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EX-32.1 - EXHIBIT 32.1 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10qx321.htm
EX-32.2 - EXHIBIT 32.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10qx322.htm
EX-31.2 - EXHIBIT 31.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10qx312.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q
 

þ           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number:  001-32171

Bimini Capital Management, Inc.
(Exact name of registrant as specified in its charter)
 

     
Maryland
 
72-1571637
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3305 Flamingo Drive, Vero Beach, Florida 32963
(Address of principal executive offices) (Zip Code)

(772) 231-1400
(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨                                           Accelerated filer ¨                                           Non-accelerated filer ¨                                            Smaller Reporting Company ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ¨  No ý
 
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:
 
Title of each Class
Latest Practicable Date
 
Shares Outstanding
 
Class A Common Stock, $0.001 par value
August 8, 2014
    12,313,758  
Class B Common Stock, $0.001 par value
August 8, 2014
    31,938  
Class C Common Stock, $0.001 par value
August 8, 2014
    31,938  
 
 
 

 
 

 

BIMINI CAPITAL MANAGEMENT, INC.

TABLE OF CONTENTS


   
Page
 
       
PART I. FINANCIAL INFORMATION
 
       
ITEM 1. Financial Statements
    1  
Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013
    1  
Consolidated Statements of Operations (unaudited) for the six and three months ended June 30, 2014 and 2013
    2  
Consolidated Statement of Stockholders’ Equity (unaudited) for the six months ended June 30, 2014
    3  
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013
    4  
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    29  
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    54  
ITEM 4. Controls and Procedures
    54  
         
PART II. OTHER INFORMATION
 
         
ITEM 1. Legal Proceedings
    55  
ITEM 1A. Risk Factors
    56  
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    56  
ITEM 3. Defaults Upon Senior Securities
    56  
ITEM 4. Mine Safety Disclosures
    56  
ITEM 5. Other Information
    56  
ITEM 6. Exhibits
    56  
SIGNATURES
    57  
 
 

 
 

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
   
(Unaudited)
       
   
June 30, 2014
   
December 31, 2013
 
ASSETS:
           
Mortgage-backed securities, at fair value
           
Pledged to counterparties
  $ 907,677,107     $ 372,102,248  
Unpledged
    43,963,577       17,238,710  
Total mortgage-backed securities
    951,640,684       389,340,958  
Cash and cash equivalents
    37,162,543       11,959,292  
Restricted cash
    3,992,200       2,557,165  
Retained interests in securitizations
    3,135,010       2,530,834  
Accrued interest receivable
    4,089,321       1,720,726  
Property and equipment, net
    3,643,358       3,663,437  
Derivative asset, at fair value
    1,199,700       -  
Deferred tax assets, net
    2,154,025       -  
Other assets
    2,994,415       2,755,234  
Total Assets
  $ 1,010,011,256     $ 414,527,646  
                 
LIABILITIES AND EQUITY
               
                 
LIABILITIES:
               
Repurchase agreements
  $ 854,026,395     $ 353,396,075  
Junior subordinated notes due to Bimini Capital Trust II
    26,804,440       26,804,440  
Payable for unsettled security purchased
    6,828,538       -  
Accrued interest payable
    360,506       142,055  
Other liabilities
    2,338,510       826,660  
Total Liabilities
    890,358,389       381,169,230  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY:
               
Preferred stock
    -       -  
Common stock
    12,359       11,574  
Additional paid-in capital
    334,108,498       334,810,312  
Accumulated deficit
    (327,379,125 )     (333,078,313 )
Stockholders’ equity
    6,741,732       1,743,573  
Noncontrolling interests
    112,911,135       31,614,843  
Total Equity
    119,652,867       33,358,416  
Total Liabilities and Equity
  $ 1,010,011,256     $ 414,527,646  
                 
The following table includes assets to be used to settle liabilities of the consolidated variable interest entity ("VIE"). These assets and liabilities are included in the consolidated balance sheets above. See Note 15 for additional information on our consolidated VIE.
 
ASSETS:
               
Mortgage-backed securities
  $ 876,004,251     $ 351,222,512  
Cash and cash equivalents and restricted cash
    36,868,745       10,615,027  
Accrued interest receivable and other assets
    5,513,490       1,738,508  
LIABILITIES:
               
Repurchase agreements
    783,700,849       318,557,054  
Payable for unsettled securities purchased
    6,828,538       -  
Accrued interest payable and other liabilities
    2,015,928       171,721  
See Notes to Consolidated Financial Statements
 
 
 
 
1

 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
For the Six and Three Months Ended June 30, 2014 and 2013
 
                         
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income
  $ 11,235,494     $ 4,005,840     $ 7,119,482     $ 2,479,678  
Interest expense
    (1,182,616 )     (607,559 )     (728,277 )     (360,853 )
Net interest income, before interest on junior subordinated notes
    10,052,878       3,398,281       6,391,205       2,118,825  
Interest expense on junior subordinated notes
    (488,517 )     (495,565 )     (245,334 )     (248,367 )
Net interest income
    9,564,361       2,902,716       6,145,871       1,870,458  
Unrealized gains (losses) on mortgage-backed securities
    11,266,428       (10,885,051 )     9,698,117       (10,412,972 )
Realized gains (losses) on mortgage-backed securities
    4,049,477       (873,987 )     2,980,121       (933,940 )
(Losses) gains on derivative instruments
    (7,590,975 )     6,596,069       (5,873,958 )     7,071,631  
Net portfolio income (deficiency)
    17,289,291       (2,260,253 )     12,950,151       (2,404,823 )
                                 
Other income:
                               
Gains (losses) on retained interests in securitizations
    2,446,586       1,755,179       2,252,897       (229,647 )
Gains on release of loan loss reserves
    -       3,037,260       -       3,037,260  
Other expense
    (20,253 )     (8,716 )     (10,125 )     (6,237 )
Total other income
    2,426,333       4,783,723       2,242,772       2,801,376  
                                 
Expenses:
                               
Compensation and related benefits
    1,357,307       852,971       911,134       421,727  
Directors' fees and liability insurance
    543,512       390,707       302,950       222,305  
Orchid Island Capital, Inc. IPO expenses
    -       3,042,333       -       546  
Audit, legal and other professional fees
    1,088,791       722,942       688,541       366,226  
Direct REIT operating expenses
    229,316       233,672       114,133       98,767  
Other administrative
    391,075       342,231       236,354       174,603  
Total expenses
    3,610,001       5,584,856       2,253,112       1,284,174  
                                 
Net income (loss) before income tax (benefit) provision
    16,105,623       (3,061,386 )     12,939,811       (887,621 )
Income tax (benefit) provision
    (2,131,758 )     39,386       25,601       3,386  
                                 
Net income (loss)
    18,237,381       (3,100,772 )     12,914,210       (891,007 )
Less: Income (loss) attributable to noncontrolling interests
    12,538,193       (530,963 )     9,584,234       (1,091,947 )
                                 
Net Income (Loss) attributable to Bimini Capital stockholders
  $ 5,699,188     $ (2,569,809 )   $ 3,329,976     $ 200,940  
                                 
Basic and Diluted Net Income (Loss) Per Share of:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
  $ 0.47     $ (0.24 )   $ 0.27     $ 0.02  
CLASS B COMMON STOCK
                               
Basic and Diluted
  $ 0.47     $ (0.24 )   $ 0.27     $ 0.02  
Weighted Average Shares Outstanding:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
    12,071,977       10,626,491       12,294,879       10,984,756  
CLASS B COMMON STOCK
                               
Basic and Diluted
    31,938       31,938       31,938       31,938  
See Notes to Consolidated Financial Statements
 
 
 
 
2

 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
(Unaudited)
 
For the Six Months Ended June 30, 2014
 
                               
   
Stockholders' Equity
         
   
Common
 
Additional
 
Accumulated
 
Noncontrolling
     
   
Stock
 
Paid-in Capital
 
Deficit
 
Interests
 
Total
 
Balances, January 1, 2014
  $ 11,574     $ 334,810,312     $ (333,078,313 )   $ 31,614,843     $ 33,358,416  
Net income
    -       -       5,699,188       12,538,193       18,237,381  
Issuance of common shares of
                                       
Orchid Island Capital, Inc.
    -       (1,004,447 )     -       76,120,369       75,115,922  
Cash dividends paid to
                                       
noncontrolling interests
    -       -       -       (7,378,350 )     (7,378,350 )
Issuance of Class A common shares
                                       
for equity plan exercises
    527       204,891       -       -       205,418  
Amortization of equity plan compensation
    -       -       -       16,080       16,080  
Class A common shares sold
                                       
directly to employees
    258       97,742       -       -       98,000  
                                         
Balances, June 30, 2014
  $ 12,359     $ 334,108,498     $ (327,379,125 )   $ 112,911,135     $ 119,652,867  
See Notes to Consolidated Financial Statements
 
 
 
 
3

 
 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Six Months Ended June 30, 2014 and 2013
 
             
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 18,237,381     $ (3,100,772 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
               
Stock based compensation and equity plan amortization
    221,498       40,744  
Depreciation
    54,629       60,545  
Deferred income tax benefit
    (2,154,025 )     -  
(Gains) losses on mortgage-backed securities
    (15,315,905 )     11,759,038  
Gains on retained interests in securitizations
    (2,446,586 )     (1,755,179 )
Gains on release of loan loss reserves
    -       (3,037,260 )
Realized and unrealized losses on interest rate swaptions
    1,285,300       -  
Changes in operating assets and liabilities:
               
Accrued interest receivable
    (2,368,595 )     (867,636 )
Other assets
    (239,673 )     308,535  
Accrued interest payable
    218,451       (22,028 )
Other liabilities
    245,850       (124,413 )
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (2,261,675 )     3,261,574  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
    (1,003,577,756 )     (460,089,739 )
Sales
    434,601,973       214,734,292  
Principal repayments
    28,820,992       20,974,437  
Payments received on retained interests in securitizations
    1,842,410       1,628,594  
Increase in restricted cash
    (1,435,035 )     (8,470,313 )
Purchases of property and equipment
    (34,550 )     (10,940 )
Purchase of interest rate swaptions, net of margin cash received
    (1,219,000 )     -  
NET CASH USED IN INVESTING ACTIVITIES
    (541,000,966 )     (231,233,669 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
    3,523,211,129       1,972,626,965  
Principal repayments on repurchase agreements
    (3,022,580,809 )     (1,776,723,801 )
Issuance of common shares of Orchid Island Capital, Inc.
    75,115,922       35,400,000  
Cash dividends paid to noncontrolling interests
    (7,378,350 )     (1,274,399 )
Class A common shares sold directly to employees
    98,000       -  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    568,465,892       230,028,765  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    25,203,251       2,056,670  
CASH AND CASH EQUIVALENTS, beginning of the period
    11,959,292       6,592,561  
CASH AND CASH EQUIVALENTS, end of the period
  $ 37,162,543     $ 8,649,231  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 1,452,682     $ 1,125,152  
Income taxes
  $ 22,267     $ 39,386  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY:
               
Security acquired settled in later period
  $ 6,828,538     $ -  
See Notes to Consolidated Financial Statements
 

 
4

 

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2014

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital”), was formed in September 2003 for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“MBS”).  Bimini Capital has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).  As a REIT, Bimini Capital is generally not subject to federal income tax on its REIT taxable income provided that it distributes to its stockholders at least 90% of its REIT taxable income on an annual basis.  In addition, a REIT must meet other provisions of the Code to retain its special tax status.  Bimini Capital’s website is located at http://www.biminicapital.com.

As used in this document, discussions related to the “Company”, refer to the consolidated entity, including Bimini Capital, our wholly-owned subsidiaries, and our consolidated variable interest entity (“VIE”).  References to “Bimini Capital” and the “parent” refer to Bimini Capital Management, Inc. as a separate entity.

On February 20, 2013, Orchid Island Capital, Inc. (“Orchid”) completed the initial public offering (“IPO”) of its common stock.  Prior to the completion of its IPO, Orchid was a wholly-owned qualified REIT subsidiary of Bimini Capital.  During 2014, Orchid has completed additional offerings of its common stock, and through June 30, 2014, Orchid continues to be consolidated as our VIE.  As used in this document, discussions related to REIT qualifying activities include the MBS portfolios of Bimini Capital and Orchid.

Discussions related 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 “Bimini Advisors”) and MortCo TRS, LLC (“MortCo”) and its consolidated subsidiaries.

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital, Orchid, Bimini Advisors and MortCo, as well as the wholly-owned subsidiaries of MortCo. All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

ASC Topic 810, Consolidation (“ASC 810”), requires the consolidation of a VIE by an enterprise if it is deemed the primary beneficiary of the VIE. Further, ASC 810 requires a qualitative assessment to determine the primary beneficiary of a VIE and ongoing assessments of whether an enterprise is the primary beneficiary of a VIE as well as additional disclosures for entities that have variable interests in VIEs.


 
5

 


At the time of Orchid’s IPO and as of June 30, 2014, management has concluded Orchid is a VIE because Orchid's equity holders lack the ability through voting rights to make decisions about its activities that have a significant effect on the success of Orchid. Management has also concluded that Bimini Capital is the primary beneficiary of Orchid because, under the management agreement between Bimini Advisors and Orchid, Bimini Capital has the power to direct the activities of Orchid that most significantly impact its economic performance. As a result, subsequent to Orchid’s IPO and through June 30, 2014, the Company has continued to consolidate Orchid in its Consolidated Financial Statements.  While the results of operations of Orchid are included in the Company’s Consolidated Financial Statements, net loss attributable to Bimini Capital stockholders does not include the portion attributable to noncontrolling interests. Additionally, noncontrolling interests in Orchid are recorded in our Consolidated Balance Sheets and our Consolidated Statement of Equity within the equity section but separate from the stockholders’ equity.

Assets recognized as a result of consolidating Orchid do not represent additional assets that could be used to satisfy claims against Bimini Capital’s assets. Conversely, liabilities recognized as a result of consolidating Orchid do not represent additional claims on Bimini Capital’s assets; rather, they represent claims against the assets of Orchid. Creditors and stockholders of Orchid have no recourse to the assets of Bimini Capital.

As further described in Note 7, Bimini Capital has a common share investment in a trust used in connection with the issuance of Bimini Capital’s junior subordinated notes.  Pursuant to ASC 810, Bimini Capital’s common share investment in the trust has not been consolidated in the financial statements of Bimini Capital, and accordingly, this investment has been accounted for on the equity method.

Liquidity

Material losses incurred by the Company in 2006 and 2007 attributable to the former mortgage origination operations of MortCo significantly reduced Bimini Capital’s equity capital base and the size of its MBS portfolio when compared to pre-2006 levels. Litigation costs stemming from both the former operations of MortCo and Bimini Capital itself caused the Company’s overhead to be high in relation to its portfolio size. The smaller capital base made it difficult to generate sufficient net interest income to cover expenses.

Beginning in 2007, to respond to the losses and their impact on our capital base, the Company took significant steps to reduce the leverage in its balance sheet, reduce its debt service costs, reduce expenses, settle various litigation matters, and alter its investment strategy for holding MBS securities. In addition, the Company evaluated and pursued capital raising opportunities for Orchid.  After pursuing several efforts to raise capital at Orchid, Orchid completed its initial public offering of common stock on February 20, 2013.  Bimini Capital and Bimini Advisors acted as sponsor to Orchid by agreeing to fund all underwriting, legal and other costs of the offering, which totaled approximately $3.0 million during the year ended December 31, 2013.  Orchid has no obligation or intent to reimburse Bimini Capital and Bimini Advisors, either directly or indirectly, for the offering costs; therefore, they were expensed in the Company’s consolidated statement of operations. As of March 31, 2014, Orchid reached $100 million of stockholders equity for the first time. As a result, in accordance with the management agreement between Bimini Advisors and Orchid,  Bimini Advisors will begin to allocate certain overhead costs to Orchid on a pro rata basis commencing on July 1, 2014.  As a stockholder of Orchid, Bimini Capital will continue to share in distributions, if any, paid by Orchid to its stockholders.

At June 30, 2014, the Company had cash and cash equivalents of approximately $37.2 million, an MBS portfolio of approximately $951.6 million and equity capital base of approximately $119.7 million, including approximately $6.7 million attributable to the stockholders of Bimini Capital and $112.9 million attributable to noncontrolling interests.  The Company generated cash flows of approximately $37.7 million from principal and interest payments on its MBS portfolio and approximately $1.8 million from retained interests in securitizations during the six months ended June 30, 2014. However, if cash resources are, at any time, insufficient to satisfy the Company’s liquidity requirements, such as when cash flow from operations are materially negative, the Company may be required to pledge additional assets to meet margin calls, liquidate assets, sell additional debt or equity securities or pursue other financing alternatives.

 
6

 
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six and three month periods ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
 
 
The consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete consolidated financial statements.  For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates affecting the accompanying financial statements include the fair values of MBS, Eurodollar futures contracts, interest rate swaption, retained interests and asset valuation allowances.

Statement of Comprehensive Income (Loss)

In accordance with FASB ASC Topic 220, Comprehensive Income, a statement of comprehensive income has not been included as the Company has no items of other comprehensive income.  Comprehensive income (loss) is the same as net income (loss) for all periods presented.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less. Restricted cash of approximately $3,992,000 and approximately $2,557,000 at June 30, 2014 and December 31, 2013, respectively, represents cash held by a broker as margin on Eurodollar futures contracts.

The Company maintains cash balances at three banks, and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures up to $250,000 per depositor at each financial institution. At June 30, 2014, the Company’s cash deposits exceeded federally insured limits by approximately $36.1 million. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty.  The Company uses large, well-known bank and derivative counterparties and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.


 
7

 


Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through (“PT”) certificates, collateralized mortgage obligations, and interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of mortgage-backed loans (collectively, “MBS”). These investments meet the requirements to be classified as available for sale under ASC 320-10-25, Debt and Equity Securities (which requires the securities to be carried at fair value on the balance sheet with changes in fair value charged to other comprehensive income, a component of stockholders’ equity). However, the Company has elected to account for its investment in MBS under the fair value option.  Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.

The Company records MBS transactions on the trade date.  Security purchases that have not settled as of the balance sheet date are included in the MBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the MBS balance with an offsetting receivable recorded.

The fair value of the Company’s investment in MBS is governed by FASB ASC Topic 820, Fair Value Measurement.  The definition of fair value in FASB ASC Topic 820 focuses on the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.  The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for MBS are based on the average of third-party broker quotes received and/or independent pricing sources when available.

Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized.  For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively from the reporting period based on the new estimate of prepayments and the contractual terms of the security.  For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security.  Changes in fair value of MBS during each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying consolidated statements of operations.

Retained Interests in Securitizations

From 2004 to 2006, MortCo participated in securitization transactions as part of its mortgage origination business. Retained interests in the securitization transactions were initially recorded at their fair value when issued by MortCo. Subsequent adjustments to fair value are reflected in earnings. Quoted market prices for these assets are generally not available, so the Company estimates fair value based on the present value of expected future cash flows using management’s best estimates of key assumptions, which include expected credit losses, prepayment speeds, weighted-average life, and discount rates commensurate with the inherent risks of the asset.

Derivative Financial Instruments

The Company uses derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are Eurodollar futures contracts and options to enter in interest rate swaps (“interest rate swaptions”), but it may enter into other transactions in the future.  The Company has elected to not treat any of its derivative financial instruments as hedges. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be carried at fair value.  Changes in fair value are recorded in earnings for each period.


 
8

 


Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties to honor their commitments.  In addition, the Company may be required to post collateral based on any declines in the market value of the derivatives.  In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement.  To mitigate this risk, the Company uses well-established commercial banks as counterparties.

Financial Instruments

FASB ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value, either in the body of the financial statements or in the accompanying notes. MBS, Eurodollar futures contracts, interest rate swaptions, retained interests in securitization transactions and mortgage loans held for sale are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 13 of the financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities generally approximates their carrying value as of  June 30, 2014 and December 31, 2013, due to the short-term nature of these financial instruments.

It is impractical to estimate the fair value of the Company’s junior subordinated notes.  Currently, there is a limited market for these types of instruments and the Company is unable to ascertain what interest rates would be available to the Company for similar financial instruments. Information regarding carrying amount, effective interest rate and maturity date for these instruments is presented in Note 7 to the consolidated financial statements.

Property and Equipment, net

Property and equipment, net, consists of computer equipment with a depreciable life of 3 years, office furniture and equipment with depreciable lives of 8 to 20 years, land which has no depreciable life, and buildings and improvements with depreciable lives of 30 years.  Property and equipment is recorded at acquisition cost and depreciated using the straight-line method over the estimated useful lives of the assets.

Repurchase Agreements

The Company finances the acquisition of the majority of its PT MBS through the use of repurchase agreements under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accounts for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

Share-Based Compensation

The Company follows the provisions of FASB ASC topic 718, Compensation – Stock Compensation, to account for stock and stock-based awards.  For stock and stock-based awards issued to employees, a compensation charge is recorded against earnings over the vesting period based on the fair value of the award.  Payments pursuant to dividend equivalent rights, which are granted along with certain equity based awards, are charged to stockholders’ equity when declared.  The Company applies a zero forfeiture rate for its equity based awards, as such awards have been granted to a limited number of employees and historical forfeitures have been minimal.  A significant forfeiture, or an indication that significant forfeitures may occur, would result in a revised forfeiture rate which would be accounted for prospectively as a change in an estimate. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance.

 
9

 
Earnings Per Share

The Company follows the provisions of FASB ASC Topic 260, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents or two (or more) classes of securities that participate in dividend distributions to present both basic and diluted earnings per share (“EPS”) on the face of the consolidated statement of operations. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the “if converted” method for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A Common Stock if, as and when authorized and declared by the Board of Directors. Accordingly, shares of the Class B Common Stock are included in the computation of basic EPS using the two-class method and, consequently, are presented separately from Class A Common Stock.

The shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. The outstanding shares of Class B and Class C Common Stock are not included in the computation of diluted EPS for the Class A Common Stock as the conditions for conversion into shares of Class A Common Stock were not met.

Income Taxes

Bimini Capital has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), and Orchid, until the closing of its IPO on February 20, 2013, was a “qualified REIT subsidiary” of Bimini Capital under the Code.   Beginning with its short tax period commencing on February 20, 2013 and ending December 31, 2013, Orchid has qualified and elected to be taxed as a REIT, and filed a REIT tax return separate from Bimini Capital.  REITs are generally not subject to federal income tax on their REIT taxable income provided that they distribute to their stockholders at least 90% of their REIT taxable income on an annual basis. In addition, a REIT must meet other provisions of the Code to retain its tax status.  At June 30, 2014, management believes that the Company has complied with Code requirements and Bimini Capital continues to qualify as a REIT. As further described in Note 11, Income Taxes, Bimini Advisors and MortCo are taxpaying entities for income tax purposes and are taxed separately from Bimini Capital and Orchid.
 
 
The Company’s U.S. federal income tax returns for years ended on or after December 31, 2010 remain open for examination. Although management believes its calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of tax audits could be materially different from the tax returns filed by the Company, and those differences could result in significant costs or benefits to the Company.

The Company measures, recognizes and presents its uncertain tax positions in accordance with FASB ASC 740, Income Taxes.  Under that guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period.  The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.

Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentations.


 
10

 


Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions.  The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015.  The ASU is not expected to materially impact the Company’s consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 amends the accounting guidance for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings, and requires additional disclosure about certain transactions by the transferor. ASU 2014-11 is effective for certain transactions that qualify for sales treatment for the first interim or annual period beginning after December 15, 2014. The new disclosure requirements for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that qualify for secured borrowing treatment is effective for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2015. We currently record our repurchase arrangements as secured borrowings and do not anticipate that ASU 2014-11 will have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This new standard requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The ASU is effective beginning January 1, 2014 on either a prospective or retrospective basis.  The guidance represents a change in financial statement presentation only and the adoption of this ASU did not have a material impact on the Company’s consolidated financial results.

In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update modify the guidance for determining whether an entity is an investment company, update the measurement requirements for noncontrolling interests in other investment companies and require additional disclosures for investment companies under US GAAP.  The amendments in the Update develop a two-tiered approach for the assessment of whether an entity is an investment company which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics.  The amendments in this Update also revise the measurement guidance in Topic 946 such that investment companies must measure noncontrolling ownership interests in other investment companies at fair value, rather than applying the equity method of accounting to such interests. The new guidance became effective beginning January 1, 2014.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date ("ASU 2013-04"). The objective of this ASU is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing US GAAP. The amendments in ASU 2013-04 became effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be retrospectively applied to all prior periods presented for those obligations resulting from joint and several liability arrangements within the ASU's scope that exist at the beginning of an entity's fiscal year of adoption. The adoption of this ASU had no impact on the Company’s consolidated financial statements.

 
11

 
NOTE 2.   MORTGAGE-BACKED SECURITIES

The following table presents the Company’s MBS portfolio as of June 30, 2014 and December 31, 2013:

(in thousands)
           
   
June 30, 2014
   
December 31, 2013
 
Pass-Through MBS:
           
Hybrid Adjustable-rate Mortgages
  $ 75,734     $ 90,487  
Adjustable-rate Mortgages
    4,650       5,334  
Fixed-rate Mortgages
    820,831       267,481  
Total Pass-Through MBS
    901,215       363,302  
Structured MBS:
               
Interest-Only Securities
    39,608       20,443  
Inverse Interest-Only Securities
    10,818       5,596  
Total Structured MBS
    50,426       26,039  
Total
  $ 951,641     $ 389,341  

Included in the table above at June 30, 2014 are $876.0 million of MBS assets that may only be used to settle liabilities of the consolidated VIE.

The following table summarizes the Company’s MBS portfolio as of June 30, 2014 and December 31, 2013, according to the contractual maturities of the securities in the portfolio. Actual maturities of MBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

(in thousands)
           
   
June 30, 2014
   
December 31, 2013
 
Less than one year
  $ 16     $ 46  
Greater than five years and less than ten years
    1,134       1,520  
Greater than or equal to ten years
    950,491       387,775  
Total
  $ 951,641     $ 389,341  

The Company generally pledges its MBS assets as collateral under repurchase agreements.  At June 30, 2014 and December 31, 2013, the Company had unpledged securities totaling $44.0 million and $17.2 million, respectively.  The unpledged balance at June 30, 2014 includes an unsettled security purchase with a fair value of approximately $6.8 million that will be pledged as collateral under a repurchase agreement on its respective settlement date in July 2014.

NOTE 3.  RETAINED INTERESTS IN SECURITIZATIONS

The following table summarizes the estimated fair value of the Company’s retained interests in asset backed securities as of June 30, 2014 and  December 31, 2013:

(in thousands)
             
Series
Issue Date
 
June 30, 2014
   
December 31, 2013
 
HMAC 2004-1
March 4, 2004
  $ 19     $ -  
HMAC 2004-2
May 10, 2004
    589       -  
HMAC 2004-3
June 30, 2004
    977       1,518  
HMAC 2004-4
August 16, 2004
    1,192       654  
HMAC 2004-5
September 28, 2004
    358       359  
              Total
    $ 3,135     $ 2,531  

 
12

 
 
NOTE 4.   REPURCHASE AGREEMENTS

As of June 30, 2014, the Company had outstanding repurchase agreement obligations of approximately $854.0 million with a net weighted average borrowing rate of 0.35%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $911.1 million.  As of December 31, 2013, the Company had outstanding repurchase agreement obligations of approximately $353.4 million with a net weighted average borrowing rate of 0.39%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $373.4 million.

As of June 30, 2014 and December 31, 2013, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)
                             
   
OVERNIGHT
   
BETWEEN 2
   
BETWEEN 31
   
GREATER
       
   
(1 DAY OR
   
AND
   
AND
   
THAN
       
   
LESS)
   
30 DAYS
   
90 DAYS
   
90 DAYS
   
TOTAL
 
June 30, 2014
                             
Fair value of securities pledged, including accrued
                             
interest receivable
  $ -     $ 643,035     $ 262,977     $ 5,052     $ 911,064  
Repurchase agreement liabilities associated with
                                       
these securities
  $ -     $ 605,018     $ 244,279     $ 4,729     $ 854,026  
Net weighted average borrowing rate
    -       0.35 %     0.34 %     0.38 %     0.35 %
December 31, 2013
                                       
Fair value of securities pledged, including accrued
                                       
interest receivable
  $ -     $ 357,338     $ 16,081     $ -     $ 373,419  
Repurchase agreement liabilities associated with
                                       
these securities
  $ -     $ 337,977     $ 15,419     $ -     $ 353,396  
Net weighted average borrowing rate
    -       0.39 %     0.37 %     -       0.39 %

As of June 30, 2014, the outstanding repurchase obligations of the consolidated VIE included in the table above was $783.7 million.

If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable, and cash posted by the Company as collateral, if any.  At June 30, 2014 and December 31, 2013, the Company had a maximum amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) of approximately $56.7 million and $19.9 million, respectively.  At June 30, 2014, the Company did not have an amount at risk with any repurchase agreement counterparty greater than 10% of the Company’s equity.  Summary information regarding amounts at risk with individual counterparties greater than 10% of equity at December 31, 2013 is as follows:

($ in thousands)
     
   
% of
Weighted
   
Stockholders'
Average
 
Amount
Equity
Maturity
Repurchase Agreement Counterparties
at Risk
at Risk
(in Days)
December 31, 2013
     
Citigroup Global Markets, Inc.
$5,487
16.4%
 11


 
13

 


At June 30, 2014 and December 31, 2013, Bimini Capital had a maximum amount at risk (the difference between the amount loaned to Bimini Capital, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) of approximately $4.2 million and $1.6 million, respectively.  Summary information regarding amounts at risk with individual counterparties greater than 10% of stockholders’ equity attributable to Bimini Capital at June 30, 2014 and December 31, 2013 is as follows:

($ in thousands)
                 
         
% of
   
Weighted
 
         
Stockholders'
   
Average
 
   
Amount
   
Equity
   
Maturity
 
Repurchase Agreement Counterparties
 
at Risk
   
at Risk
   
(in Days)
 
June 30, 2014
                 
ED&F Man Capital Markets Inc.
  $ 1,520       22.5 %     65  
JVB Financial Group, LLC
    788       11.7 %     11  
Suntrust Robinson Humphrey, Inc.
    776       11.5 %     28  
December 31, 2013
                       
Suntrust Robinson Humphrey, Inc.
  $ 715       41.0 %     3  
JVB Financial Group, LLC
    559       32.1 %     21  

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivatives, such as Eurodollar futures contracts and an interest rate swaption.  The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

As of December 31, 2013, such instruments were comprised entirely of Eurodollar futures contracts.  Eurodollar futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company’s account on a daily basis and reflected in earnings as they occur. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker.  This margin represents the collateral the Company has posted for its open positions and is recorded on the consolidated balance sheet as part of restricted cash.

 During the six months ended June 30, 2014, the Company was a party to interest rate swaption agreements.  At June 30, 2014, the Company had one outstanding swaption agreement which grants the Company the right but not the obligation to enter into an underlying pay fixed interest rate swap (“payer swaption”).  The Company may also enter into swaption agreements that provide the Company the option to enter into a receive fixed interest rate swap (“receiver swaption”).

Derivative Assets (Liability), at Fair Value

The table below summarizes fair value information about our derivative assets and liability as of June 30, 2014 and December 31, 2013.

(in thousands)
             
Derivative Instruments and Related Accounts
Balance Sheet Location
 
June 30, 2014
   
December 31, 2013
 
Assets
             
Eurodollar futures - Margin posted to counterparty
Restricted cash
  $ 3,992     $ 2,557  
Payer swaption
Derivative assets, at fair value
    1,200       -  
      $ 5,192     $ 2,557  
Liability
                 
Payer swaption - Margin posted by counterparty
Other liabilities
  $ (1,266 )   $ -  
 
 
 

 
 
14

 
The tables below present information related to the Company’s Eurodollar futures positions at June 30, 2014 and December 31, 2013.

($ in thousands)
                                   
Eurodollar Futures Positions (Consolidated)
 
As of June 30, 2014
                                   
   
Repurchase Agreement Funding Hedges
   
Junior Subordinated Debt Funding Hedges
 
   
Weighted
   
Average
         
Weighted
   
Average
       
   
Average
   
Contract
         
Average
   
Contract
       
   
LIBOR
   
Notional
   
Open
   
LIBOR
   
Notional
   
Open
 
Expiration Year
 
Rate
   
Amount
   
Equity(1)
   
Rate
   
Amount
   
Equity(1)
 
2015
    0.65 %   $ 580,000     $ (795 )     0.63 %   $ 26,000     $ (222 )
2016
    1.54 %     586,500       150       1.58 %     26,000       (50 )
2017
    2.46 %     430,000       192       2.46 %     26,000       (7 )
2018
    2.97 %     420,000       (457 )     2.92 %     26,000       (3 )
Total / Weighted Average
    1.71 %   $ 509,733     $ (910 )     1.75 %   $ 26,000     $ (282 )

($ in thousands)
                                   
Eurodollar Futures Positions (Consolidated)
 
As of December 31, 2013
                                   
   
Repurchase Agreement Funding Hedges
   
Junior Subordinated Debt Funding Hedges
 
   
Weighted
   
Average
         
Weighted
   
Average
       
   
Average
   
Contract
         
Average
   
Contract
       
   
LIBOR
   
Notional
   
Open
   
LIBOR
   
Notional
   
Open
 
Expiration Year
 
Rate
   
Amount
   
Equity(1)
   
Rate
   
Amount
   
Equity(1)
 
2014
    0.40 %   $ 262,500     $ (189 )     0.35 %   $ 26,000     $ (428 )
2015
    0.80 %     275,000       (146 )     0.80 %     26,000       (176 )
2016
    1.90 %     250,000       1,367       1.74 %     26,000       9  
2017
    3.03 %     250,000       2,291       -       -       -  
2018
    3.77 %     250,000       1,575       -       -       -  
Total / Weighted Average
    2.02 %   $ 257,353     $ 4,898       0.89 %   $ 26,000     $ (595 )

The tables below present information related solely to Bimini Capital’s Eurodollar futures positions at June 30, 2014 and December 31, 2013.

($ in thousands)
                                   
Eurodollar Futures Positions (Parent-Only)
 
   
Repurchase Agreement Funding Hedges
 
   
June 30, 2014
   
December 31, 2013
 
   
Weighted
   
Average
         
Weighted
   
Average
       
   
Average
   
Contract
         
Average
   
Contract
       
   
LIBOR
   
Notional
   
Open
   
LIBOR
   
Notional
   
Open
 
Expiration Year
 
Rate
   
Amount
   
Equity
   
Rate
   
Amount
   
Equity(1)
 
2015
    0.63 %   $ 30,000     $ (5 )     -     $ -     $ -  
2016
    1.60 %     36,500       (9 )     -       -       -  
2017
    2.46 %     30,000       (10 )     -       -       -  
2018
    2.92 %     30,000       (5 )     -       -       -  
Total / Weighted Average
    1.75 %   $ 31,857     $ (29 )     -     $ -     $ -  


 
15

 



($ in thousands)
                                   
Eurodollar Futures Positions (Parent-Only)
 
   
Junior Subordinated Debt Funding Hedges
 
   
June 30, 2014
   
December 31, 2013
 
   
Weighted
   
Average
         
Weighted
   
Average
       
   
Average
   
Contract
         
Average
   
Contract
       
   
LIBOR
   
Notional
   
Open
   
LIBOR
   
Notional
   
Open
 
Expiration Year
 
Rate
   
Amount
   
Equity
   
Rate
   
Amount
   
Equity(1)
 
2014
    -     $ -     $ -       0.35 %   $ 26,000     $ (428 )
2015
    0.63 %     26,000       (222 )     0.80 %     26,000       (176 )
2016
    1.58 %     26,000       (50 )     1.74 %     26,000       9  
2017
    2.46 %     26,000       (7 )     -       -       -  
2018
    2.92 %     26,000       (3 )     -       -       -  
Total / Weighted Average
    1.75 %   $ 26,000     $ (282 )     0.89 %   $ 26,000     $ (595 )

(1)  
Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

The table below presents information related to the Company’s interest rate swaption position at June 30, 2014.

($ in thousands)
             
 
Option
Underlying Swap
         
Fixed
Receive
 
   
Fair
Months to
Notional
Pay
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
≤ 1 year
$1,520 $1,200
11.5
$100,000
2.38%
3 Month
5

Gain (Loss) From Derivative Instruments, Net

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the six and three months ended June 30, 2014 and 2013.

(in thousands)
                       
   
Consolidated
   
Parent-Only
 
Six Months Ended June 30,
 
2014
   
2013
   
2014
   
2013
 
Eurodollar futures contracts (short positions)
  $ (6,306 )   $ 6,596     $ (170 )   $ 228  
Payer swaptions
    (1,285 )     -       -       -  
    $ (7,591 )   $ 6,596     $ (170 )   $ 228  

(in thousands)
                       
   
Consolidated
   
Parent-Only
 
Three Months Ended June 30,
 
2014
   
2013
   
2014
   
2013
 
Eurodollar futures contracts (short positions)
  $ (4,745 )   $ 7,071     $ (146 )   $ 220  
Payer swaptions
    (1,129 )     -       -       -  
    $ (5,874 )   $ 7,071     $ (146 )   $ 220  


 
16

 


Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments are included in restricted cash on our consolidated balance sheets.

NOTE 6. OFFSETTING ASSETS AND LIABILITIES

The Company’s derivatives and repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions.  The Company reports its assets and liabilities subject to these arrangements on a gross basis.

The following tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30, 2014 and December 31, 2013.

(in thousands)
                                   
Offsetting of Assets
 
                   
Gross Amount Not Offset
       
                   
in the Balance Sheet
       
         
Net Amount
 
Financial
         
 
Gross Amount
 
Gross Amount
 
of Assets
 
Instruments
 
Cash
     
 
of Recognized
 
Offset in the
 
Presented in the
 
Received as
 
Received as
 
Net
 
 
Assets
 
Balance Sheet
 
Balance Sheet
 
Collateral
 
Collateral
 
Amount
 
June 30, 2014
                                   
Derivative asset - Payer swaption
  $ 1,200     $ -     $ 1,200     $ -     $ (1,200 )   $ -  
December 31, 2013
                                               
Derivative asset
  $ -     $ -     $ -     $ -     $ -     $ -  

(in thousands)
                                   
Offsetting of Liabilities
 
                   
Gross Amount Not Offset
       
                   
in the Balance Sheet
       
         
Net Amount
 
Financial
         
 
Gross Amount
 
Gross Amount
 
of Liabilities
 
Instruments
         
 
of Recognized
 
Offset in the
 
Presented in the
 
Posted as
 
Cash Posted
 
Net
 
 
Liabilities
 
Balance Sheet
 
Balance Sheet
 
Collateral
 
Collateral
 
Amount
 
June 30, 2014
                                   
Repurchase Agreements
  $ 854,026     $ -     $ 854,026     $ (854,026 )   $ -     $ -  
December 31, 2013
                                               
Repurchase Agreements
  $ 353,396     $ -     $ 353,396     $ (353,396 )   $ -     $ -  

The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the balance sheet to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.  The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented.  See Notes 4 and 5 for a discussion of collateral posted or received against or for repurchase obligations and derivative instruments.

 
17

 
NOTE 7.  TRUST PREFERRED SECURITIES

During 2005, Bimini Capital sponsored the formation of a statutory trust, known as Bimini Capital Trust II (“BCTII”) of which 100% of the common equity is owned by Bimini Capital.  It was formed for the purpose of issuing trust preferred capital securities to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of Bimini Capital. The debt securities held by BCTII are the sole assets of BCTII.

As of June 30, 2014 and December 31, 2013, the outstanding principal balance on the junior subordinated debt securities owed to BCTII was $26.8 million.  The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a rate of interest that floats at a spread of 3.50% over the prevailing three-month LIBOR rate.  As of June 30, 2014, the interest rate was 3.73%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions and are redeemable at Bimini Capital's option, in whole or in part and without penalty, beginning December 15, 2010. Bimini Capital's BCTII Junior Subordinated Notes are subordinate and junior in right of payment of all present and future senior indebtedness.

The trust is a VIE because the holders of the equity investment at risk do not have adequate decision making ability over the trust's activities. Since Bimini Capital's investment in the trust's common equity securities was financed directly by the trust as a result of its loan of the proceeds to Bimini Capital, that investment is not considered to be an equity investment at risk. Since Bimini Capital's common share investment in BCTII is not a variable interest, Bimini Capital is not the primary beneficiary of BCTII. Therefore, Bimini Capital has not consolidated the financial statements of BCTII into its financial statements.

The accompanying consolidated financial statements present Bimini Capital's BCTII Junior Subordinated Notes issued to the trust as a liability and Bimini Capital's investment in the common equity securities of BCTII as an asset (included in other assets).  For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.

NOTE 8.  CAPITAL STOCK

At June 30, 2014 and December 31, 2013, Bimini Capital’s capital stock is comprised of the following:

     
June 30, 2014
December 31, 2013
Preferred stock, $0.001 par value; 10,000,000 shares authorized; designated, 1,800,000
       
 
shares as Class A Redeemable and 2,000,000 shares as Class B Redeemable; no
       
 
shares issued and outstanding as of June 30, 2014 and December 31, 2013
$
 -
$
 -
Class A Common Stock, $0.001 par value; 98,000,000 shares designated: 12,295,182
       
 
shares issued and outstanding as of June 30, 2014 and 11,509,756 shares
       
 
issued and outstanding as of December 31, 2013
 
 12,295
 
 11,510
Class B Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
       
 
issued and outstanding as of June 30, 2014 and December 31, 2013
 
 32
 
 32
Class C Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
       
 
issued and outstanding as of June 30, 2014 and December 31, 2013
 
 32
 
 32


 
18

 


Issuances of Common Stock

The table below presents information related to the Company’s Class A Common Stock issued during the six and three months ended June 30, 2014 and 2013.

   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
Shares Issued Related To:
 
2014
   
2013
   
2014
   
2013
 
Directors' compensation
    27,531       -       27,531       -  
Vesting incentive plan shares(1)
    500,000       16,204       -       -  
Shares sold directly to employees(1)
    257,895       -       -       -  
Total shares of Class A Common Stock issued
    785,426       16,204       27,531       -  

(1)  
See Note 9, Stock Incentive Plans, for details of these issuances.

There were no issuances of the Company's Class B Common Stock and Class C Common Stock during the six and three months ended June 30, 2014 and 2013.

NOTE 9.    STOCK INCENTIVE PLANS

On August 12, 2011, Bimini Capital’s shareholders approved the 2011 Long Term Compensation Plan (the “2011 Plan”) to assist the Company in recruiting and retaining employees, directors and other service providers by enabling them to participate in the success of Bimini Capital and to associate their interest with those of the Company and its stockholders.  The plan is intended to permit the grant of stock options, stock appreciation rights (“SARs”), stock awards, performance units and other equity-based and incentive awards.  The maximum aggregate number of shares of Common Stock that may be issued under the 2011 Plan pursuant to the exercise of options and SARs, the grant of stock awards or other equity-based awards and the settlement of incentive awards and performance units is equal to 4,000,000 shares.

In October 2012, Orchid adopted the 2012 Equity Incentive Plan (the “2012 Plan”) to recruit and retain employees, directors and other service providers, including employees of Bimini Capital and other affiliates. The 2012 Plan provides for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards.  The 2012 Plan is administered by the Compensation Committee of Orchid’s Board of Directors except that Orchid’s full Board of Directors will administer awards made to directors who are not employees of Orchid or its affiliates.  The 2012 Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of Orchid’s common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate 4,000,000 shares of Orchid common stock that may be issued under the Incentive Plan.
 
 
Phantom share awards represent a right to receive a share of Bimini Capital's Class A Common Stock.  These awards do not have an exercise price and are valued at the fair value of Bimini Capital’s Class A Common Stock at the date of the grant. The grant date value is amortized to compensation expense on a straight-line basis over the vesting period of the respective award.  The phantom shares vest, based on the employees’ continuing employment, following a schedule as provided in the individual grant agreements. Compensation expense recognized for phantom shares was approximately $41,000 and $20,000 for the six and three months ended June 30, 2013, respectively.  During the six months ended June 30, 2014, there was no compensation expense recognized for the phantom share awards issued, as such awards were in settlement of the 2013 bonus liability accrued at December 31, 2013, as described below.  Dividends paid on unsettled awards are charged to stockholders’ equity when declared.


 
19

 


A summary of Bimini’s phantom share activity during six months ended June 30, 2014 and 2013 is presented below:

   
2014
   
2013
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
 
       
Grant-Date
         
Grant-Date
 
 
 
Shares
   
Fair Value
   
Shares
   
Fair Value
 
Nonvested, at January 1
    -     $ -       367,844     $ 1.11  
Granted during the period
    500,000       0.38       -       -  
Vested during the period
    (500,000 )     0.38       (16,204 )     0.97  
Nonvested, at June 30
    -     $ -       351,640     $ 1.12  

In February 2014, the Compensation Committee of the Board of Directors of Bimini Capital approved certain performance bonuses for members of management.  These bonuses were awarded primarily in recognition of management’s capital raising efforts in 2013.  The bonuses, which were paid on February 19, 2014 (the “Bonus Date”), consisted of cash and fully vested shares of the Company’s common stock issued under the 2011 Plan.  In particular, executive officers received bonuses totaling approximately $422,000, consisting of 500,000 shares of the Company’s common stock with an approximate value of $190,000, and cash of approximately $232,000 which, at the officer’s election, could be used to purchase newly issued shares directly from the Company.  Under this election, the officers purchased 257,895 shares of the Company’s common stock.  For purposes of these bonuses, shares of the Company’s common stock were valued based on the closing price of the Company’s common stock on the Bonus Date. The expense related to this bonus was accrued at December 31, 2013 and do not affect the results of operations for the six and three months ended June 30, 2014.

A summary of Orchid’s incentive share activity during the six months ended June 30, 2014 is presented below:

         
Weighted-
   
Weighted-
 
         
Average
   
Average
 
 
       
Grant-Date
   
Remaining
 
 
 
Shares
   
Fair Value
   
Life
 
Restricted common stock, at January 1, 2014
    -     $ -       -  
Restricted common stock granted during the period
    26,944       12.32       -  
Vested during the period
    (2,944 )     13.06       -  
Restricted common stock, at June 30, 2014
    24,000     $ 12.23    
2.8 Years
 

On April 25, 2014, Orchid’s Compensation Committee granted each of its non-employee directors 6,000 shares of restricted common stock subject to a three year vesting schedule whereby 2,000 shares of the award vest on the first, second and third anniversaries of the award date.  Directors have all the rights of any other Orchid stockholder with respect to the awards, including the right to receive dividends and vote the shares.  The awards are subject to forfeiture should the director no longer be a member of the Board of Directors of Orchid prior to the respective vesting dates.  In June 2014, the non-employee directors also received a total of 2,944 shares of immediately vested stock awards as part of their compensation for service on Orchid’s board of directors. Compensation expense recognized for restricted shares was approximately $55,000 for both the six and three months ended June 30, 2014.


 
20

 


NOTE 10.  COMMITMENTS AND CONTINGENCIES

Outstanding Litigation

The Company is involved in various lawsuits and claims, both actual and potential, including some that it has asserted against others, in which monetary and other damages are sought. These lawsuits and claims relate primarily to contractual disputes arising out of the ordinary course of the Company’s business. The outcome of such lawsuits and claims is inherently unpredictable. However, management believes that, in the aggregate, the outcome of all lawsuits and claims involving the Company will not have a material effect on the Company’s consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular period in which costs, if any, are recognized.

A complaint by a note-holder in Preferred Term Securities XX (“PreTSL XX”) was filed on July 16, 2010 in the Supreme Court of the State of New York, New York County, against Bimini Capital, the Bank of New York Mellon (“BNYM”), PreTSL XX, Ltd. and Hexagon Securities, LLC (“Hexagon”).  The complaint, filed by Hildene Capital Management, LLC and Hildene Opportunities Fund, Ltd. (“Hildene”), alleges that Hildene suffered losses as a result of Bimini’s repurchase of all outstanding fixed/floating rate capital securities of Bimini Capital Trust II for less than par value from PreTSL XX in October 2009.  Hildene has alleged claims against BNYM for breach of the Indenture, breach of fiduciary duties and breach of covenant of good faith and fair dealing, and claims against Bimini Capital for tortious interference with contract, aiding and abetting breach of fiduciary duty, unjust enrichment and “rescission/illegality.”  Hildene also alleged derivative claims brought in the name of Nominal Defendant BNYM.   (Subsequently, Hexagon and Nominal Defendant PreTSL XX were voluntarily dismissed without prejudice by Hildene.)  PreTSL XX, Ltd. moved to intervene as an additional plaintiff in the action, and Bimini Capital and BNYM opposed that motion.  The court granted PreTSL XX, Ltd.’s motion to intervene, and the Appellate Division, First Department affirmed that decision.  In May 2013, Hildene voluntarily dismissed its purported derivative claims brought in the name of BNYM, including its claim for “rescission/illegality.”  On April 14, 2014 and May 18, 2014,  Stipulations of Partial Discontinuance were filed with the court that dismissed all claims between and among Hildene and BNYM, and PreTSL XX and BNYM.  The parties have completed discovery and are currently briefing summary judgment motions.  A trial date for the action has not yet been scheduled.  Bimini Capital denies that the repurchase was improper and intends to continue to defend the suit vigorously.

On March 2, 2011, Orchid Island TRS, LLC, formerly known as Opteum Financial Services, LLC and presently known as MortCo, LLC (“Opteum Financial”) and Opteum Mortgage Acceptance Corporation (“Opteum Acceptance”) (collectively referred to herein as “MortCo”) received a cover letter dated March 1, 2011 from Massachusetts Mutual Life Insurance Company (“Mass Mutual”) enclosing a draft complaint against MortCo.  In summary, Mass Mutual alleges that it purchased residential mortgage-backed securities offered by MortCo in August 2005 and the first quarter of 2006 and that MortCo made false representations and warranties in connection with the sale of the securities in violation of Mass Gen. Laws Ch. 110A § 410(a)(2) (the “Massachusetts Blue Sky Law”).  In its cover letter, Mass Mutual claims it is entitled to damages in excess of $25 million.  However, no monetary demand is contained within the draft complaint and the actual damages Mass Mutual claims to have incurred is uncertain.

Mass Mutual has not filed the complaint or initiated litigation.  Pursuant to its request, on March 14, 2011 Mass Mutual and MortCo entered into a Tolling Agreement through June 1, 2011 so that Mass Mutual could address its allegations against MortCo without incurring litigation costs.  Mass Mutual never contacted MortCo to schedule such discussions.  On August 22, 2011, the parties extended the Tolling Agreement through June 1, 2013, and on May 31, 2013, the parties extended the Tolling Agreement through December 2, 2013. To date, MortCo is aware of no action taken by Mass Mutual, and the Tolling Agreement appears to have expired by its own terms. MortCo denies Opteum Financial or Opteum Acceptance, individually or collectively, made false representations and warranties in connection with the sale of securities to Mass Mutual.  Mass Mutual has taken no action to prosecute its claim against MortCo, and the range of loss or potential loss, if any, cannot reasonably be estimated.  Should Mass Mutual initiate litigation, MortCo will defend such litigation vigorously.


 
21

 


NOTE 11.  INCOME TAXES

REIT Activities

Generally, REITs are not subject to federal income tax on REIT taxable income distributed to its shareholders.  REIT taxable income or loss, as generated by qualifying REIT activities, is computed in accordance with the Internal Revenue Code, which is different from the financial statement net income or loss as computed in accordance with GAAP. Depending on the number and size of the various items or transactions being accounted for differently, the differences between the Company’s REIT taxable income or loss and its GAAP financial statement net income or loss can be substantial and each item can affect several years.

As of December 31, 2013, Bimini Capital had an estimated REIT tax net operating loss carryforward (“NOL carryforwards” or “NOLs”) of approximately $17.9 million that is immediately available to offset future REIT taxable income.  The REIT tax net operating loss carryforwards will expire in years 2028 through 2033.

As discussed in Note 1, Orchid was a qualified REIT subsidiary of Bimini Capital until the closing of its IPO and all of its activities were included with the activities of Bimini Capital through that date.  Subsequent to the closing of its IPO, Orchid is taxed separately from Bimini Capital.

Taxable REIT Subsidiaries

As taxable REIT subsidiaries (“TRS”), Bimini Advisors and MortCo are tax paying entities for income tax purposes and are taxed separately from Bimini Capital, Orchid and from each other.  Therefore, Bimini Advisors and MortCo each separately report an income tax provision or benefit based on their own taxable activities.  For the six months ended June 30, 2014 and 2013, neither TRS had taxable income primarily due to the utilization of NOL carryforwards.

The TRS income tax (benefit) provision for the six and three months ended June 30, 2014 and 2013 differs from the amount determined by applying the statutory Federal rate of 35% to the pre-tax income or loss due primarily to the recording of, and adjustments to, the deferred tax asset valuation allowances and the release of the deferred tax valuation allowance related to an intangible asset and NOL carryforwards.

Bimini Advisors has available at June 30, 2014 estimated federal and Florida NOL carryforwards of approximately $2.3 million which begin to expire in 2031 and are fully available to offset future federal and Florida taxable income.  In connection with Orchid’s IPO, Bimini Advisors paid for, and expensed for GAAP purposes, certain offering costs totaling approximately $3.2 million. For tax purposes, these offering costs created an intangible asset related to the management agreement with a tax basis of $3.2 million. The deferred tax assets related to the NOL carryforwards and the intangible asset at June 30, 2014 total approximately $2.2 million.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

As of December 31, 2013, the Company did not believe that it had sufficient positive evidence to conclude that the realization of its deferred tax assets was more likely than not; therefore, a valuation allowance was provided for the entire balance of the deferred tax assets.  During the six months ended June 30, 2014 the Company re-evaluated this position and determined that, due to increased projected management fee revenue and the ability to allocate certain overhead expenses to Orchid, there is sufficient positive evidence to conclude that the realization of Bimini Advisors’ deferred tax assets is more likely than not.  As a result, Bimini Advisors recorded a deferred income tax benefit of approximately $2.2 million related to the release of the valuation allowance.

 
22

 
As of June 30, 2014, MortCo has estimated federal NOL carryforwards of approximately $264.9 million and estimated available Florida NOLs of approximately $37.5 million, both of which begin to expire in 2025, and are fully available to offset future federal and Florida taxable income, respectively. The net deferred tax assets for MortCo at June 30, 2014 are approximately $95.3 million. As of June 30, 2014 and December 31, 2013, the Company did not believe that it had sufficient positive evidence to conclude that the realization of MortCo’s deferred tax assets was more likely than not; therefore, a valuation allowance was provided for the entire balance of MortCo’s deferred tax assets.

NOTE 12.   EARNINGS PER SHARE

Shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared on each share of Class A Common Stock if, and when, authorized and declared by the Board of Directors. Following the provisions of FASB ASC 260, the Class B Common Stock is included in the computation of basic EPS using the two-class method, and consequently is presented separately from Class A Common Stock. Shares of Class B Common Stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A Common Stock were not met at June 30, 2014 and 2013.

Shares of Class C Common Stock are not included in the basic EPS computation as these shares do not have participation rights. Shares of Class C Common Stock are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A Common Stock were not met at June 30, 2014 and 2013.

Bimini Capital had dividend eligible stock incentive plan shares that were outstanding during the six and three months ended June 30, 2013. The basic and diluted per share computations include these unvested incentive plan shares if there is income available to Class A Common Stock, as they have dividend participation rights. The stock incentive plan shares have no contractual obligation to share in losses. Because there is no such obligation, the incentive plan shares are not included in the basic and diluted EPS computations when no income is available to Class A Common Stock even though they are considered participating securities.

The table below reconciles the numerator and denominator of EPS for the six and three months ended June 30, 2014 and 2013.

(in thousands, except per-share information)
                       
   
Six Months Ended June 30,
   
Three Months Ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Basic and diluted EPS per Class A common share:
                       
Income (loss) attributable to Class A common shares:
                       
Basic and diluted
  $ 5,684