,064           3.85 %
December 31, 2011              89,670          1,039             4.64 %            68,462              (22 )         (0.13 )%        1,061           4.77 %
September 30, 2011            101,102          1,133             4.48 %            79,750              404            2.03 %           729           2.45 %
June 30, 2011                 115,521          1,301             4.51 %            93,516              164            0.70 %         1,137           3.81 %
March 31, 2011                126,084          1,608             5.10 %           104,259               76            0.29 %         1,532           4.81 %
Years Ended,
December 31, 2012        $    122,224     $    4,237             3.47 %   $       102,647     $        671            0.65 %    $    3,566           2.82 %
December 31, 2011             108,094          5,081             4.70 %            86,497              622            0.72 %         4,459           3.98 %

(1) Portfolio yields and costs of borrowings presented in the table above and the tables on pages 61 and 62 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. Average balances for the year to date periods are calculated as the average of the average quarterly periods.

(2) Interest income presented in the table above includes only interest earned on the Company's MBS investments and excludes interest earned on cash balances and excludes the impact of discounts and premiums on MBS investments, as discounts or premiums are not amortized under the fair value option. Interest income and net portfolio interest income may not agree with the information presented in the consolidated statements of operations.

(3) Economic interest expense and economic net interest income presented in the table above and the table on page 62 includes the effect of the portion of our Eurodollar futures positions that were entered into as an economic hedge against the increase in interest on repurchase agreements in a rising rate environment.

Interest Income and Average Earning Asset Yield

Interest income was $4.2 million for the year ended December 31, 2012 and $5.1 million for the year ended December 31, 2011. Average MBS holdings were $122.2 million and $108.1 million for the years ended December 31, 2012 and 2011, respectively. The $0.8 million decrease in interest income was due to a 123 basis point decrease in yields, which was partially offset by a $14.1 million increase in average MBS holdings.


The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured MBS and PT MBS.

(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,
December
31, 2012     $ 135,892     $     11,055     $ 146,947     $     929     $       (179 )   $     750           2.73 %             (6.48 )%        2.04 %
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 %
Years Ended,
December
31, 2012     $ 108,275     $     13,949     $ 122,224     $   3,262     $        974     $   4,236           3.01 %              6.99 %         3.47 %
December
31, 2011        90,169           17,925       108,094         2,866            2,215         5,081           3.18 %             12.35 %         4.70 %

Interest Expense on Repurchase Agreements and the Cost of Funds

Average outstanding repurchase agreements were $102.6 million and total economic interest expense was $0.7 million for the year ended December 31, 2012. During the year ended December 31, 2011, average outstanding repurchase agreements were $86.5 million and total economic interest expense was $0.6 million. Our average economic cost of funds was 0.65% and 0.72% for years ended December 31, 2012 and 2011, respectively. There was a $0.1 million increase in economic interest expense for the year ended December 31, 2012 when compared to the year ended December 31, 2011. This change was due to the combination of a $16.1 million increase in average outstanding repurchase agreements and a 7 basis point decrease in borrowing rates for the year ended December 31, 2012 when compared to the same period ended December 31, 2011.

Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average economic cost of funds was 26 basis points above average one-month LIBOR and 11 basis points below average six-month LIBOR for the quarter ended December 31, 2012. The average term to maturity of the outstanding repurchase agreements decreased from 25 days at December 31, 2011 to 14 days at December 31, 2012.


The table below presents the average outstanding balance under all repurchase agreements, economic interest expense and average economic cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2012 and 2011 and for the years ended December 31, 2012 and 2011.

(dollars in
thousands)
                                                                                                          Average              Average
                                                                                                         Economic             Economic
                   Average                                                                             Cost of Funds        Cost of Funds
                  Balance of       Economic          Average            Average         Average         Relative to          Relative to
                  Repurchase       Interest         Economic           One-Month       Six-Month       Average One-         Average Six-
                  Agreements       Expense        Cost of Funds          LIBOR           LIBOR          Month LIBOR          Month LIBOR
Three Months
Ended,
December 31,
2012             $    128,708     $      155                0.48 %           0.22 %          0.59 %              0.26 %              (0.11 )%
September 30,
2012                   99,473            203                0.82 %           0.23 %          0.70 %              0.59 %               0.12 %
June 30, 2012          96,778            139                0.58 %           0.24 %          0.74 %              0.34 %              (0.16 )%
March 31, 2012         85,629            174                0.81 %           0.26 %          0.76 %              0.55 %               0.05 %
December 31,
2011                   68,462            (22 )             (0.13 )%          0.26 %          0.65 %             (0.39 )%             (0.78 )%
September 30,
2011                   79,750            404                2.03 %           0.21 %          0.46 %              1.82 %               1.57 %
June 30, 2011          93,516            164                0.70 %           0.22 %          0.43 %              0.48 %               0.27 %
March 31, 2011        104,259             76                0.29 %           0.26 %          0.46 %              0.03 %              (0.17 )%
Years Ended,
December 31,
2012             $    102,647     $      671                0.65 %           0.24 %          0.70 %              0.41 %              (0.05 )%
December 31,
2011                   86,497            622                0.72 %           0.24 %          0.50 %              0.48 %               0.22 %

Junior Subordinated Notes

Interest expense on the Company's junior subordinated debt securities was $1.05 million for the year ended December 31, 2012 compared to $1.01 million for the comparable period in 2011. 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 December 31, 2012, the interest rate was 3.81%. The average rate of interest paid, including the amortization of debt issuance costs, for the year ended December 31, 2012 was 4.04% compared to 3.88% for the comparable period in 2011. Interest expense increased $0.04 million for the year ended December 31, 2012 when compared to the same period in 2011 due to the 16 basis point increase in interest rates.

Gains and Losses

The table below presents the Company's gains and losses for the years ended
December 31, 2012 and 2011.

(in thousands)
                                               Years Ended December 31,
                                            2012         2011        Change
Realized (losses) gains on sales of MBS   $   (246 )   $    941     $ (1,187 )
Unrealized losses on MBS                    (2,055 )     (1,787 )       (268 )
Total losses on MBS                         (2,301 )       (846 )     (1,455 )
Losses on Eurodollar futures                  (766 )     (1,094 )        328
Gains on retained interests                  4,323        3,190        1,133

. . .

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