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EX-32.1 - EXHIBIT 32.1 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20150930x321.htm
EX-31.1 - EXHIBIT 31.1 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20150930x311.htm
EX-31.2 - EXHIBIT 31.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20150930x312.htm
EX-32.2 - EXHIBIT 32.2 - BIMINI CAPITAL MANAGEMENT, INC.bmnm10q20150930x322.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 September 30, 2015

¨           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
November 6, 2015
    12,373,294  
Class B Common Stock, $0.001 par value
November 6, 2015
    31,938  
Class C Common Stock, $0.001 par value
November 6, 2015
    31,938  
 
 
 

 
 

 

BIMINI CAPITAL MANAGEMENT, INC.

TABLE OF CONTENTS


   
Page
     
PART I. FINANCIAL INFORMATION
     
ITEM 1. Financial Statements
1
 
Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014
1
 
Consolidated Statements of Operations (unaudited) for the nine and three months ended September 30, 2015 and 2014
2
 
Consolidated Statement of Stockholders’ Equity (unaudited) for the nine months ended September 30, 2015
3
 
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014
4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
53
ITEM 4. Controls and Procedures
53
   
PART II. OTHER INFORMATION
   
ITEM 1. Legal Proceedings
54
ITEM 1A. Risk Factors
55
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
55
ITEM 3. Defaults Upon Senior Securities
55
ITEM 4. Mine Safety Disclosures
55
ITEM 5. Other Information
55
ITEM 6. Exhibits
56
SIGNATURES
57
 
 

 
 

 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
   
(Unaudited)
       
   
September 30, 2015
   
December 31, 2014
 
ASSETS:
           
Mortgage-backed securities, at fair value
           
Pledged to counterparties
  $ 120,856,466     $ 116,026,180  
Unpledged
    2,257,098       1,804,852  
Total mortgage-backed securities
    123,113,564       117,831,032  
Cash and cash equivalents
    4,079,740       4,699,059  
Restricted cash
    446,900       733,660  
Orchid Island Capital, Inc. common stock, at fair value
    9,080,401       12,810,728  
Retained interests in securitizations
    1,633,605       1,899,684  
Accrued interest receivable
    488,439       460,326  
Property and equipment, net
    3,514,996       3,584,603  
Deferred tax assets, net
    1,276,920       1,900,064  
Other assets
    2,867,438       2,960,042  
Total Assets
  $ 146,502,003     $ 146,879,198  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES:
               
Repurchase agreements
  $ 113,677,303     $ 109,963,995  
Junior subordinated notes due to Bimini Capital Trust II
    26,804,440       26,804,440  
Accrued interest payable
    68,736       94,397  
Other liabilities
    2,211,374       814,597  
Total Liabilities
    142,761,853       137,677,429  
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock
    -       -  
Common stock
    12,419       12,388  
Additional paid-in capital
    334,600,801       334,522,850  
Accumulated deficit
    (330,873,070 )     (325,333,469 )
Stockholders’ equity
    3,740,150       9,201,769  
Total Liabilities and Stockholders' Equity
  $ 146,502,003     $ 146,879,198  
See Notes to Consolidated Financial Statements
 
 
 
 
-1-

 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
For the Nine and Three Months Ended September 30, 2015 and 2014
 
                         
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest income
  $ 3,277,241     $ 21,270,241     $ 995,985     $ 10,034,747  
Interest expense
    (305,726 )     (2,068,056 )     (107,392 )     (885,440 )
Net interest income, before interest on junior subordinated notes
    2,971,515       19,202,185       888,593       9,149,307  
Interest expense on junior subordinated notes
    (743,603 )     (736,432 )     (252,142 )     (247,916 )
Net interest income
    2,227,912       18,465,753       636,451       8,901,391  
Unrealized (losses) gains on mortgage-backed securities
    (910,896 )     9,626,963       (713,497 )     (1,639,465 )
Realized (losses) gains on mortgage-backed securities
    (2,108 )     2,057,582       (2,108 )     (1,991,895 )
(Losses) gains on derivative instruments
    (1,999,650 )     (4,185,049 )     (990,575 )     3,405,926  
Net portfolio (loss) income
    (684,742 )     25,965,249       (1,069,729 )     8,675,957  
                                 
Other income (expense):
                               
Gains on retained interests in securitizations
    2,739,353       2,643,068       200,773       196,482  
Unrealized losses on Orchid Island Capital, Inc. common stock
    (3,730,327 )     -       (1,924,063 )     -  
Orchid Island Capital, Inc. dividends
    1,472,498       -       412,299       -  
Management fees
    2,929,200       -       1,060,500       -  
Other income (expense), net
    19,748       (43,261 )     41,901       (23,007 )
Total other income (expense)
    3,430,472       2,599,807       (208,590 )     173,475  
                                 
Expenses:
                               
Compensation and related benefits
    1,863,819       2,124,080       600,376       766,773  
Directors' fees and liability insurance
    514,406       855,787       171,703       312,274  
Audit, legal and other professional fees
    1,281,993       1,653,898       234,542       565,108  
Direct REIT operating expenses
    54,825       331,500       17,967       102,184  
Settlement of litigation
    3,500,000       -       -       -  
Other administrative expenses
    168,062       841,911       49,371       450,836  
Total expenses
    7,383,105       5,807,176       1,073,959       2,197,175  
                                 
Net (loss) income before income tax provision (benefit)
    (4,637,375 )     22,757,880       (2,352,278 )     6,652,257  
Income tax provision (benefit)
    902,226       (2,055,075 )     293,915       76,683  
                                 
Net (loss) income
    (5,539,601 )     24,812,955       (2,646,193 )     6,575,574  
Less: income attributable to noncontrolling interests
    -       18,767,100       -       6,228,907  
                                 
Net (Loss) Income attributable to Bimini Capital stockholders
  $ (5,539,601 )   $ 6,045,855     $ (2,646,193 )   $ 346,667  
                                 
Basic and Diluted Net (Loss) Income Per Share of:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
  $ (0.45 )   $ 0.50     $ (0.21 )   $ 0.03  
CLASS B COMMON STOCK
                               
Basic and Diluted
  $ (0.45 )   $ 0.50     $ (0.21 )   $ 0.03  
Weighted Average Shares Outstanding:
                               
CLASS A COMMON STOCK
                               
Basic and Diluted
    12,344,613       12,153,388       12,354,951       12,313,556  
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 Nine Months Ended September 30, 2015
 
                         
 
Stockholders' Equity
     
   
Common
 
Additional
 
Accumulated
     
   
Stock
 
Paid-in Capital
 
Deficit
 
Total
 
Balances, January 1, 2015
  $ 12,388     $ 334,522,850     $ (325,333,469 )   $ 9,201,769  
Net loss
    -       -       (5,539,601 )     (5,539,601 )
Issuance of Class A common shares for board compensation
    31       63,934       -       63,965  
Amortization of equity plan compensation
    -       14,017       -       14,017  
                                 
Balances, September 30, 2015
  $ 12,419     $ 334,600,801     $ (330,873,070 )   $ 3,740,150  
See Notes to Consolidated Financial Statements
 
 
 
 
-3-

 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Nine Months Ended September 30, 2015 and 2014
 
             
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
  $ (5,539,601 )   $ 24,812,955  
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
               
Stock based compensation
    77,982       261,602  
Depreciation
    69,607       78,858  
Deferred income tax provision (benefit)
    623,144       (2,077,342 )
Losses (gains) on mortgage-backed securities
    913,004       (11,684,545 )
Gains on retained interests in securitizations
    (2,739,353 )     (2,643,068 )
Loss on disposal of property and equipment
    -       12,886  
Unrealized losses on Orchid Island Capital, Inc. common stock
    3,730,327       -  
Realized and unrealized losses on interest rate swaptions
    -       1,119,525  
Changes in operating assets and liabilities:
               
Accrued interest receivable
    (28,113 )     (4,200,581 )
Other assets
    92,604       (253,487 )
Accrued interest payable
    (25,661 )     305,835  
Other liabilities
    1,396,777       763,837  
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    (1,429,283 )     6,496,475  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
From mortgage-backed securities investments:
               
Purchases
    (26,396,648 )     (1,605,257,665 )
Sales
    4,316,964       499,227,793  
Principal repayments
    15,884,148       56,361,141  
Payments received on retained interests in securitizations
    3,005,432       3,186,805  
Decrease (increase) in restricted cash
    286,760       (5,567,535 )
Purchases of property and equipment
    -       (36,851 )
Purchase of interest rate swaptions, net of margin cash received
    -       (1,249,625 )
NET CASH USED IN INVESTING ACTIVITIES
    (2,903,344 )     (1,053,335,937 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from repurchase agreements
    748,150,368       5,851,128,876  
Principal repayments on repurchase agreements
    (744,437,060 )     (4,865,328,741 )
Issuance of common shares of Orchid Island Capital, Inc.
    -       121,525,917  
Cash dividends paid to noncontrolling interests
    -       (12,953,922 )
Class A common shares sold directly to employees
    -       98,000  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    3,713,308       1,094,470,130  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (619,319 )     47,630,668  
CASH AND CASH EQUIVALENTS, beginning of the period
    4,699,059       11,959,292  
CASH AND CASH EQUIVALENTS, end of the period
  $ 4,079,740     $ 59,589,960  
                 
 
 
 
-4-

 
 
BIMINI CAPITAL MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
For the Nine Months Ended September 30, 2015 and 2014
 
                 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
Cash paid during the period for:
           
Interest
  $ 1,074,990     $ 2,498,653  
Income taxes
  $ 137,001     $ 22,267  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
               
Securities acquired settled in later period
  $ -     $ 66,812,482  
Securities sold settled in later period
  $ -     $ 249,410,368  
See Notes to Consolidated Financial Statements
 

 
-5-

 

BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2015

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. As further described in Note 11, Income Taxes, certain events may have caused, or may cause, the Bimini Capital to no longer qualify as a REIT under the Code.  Bimini Capital’s website is located at http://www.biminicapital.com.

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.  Since Orchid’s IPO and until December 31, 2014, Orchid was consolidated as a variable interest entity (“VIE”). Effective December 31, 2014, Orchid was deconsolidated.

As used in this document, discussions related to REIT qualifying activities include the MBS portfolios of both Bimini Capital and Orchid for 2014, and only the MBS portfolio of Bimini Capital for 2015. Discussions related to the “Company” refer to the consolidated entity, including Bimini Capital, our wholly-owned subsidiaries, and, through December 31, 2014, our VIE.  References to “Bimini Capital” and the “parent” refer to Bimini Capital Management, Inc. as a separate entity. 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 and its consolidated subsidiaries (“MortCo”).

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital, Bimini Advisors and MortCo. The accounts of Orchid are included in the consolidated statements of operations for the nine and three months ended September 30, 2014, and in the statement of cash flows for the nine months ended September 30, 2014.  All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, 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, an ongoing assessment of whether an enterprise is the primary beneficiary of a VIE, and additional disclosures for entities that have variable interests in VIEs.

From the effective date of Orchid’s IPO and until December 31, 2014, management concluded, pursuant to ASC 810, that Orchid was a VIE. As a result, subsequent to Orchid’s IPO and until December 31, 2014, the Company consolidated Orchid in its financial statements.  The results of operations of Orchid were included in the Company’s 2014 consolidated statements of operations and cash flows, however, net income attributable to Bimini Capital stockholders did not include the portion of net income attributable to noncontrolling interests.

 
-6-

 
In December 2014, management re-evaluated the conditions resulting in the consolidation of Orchid and concluded that, due to Bimini’s decreased percentage ownership interest in Orchid, there was no longer a variable interest requiring consolidation.  As a result, in accordance with ASC 810, the Company deconsolidated Orchid from the consolidated balance sheet as of December 31, 2014.  However, as a VIE which was deconsolidated on December 31, 2014, Orchid’s results of operations were included in the consolidated statements of operations and cash flows through December 31, 2014, and are excluded in subsequent periods.

Assets recognized as a result of consolidating Orchid in prior periods did not represent additional assets that could be used to satisfy claims against Bimini Capital’s assts.  Conversely, liabilities recognized as a result of consolidating Orchid did not represent additional claims on Bimini Capital’s assets; rather, they represented 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

In 2006 and 2007, there were significant losses incurred which were attributable to the former mortgage origination operations of MortCo. These losses significantly reduced Bimini Capital’s equity capital base and the size of its MBS portfolio when compared to pre-2006 levels. This 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, the Company began a series of actions to respond to the losses and their impact on our capital base.  One of these actions was to evaluate and pursue capital raising opportunities for Orchid.  Orchid completed its initial public offering of common stock on February 20, 2013.  In accordance with the management agreement between Bimini Advisors and Orchid,  Bimini Advisors receives fees for managing the MBS portfolio of Orchid, and certain overhead costs are allocated to Orchid on a pro rata basis commencing on July 1, 2014.  As a stockholder of Orchid, Bimini Capital shares in distributions when paid by Orchid to its stockholders.  These actions improved the Company’s liquidity outlook.

At September 30, 2015, the Company had cash and cash equivalents of approximately $4.1 million, an MBS portfolio of approximately $123.1 million and an equity capital base of approximately $3.7 million.  The Company generated cash flows of approximately $19.1 million from principal and interest payments on its MBS portfolio and approximately $3.0 million from retained interests in securitizations during the nine months ended September 30, 2015. In addition, during the nine months ended September 30, 2015, the Company received approximately $3.6 million in management fees and expense reimbursements as manager of Orchid and approximately $1.5 million in dividends from its investment in Orchid common shares.  However, if cash resources are, at any time, insufficient to satisfy the Company’s liquidity requirements, such as when cash flows 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.

In May 2015, Bimini Capital agreed to settle a legal action as more fully described in Note 10.  In connection with the settlement and in accordance with GAAP, a loss of $3.5 million has been charged to operations for the nine months ended September 30, 2015.  Although payments under the settlement agreement will reduce the Company’s liquidity, management believes that the Company will be able to generate sufficient cash from its operations to meet the payment obligations as they come due.


 
-7-

 


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 nine and three month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

The consolidated balance sheet at December 31, 2014 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, 2014.

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 consolidated financial statements include the fair values of MBS, investment in Orchid common shares, Eurodollar futures contracts, interest rate swaptions and retained interests, and asset valuation allowances and deferred tax allowances.

Statement of Comprehensive (Loss) Income

In accordance with ASC Topic 220, Comprehensive Income, a statement of comprehensive (loss) income has not been included as the Company has no items of other comprehensive income (loss).  Comprehensive (loss) income is the same as net (loss) income 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 at the time of purchase.  At September 30, 2015, restricted cash consisted of approximately $0.4 million of cash held by a broker as margin on Eurodollar futures contracts.  At December 31, 2014, restricted cash consisted of approximately $0.5 million of cash held by a broker as margin on Eurodollar futures contracts and $0.3 million of cash held on deposit as collateral with repurchase agreement counterparties.

The Company maintains cash balances at four 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 eligible accounts up to $250,000 per depositor at each financial institution. At September 30, 2015, the Company’s cash deposits exceeded federally insured limits by approximately $3.1 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 limits uninsured balances to only large, well-known banks and derivative counterparties and believes that it is not exposed to significant credit risk on cash and cash equivalents or restricted cash balances.


 
-8-

 


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”). 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 ASC Topic 820, Fair Value Measurement.  The definition of fair value in 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 independent pricing sources and/or third-party broker quotes, when available.

Income on PT MBS is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized.  Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on MBS in the consolidated statements of operations.  For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively 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. The amount reported as unrealized gains or losses on mortgage backed securities thus captures the net effect of changes in the fair market value of securities caused by market developments and any premium or discount lost as a result of principal repayments during the period.

Orchid Island Capital, Inc. Common Stock

At the date of Orchid’s deconsolidation, the Company elected the fair value option for its continuing investment in Orchid common shares.  The change in the fair value of this investment and dividends received on this investment are reflected in other income in the consolidated statements of operations for the nine and three months ended September 30, 2015.  We estimate the fair value of our investment in Orchid on a market approach using “Level 1” inputs based on the quoted market price of Orchid’s common stock. Electing the fair value option requires the Company to record changes in fair value in the consolidated statements of operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with how the investment is managed.


 
-9-

 


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 in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option.  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.

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

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, Orchid Island Capital, Inc. common stock, Eurodollar futures contracts, interest rate swaptions and retained interests in securitization transactions 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 consolidated financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, other assets, repurchase agreements, accrued interest payable and other liabilities generally approximates their carrying value as of September 30, 2015 and December 31, 2014, 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.


 
-10-

 


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 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 dividends are 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.

Earnings Per Share

The Company follows the provisions of 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 treasury stock or two-class method, as applicable for common stock equivalents. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

Outstanding shares of Class B Common Stock, participating and convertible into Class A Common Stock, are entitled to receive dividends in an amount equal to the dividends declared 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”).  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.  As further described in Note 11, Income Taxes, certain events may have caused, or may cause, Bimini Capital to no longer qualify as a REIT under the Code.  Bimini Advisors and MortCo are taxpaying entities for income tax purposes and are taxed separately from Bimini Capital.


 
-11-

 


The Company’s U.S. federal income tax returns for years ended on or after December 31, 2012 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 ASC Topic 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.

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. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

NOTE 2.   MORTGAGE-BACKED SECURITIES

The following table presents the Company’s MBS portfolio as of September 30, 2015 and December 31, 2014:
 
(in thousands)
           
   
September 30, 2015
   
December 31, 2014
 
Pass-Through MBS:
           
Hybrid Adjustable-rate Mortgages
  $ 120     $ 442  
Fixed-rate Mortgages
    117,762       112,174  
Total Pass-Through MBS
    117,882       112,616  
Structured MBS:
               
Interest-Only Securities
    2,647       2,276  
Inverse Interest-Only Securities
    2,585       2,939  
Total Structured MBS
    5,232       5,215  
Total
  $ 123,114     $ 117,831  


 
-12-

 


The following table summarizes the Company’s MBS portfolio as of September 30, 2015 and December 31, 2014, 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)
           
 
September 30, 2015
 
December 31, 2014
 
Greater than five years and less than ten years
  $ 7     $ 16  
Greater than or equal to ten years
    123,107       117,815  
Total
  $ 123,114     $ 117,831  

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 September 30, 2015 and December 31, 2014:

(in thousands)
             
Series
Issue Date
 
September 30, 2015
   
December 31, 2014
 
HMAC 2004-2
May 10, 2004
  $ 150     $ 320  
HMAC 2004-3
June 30, 2004
    677       753  
HMAC 2004-4
August 16, 2004
    104       496  
HMAC 2004-5
September 28, 2004
    321       331  
HMAC 2004-6
November 17, 2004
    382       -  
              Total
    $ 1,634     $ 1,900  

NOTE 4.   REPURCHASE AGREEMENTS

As of September 30, 2015, the Company had outstanding repurchase agreement obligations of approximately $113.7 million with a net weighted average borrowing rate of 0.45%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $121.3 million.  As of December 31, 2014, the Company had outstanding repurchase agreement obligations of approximately $110.0 million with a net weighted average borrowing rate of 0.36%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $116.4 million, and cash pledged to counterparties of approximately $0.3 million.

As of September 30, 2015 and December 31, 2014, 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
 
September 30, 2015
                             
Fair value of securities pledged, including accrued
                             
interest receivable
  $ -     $ 121,277     $ -     $ -     $ 121,277  
Repurchase agreement liabilities associated with
                                       
these securities
  $ -     $ 113,677     $ -     $ -     $ 113,677  
Net weighted average borrowing rate
    -       0.45 %     -       -       0.45 %
December 31, 2014
                                       
Fair value of securities pledged, including accrued
                                       
interest receivable
  $ -     $ 114,433     $ 1,998     $ -     $ 116,431  
Repurchase agreement liabilities associated with
                                       
these securities
  $ -     $ 108,074     $ 1,890     $ -     $ 109,964  
Net weighted average borrowing rate
    -       0.36 %     0.33 %     -       0.36 %
 
 
 
-13-

 

 
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 September 30, 2015 and December 31, 2014, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $7.4 million and $6.7 million, respectively.  Summary information regarding amounts at risk with individual counterparties greater than 10% of stockholders’ equity at September 30, 2015 and December 31, 2014 is as follows:
 
($ in thousands)
                 
         
% of
   
Weighted
 
         
Stockholders'
   
Average
 
   
Amount
   
Equity
   
Maturity
 
Repurchase Agreement Counterparties
 
at Risk
   
at Risk
   
(in Days)
 
September 30, 2015
                 
Citigroup Global Markets, Inc.
  $ 3,459       92.5 %     10  
ED&F Man Capital Markets Inc.
    2,283       61.1 %     17  
South Street Securities, LLC
    744       19.9 %     21  
CRT Capital Group, LLC
    701       18.8 %     16  
December 31, 2014
                       
JVB Financial Group, LLC
  $ 1,807       19.6 %     8  
ED&F Man Capital Markets Inc.
    1,490       16.2 %     22  

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 and junior subordinated notes by entering into derivatives, such as Eurodollar futures contracts and interest rate swaptions, but may enter into other contracts in the future.  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 September 30, 2015 and December 31, 2014, 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 sheets as part of restricted cash.

 During the nine months ended September 30, 2014, the Company, through Orchid, was a party to interest rate swaption agreements which granted the Company the right but not the obligation to enter into 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”).


 
-14-

 


The tables below present information related to the Company’s Eurodollar futures positions at September 30, 2015 and December 31, 2014.
 
($ in thousands)
                       
As of September 30, 2015
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2015
  $ 56,000       0.82 %     0.42 %   $ (56 )
2016
    56,000       1.45 %     0.72 %     (408 )
2017
    56,000       2.23 %     1.26 %     (545 )
2018
    56,000       2.65 %     1.60 %     (293 )
Total / Weighted Average
  $ 56,000       1.90 %     1.05 %   $ (1,302 )

($ in thousands)
                       
As of September 30, 2015
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2015
  $ 26,000       1.73 %     0.42 %   $ (86 )
2016
    26,000       1.77 %     0.72 %     (272 )
2017
    26,000       2.49 %     1.26 %     (319 )
2018
    26,000       2.94 %     1.60 %     (173 )
Total / Weighted Average
  $ 26,000       2.24 %     1.05 %   $ (850 )

($ in thousands)
                       
As of December 31, 2014
                       
   
Repurchase Agreement Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2015
  $ 36,500       0.65 %     0.63 %   $ (5 )
2016
    56,000       1.45 %     1.54 %     46  
2017
    56,000       2.23 %     2.23 %     (3 )
2018
    56,000       2.65 %     2.51 %     (38 )
Total / Weighted Average
  $ 50,429       1.72 %     1.72 %   $ -  


 
-15-

 


($ in thousands)
                       
As of December 31, 2014
                       
   
Junior Subordinated Debt Funding Hedges
 
   
Average
   
Weighted
   
Weighted
       
   
Contract
   
Average
   
Average
       
   
Notional
   
Entry
   
Effective
   
Open
 
Expiration Year
 
Amount
   
Rate
   
Rate
   
Equity(1)
 
2015
  $ 26,000       1.48 %     0.57 %   $ (237 )
2016
    26,000       1.77 %     1.54 %     (61 )
2017
    26,000       2.49 %     2.23 %     (67 )
2018
    26,000       2.94 %     2.51 %     (56 )
Total / Weighted Average
  $ 26,000       2.06 %     1.60 %   $ (421 )

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

Loss (Gain) From Derivative Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the nine and three months ended September 30, 2015 and 2014.  The consolidated information for 2014 includes the activity of Orchid, as it was included in the consolidated statements of operations for those periods.

(in thousands)
                       
   
Consolidated
   
Parent-Only
 
Nine Months Ended September 30,
 
2015
   
2014
   
2015
   
2014
 
Eurodollar futures contracts (short positions)
  $ (2,000 )   $ (3,151 )   $ (2,000 )   $ 165  
Payer swaptions
    -       (1,120 )     -       -  
T-Note futures contracts (short positions)
    -       86       -       14  
Net (losses) gains on derivative instruments
  $ (2,000 )   $ (4,185 )   $ (2,000 )   $ 179  

(in thousands)
                       
   
Consolidated
   
Parent-Only
 
Three Months Ended September 30,
 
2015
   
2014
   
2015
   
2014
 
Eurodollar futures contracts (short positions)
  $ (991 )   $ 3,154     $ (991 )   $ 334  
Payer swaptions
    -       166       -       -  
T-Note futures contracts (short positions)
    -       86       -       14  
Net (losses) gains on derivative instruments
  $ (991 )   $ 3,406     $ (991 )   $ 348  

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 attempt to 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.


 
-16-

 


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 table presents information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of September 30, 2015 and December 31, 2014.
 
(in thousands)
                                   
Offsetting of Liabilities
 
                   
Gross Amount Not Offset in the
       
             
Net Amount
 
Consolidated Balance Sheet
       
     
Gross Amount
 
of Liabilities
 
Financial
         
 
Gross Amount
 
Offset in the
 
Presented in the
 
Instruments
 
Cash
     
 
of Recognized
 
Consolidated
 
Consolidated
 
Posted as
 
Posted as
 
Net
 
 
Liabilities
 
Balance Sheet
 
Balance Sheet
 
Collateral
 
Collateral
 
Amount
 
September 30, 2015
                                   
Repurchase Agreements
  $ 113,677     $ -     $ 113,677     $ (113,677 )   $ -     $ -  
December 31, 2014
                                               
Repurchase Agreements
  $ 109,964     $ -     $ 109,964     $ (109,706 )   $ (258 )   $ -  

The amounts disclosed for collateral received by or posted to the same counterparty are limited to the amount sufficient to reduce the asset or liability presented in the consolidated balance sheet to zero 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 for, or received against, repurchase obligations and derivative instruments.

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 September 30, 2015 and December 31, 2014, 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 September 30, 2015, the interest rate was 3.84%. The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes require quarterly interest distributions and became 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.

BCTII is a VIE because the holders of the equity investment at risk do not have adequate decision making ability over BCTII’s activities. Since Bimini Capital's investment in BCTII’s common equity securities was financed directly by BCTII 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 consolidated financial statements.

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

 
-17-

 
NOTE 8.  COMMON STOCK

At September 30, 2015 and December 31, 2014, Bimini Capital’s common stock is comprised of the following:

   
September 30, 2015
   
December 31, 2014
 
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 September 30, 2015 and December 31, 2014
  $ -     $ -  
Class A Common Stock, $0.001 par value; 98,000,000 shares designated: 12,355,045
               
shares issued and outstanding as of September 30, 2015 and 12,324,391 shares
               
issued and outstanding as of December 31, 2014
    12,355       12,324  
Class B Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of September 30, 2015 and December 31, 2014
    32       32  
Class C Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares
               
issued and outstanding as of September 30, 2015 and December 31, 2014
    32       32  
    $ 12,419     $ 12,388  

Issuances of Common Stock

The table below presents information related to Bimini Capital’s Class A Common Stock issued during the nine months ended September 30, 2015 and 2014.
 
   
Nine Months Ended September 30,
   
Three Months Ended, September 30,
 
Shares Issued Related To:
 
2015
   
2014
   
2015
   
2014
 
Directors' compensation
    30,654       46,107       8,669       18,576  
Vesting incentive plan shares(1)
    -       500,000       -       -  
Shares sold directly to employees(1)
    -       257,895       -       -  
Total shares of Class A Common Stock issued
    30,654       804,002       8,669       18,576  

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

There were no issuances of Bimini Capital's Class B Common Stock and Class C Common Stock during the nine months ended September 30, 2015 and 2014.

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 interests with those of the Company and its stockholders.  The 2011 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.


 
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Share Awards

In February 2014, the Compensation Committee of the Board of Directors of Bimini Capital (the “Committee”) 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 does not affect the results of operations for the nine and three months ended September 30, 2014.

A summary of share award activity during the nine months ended September 30, 2014 is presented below:
 
         
Weighted-
 
         
Average
 
 
       
Grant-Date
 
 
 
Shares
   
Fair Value
 
Fully vested shares granted
    500,000     $ 0.38  

Performance Units

The Committee may issue Performance Units under the 2011 Plan to certain officers and employees.  “Performance Units” represent the participant’s right to receive an amount, based on the value of a specified number of shares of Common Stock, if the terms and conditions prescribed by the Committee are satisfied.  The Committee will determine the requirements that must be satisfied before Performance Units are earned, including but not limited to any applicable performance period and performance goals.  Performance goals may relate to the Company’s financial performance or the participant’s performance or such other criteria determined by the Committee, including goals stated with reference to the performance measures discussed below.  If Performance Units are earned, they will be settled in cash, shares of Common Stock or a combination thereof.

The following table presents information related to Performance Units outstanding at September 30, 2015 and December 31, 2014:
 
 
 
September 30, 2015
   
December 31, 2014
 
Nonvested performance units outstanding at period end
    31,500       31,500  
Weighted-average grant date fair price
  $ 1.78     $ 1.78  
Unrecognized compensation expense at period end
  $ 41,274     $ 55,291  
Weighted-average remaining vesting term (in years)
    2.30       3.00  
Intrinsic value of unvested shares at period end
  $ 41,895     $ 59,850  

NOTE 10.  COMMITMENTS AND CONTINGENCIES

Litigation

The Company may from time to time be involved in various lawsuits and claims, both pending and threatened, 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, as well as the costs to defend them, is inherently unpredictable, and management may choose to settle certain matters based on a cost-benefit analysis.

 
-19-

 
 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 (“BNY Mellon”) and Hexagon Securities LLC (“Hexagon”) and nominal defendants BNY Mellon and Preferred Term Securities XX, Ltd. (“PreTSL XX”), captioned Hildene Capital Management, LLC, et al. v. The Bank of New York Mellon, et. al.  The complaint, filed by Hildene Capital Management, LLC and Hildene Opportunities Fund, Ltd. (“Hildene”), alleged that Hildene suffered losses as a result of Bimini Capital’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 alleged claims against BNY Mellon for breach of the Indenture, breach of fiduciary duties and breach of the 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 BNY Mellon.  (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 and BNY Mellon 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 BNY Mellon, 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 BNY Mellon, and PreTSL XX and BNY Mellon.
 
 
On May 15, 2015, Hildene and Bimini Capital agreed to settle the case, and on July 10, 2015, a Stipulation of Discontinuance was filed dismissing all claims and counterclaims between and among Hildene and Bimini Capital.  In connection with the settlement and in accordance with GAAP, a loss of $3.5 million was accrued at March 31, 2015 and has been charged to operations for the nine months ended September 30, 2015.   During the three months ended September 30, 2015 payments totaling $2.25 million were made, as required by the settlement agreement.  The remaining $1.25 million is scheduled to be paid in installments through July 2019 and is included in other liabilities in the September 30, 2015 consolidated balance sheet.

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, 2014, Bimini Capital had a REIT tax net operating loss carryforward (“NOL carryforwards” or “NOLs”) of approximately $17.3 million that is immediately available to offset future REIT taxable income.  These REIT NOLs will expire in years 2028 through 2034, if not previously used to offset future REIT taxable income.

Bimini Capital’s qualification as a REIT depends upon its ability to meet, on an annual or in some cases quarterly basis, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels and the diversity of ownership of its shares.  As described more fully below, certain events may have caused, or may cause, Bimini Capital to no longer qualify as a REIT under the Code.


 
-20-

 


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 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 nine months ended September 30, 2015 and 2014, MortCo did not have taxable income primarily due to the utilization of their respective NOL carryforwards. During the nine months ended September 30, 2015, Bimini Advisors is projected to have exhausted its available NOLs and generated taxable income, net of those NOLs, of approximately $0.4 million. The Company’s payment of taxes reported on the consolidated statement of cash flows results from alternative minimum taxes (“AMT”) which become due when NOLs are used to offset taxable income.  Bimini Advisors did not make any Federal Income tax payments during the quarter, although a provision for Federal Income taxes was recorded.

The income tax provision (benefit) for the nine and three months ended September 30, 2015 and 2014 is solely attributable to the TRSs.  For Bimini Advisors, the provision for the 2015 period was determined by applying the statutory Federal rate of 35% to its pre-tax income or loss.  Bimini Advisors’ NOL is projected to be fully used during the 2015 tax year to offset taxable income. During 2014, a benefit was recorded for the release of Bimini Advisor’s deferred tax valuation allowance related to an intangible asset and NOL carryforwards.  For MortCo, its provision is generally zero, and it differs from the statutory Federal rate 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 NOL carryforwards.  The payment of AMT is included in the tax provision in the period it is paid.

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 asset related to the intangible asset at September 30, 2015 total approximately $1.3 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. During 2014, the Company re-evaluated its previous position regarding its ability to realize Bimini Advisors’ deferred tax assets and determined that there was sufficient positive evidence to conclude that the realization of Bimini Advisors’ deferred tax assets was more likely than not.  As a result, Bimini Advisors recorded a deferred income tax benefit of approximately $2.1 million during the nine months ended September 30, 2014 related to the release of the valuation allowance.

As of September 30, 2015, MortCo has estimated federal NOL carryforwards of approximately $261.5 million and estimated available Florida NOLs of approximately $34.0 million, both of which will 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 September 30, 2015 are approximately $93.9 million. As of September 30, 2015 and December 31, 2014, management 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.


 
-21-

 


MortCo holds residual interests in various real estate mortgage investment conduits (“REMICs”), which were issued in 2004, 2005 and 2006, some of which generate excess inclusion income (“EII”), a type of taxable income pursuant to specific provisions of the Code.  In 2008, based on a re-evaluation of its tax position regarding REMIC income, MortCo recorded a liability of approximately $2.1 million for taxes, interest and penalties related to this uncertain tax position.  During 2010 (as part of the filing of its 2009 tax returns), MortCo reached a tax filing position related to the EII taxable income, reported EII taxable income of approximately $2.1 million, paid $0.8 million of income tax, interest and penalties, and included a notice of inconsistent treatment in its tax returns.  Because of the uncertainty surrounding the taxation of EII, MortCo accounted for the pre-2008 tax position as being more likely than not that the tax position would not be fully sustained upon examination.  On September 15, 2013, the statute of limitations for the IRS to challenge MortCo’s pre-2008 tax position expired.  As such, the remaining balance of the liability recorded in 2008 was reversed during the year ended December 31, 2013, which resulted in a tax benefit of $1.3 million.  MortCo continues to file its tax returns following its 2009 tax filing position, and it continues to include a notice of inconsistent treatment in each return.

Qualification as a REIT

As discussed above, our qualification as a REIT depends upon our ability to meet, on an annual or in some cases quarterly basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares.  Certain trends or events experienced during 2015 may have caused, or may cause, Bimini Capital to no longer qualify as a REIT under the Code.  In particular, additional offerings of common stock by Orchid in the first two quarters of 2015 have increased revenue attributable to management fees received from Orchid by Bimini Advisors. In addition, payments that have been and will  be made by Bimini Capital pursuant to a litigation settlement agreement entered into in May, 2015 have reduced and may continue to reduce the value of Bimini Capital’s assets and revenues generated by our MBS portfolio.  As a result, the value of our two TRSs (MortCo and Bimini Advisors) has increased in relation to the value of Bimini Capital’s assets.

The failure to qualify as a REIT would subject Bimini Capital to taxation as a regular “C” corporation, with the entity’s taxable income being subject to federal and state income tax at regular corporate rates, and dividends paid to stockholders would not be deductible by Bimini Capital in computing our taxable income.  However, as described above, Bimini Capital and MortCo each have NOL carryforwards that will be available to offset any 2015 or future taxable income.  As of December 31, 2014, federal NOL carryforwards for Bimini Capital and MortCo were approximately $17.3 million and $263.9 million, respectively.  Given Bimini Capital’s current ownership structure, the NOL carryforwards of each entity may generally be applied only to offset the taxable income of that entity.

If Bimini Capital fails to qualify as a REIT, management is considering the feasibility of certain internal restructuring transactions that would maximize its ability to utilize the existing federal NOL carryforwards. These transactions, if completed, would not materially change the overall consolidated operations or assets of the Company.

It is not known if Bimini Capital will qualify as a REIT for the tax year 2015; management has sought the advice of outside advisors and valuation experts, but as of November 6, 2015, this analysis is not complete. Should the REIT status be unavailable for the tax year 2015, Bimini Capital will consider the feasibility of the transactions referred to above.  There can be no assurance that all or any of such transactions will be completed or that all or any portion of the various NOL carryforwards will be available to offset future taxable income.

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 September 30, 2015 and 2014.

 
-22-

 
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 September 30, 2015 and 2014.

The Company has dividend eligible stock incentive plan shares that were outstanding during the nine and three months ended September 30, 2015. 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 average number of dividend eligible stock incentive plan shares that were anti-dilutive and not included in diluted earnings per share for both the nine and three months ended September 30, 2015 was 31,600.

The table below reconciles the numerator and denominator of EPS for the nine and three months ended September 30, 2015 and 2014.
 
(in thousands, except per-share information)
                       
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Basic and diluted EPS per Class A common share:
                       
(Loss) income attributable to Class A common shares:
                       
Basic and diluted
  $ (5,526 )   $ 6,030     $ (2,639 )   $ 346  
Weighted average common shares:
                               
Class A common shares outstanding at the balance sheet date
    12,355       12,314       12,355       12,314  
Effect of weighting
    (10 )     (161 )     -       -  
Weighted average shares-basic and diluted
    12,345       12,153       12,355       12,314  
(Loss) income per Class A common share:
                               
Basic and diluted
  $ (0.45 )   $ 0.50     $ (0.21 )   $ 0.03  

(in thousands, except per-share information)
                       
   
Nine Months Ended September 30,
   
Three Months Ended September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Basic and diluted EPS per Class B common share:
                       
(Loss) income attributable to Class B common shares:
                       
Basic and diluted
  $ (14 )   $ 16     $ (7 )   $ 1  
Weighted average common shares:
                               
Class B common shares outstanding at the balance sheet date
    32       32       32       32  
Weighted average shares-basic and diluted
    32       32       32       32  
(Loss) income per Class B common share:
                               
Basic and diluted
  $ (0.45 )   $ 0.50     $ (0.21 )   $ 0.03  

NOTE 13.   FAIR VALUE

Authoritative accounting literature establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:

·  
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),
·  
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
·  
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
 

 
 
-23-

 
The Company’s MBS are valued using Level 2 valuations, and such valuations currently are determined by the Company based on independent pricing sources and/or third-party broker quotes, when available. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our MBS positions determined by either an independent third-party or do so internally.

MBS, retained interests, Eurodollar futures contracts, Orchid common stock and interest rate swaptions were recorded at fair value on a recurring basis during the nine and three months ended September 30, 2015 and 2014. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets.  When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.  Fair value measurements for the retained interests are generated by a model that requires management to make a significant number of assumptions.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:
 
(in thousands)
                       
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
   
Fair Value
   
Assets
   
Inputs
   
Inputs
 
   
Measurements
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
September 30, 2015
                       
Mortgage-backed securities
  $ 123,114     $ -     $ 123,114     $ -  
Eurodollar futures contracts
    447       447       -       -  
Orchid Island Capital, Inc. common stock
    9,080       9,080       -       -  
Retained interests
    1,634       -       -       1,634  
December 31, 2014
                               
Mortgage-backed securities
  $ 117,831     $ -     $ 117,831     $ -  
Eurodollar futures contracts
    476       476       -       -  
Orchid Island Capital, Inc. common stock
    12,811       12,811       -       -  
Retained interests
    1,900       -       -       1,900  


 
-24-

 


The following table illustrates a roll forward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2015 and 2014:
 
(in thousands)
           
   
Retained Interests
 
   
2015
   
2014
 
Balances, January 1
  $ 1,900     $ 2,531  
Gain included in earnings
    2,739       2,643  
Collections
    (3,005 )     (3,187 )
Balances, September 30
  $ 1,634     $ 1,987  

During the nine months ended September 30, 2015 and 2014, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

Our retained interests are valued based on a discounted cash flow approach.  These values are sensitive to changes in unobservable inputs, including: estimated prepayment speeds, default rates and loss severity, weighted-average life, and discount rates.  Significant increases or decreases in any of these inputs may result in significantly different fair value measurements.

The following table summarizes the significant quantitative information about our level 3 fair value measurements as of September 30, 2015.
 
Retained interests fair value (in thousands)
   
$
 1,634
   
CPR Range
   
Prepayment Assumption
 
(Weighted Average)
   
Constant Prepayment Rate
 
10% (10%)
   
   
Severity
   
Default Assumptions
Probability of Default
(Weighted Average)
 
Range Of Loss Timing
Real Estate Owned
100%
42%
 
Next 10 Months
Loans in Foreclosure
100%
42%
 
 Month 4 - 13
Loans 90 Day Delinquent
100%
45%
 
Month 11-28
Loans 60 Day Delinquent
85%
45%
 
Month 11-28
Loans 30 Day Delinquent
75%
45%
 
Month 11-28
Current Loans
2.5%
45%
 
Month 29 and Beyond
   
Remaining Life Range
 
Discount Rate Range
Cash Flow Recognition
Valuation Technique
(Weighted Average)
 
(Weighted Average)
Nominal Cash Flows
Discounted Cash Flow
0.2 - 15.1 (6.6)
 
27.50% (27.50%)
Discounted Cash Flows
Discounted Cash Flow
0.2 - 9.7 (1.1)
 
27.50% (27.50%)
 
NOTE 14. RELATED PARTY TRANSACTIONS

Frank E. Jaumot is a shareholder in an accounting firm from which the Company receives accounting and tax services. Mr. Jaumot is both a director and a shareholder of Bimini Capital and a shareholder of Orchid. Professional fees incurred with this firm were $71,000 for the nine months ended September 30, 2015 and $75,000 for the nine months ended September 30, 2014.

NOTE 15. CONSOLIDATED VARIABLE INTEREST ENTITY AND NONCONTROLLING INTERESTS

A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.

 
-25-

 
As discussed in Note 1, Orchid completed its IPO on February 20, 2013.  Management concluded that, after the close of its IPO, Orchid was 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 its success. Management also concluded that Bimini Capital was the primary beneficiary of Orchid because, under the terms of the management agreement, Bimini Capital had the power to direct the activities of Orchid that most significantly impact its economic performance including asset selection, asset and liability management and investment portfolio risk management. As a result, subsequent to Orchid’s IPO, and until December 31, 2014, the Company continued to consolidate Orchid in its consolidated financial statements.

Orchid completed additional offerings of its common stock during the year ended December 31, 2014.  Management continued to re-evaluate the conditions resulting in the consolidation of Orchid and at December 31, 2014 concluded that, due to Bimini’s decreased percentage ownership interest in Orchid, there was no longer a variable interest requiring consolidation.  In accordance with ASC 810, the Company deconsolidated Orchid from the consolidated balance sheet as of December 31, 2014.  Orchid’s activities were included in the consolidated statements of operations, equity and cash flows through December 31, 2014 and are excluded in subsequent periods.

The table below presents the effects of the above on the changes in equity attributable to Bimini Capital stockholders during the nine months ended September 30, 2014.
 
($ in thousands)
     
Net income attributable to Bimini Capital
  $ 6,046  
Transfers from the noncontrolling interests
       
Decrease in Bimini Capital's paid-in capital for the sale of 9,682,784 common shares of Orchid
       
and the effect of the 24,000 shares of unvested restricted shares of Orchid
    (793 )
Change from net income attributable to Bimini Capital and transfers from noncontrolling interest
  $ 5,253  

Net income of Orchid for the nine and three months ended September 30, 2014 is allocated between the noncontrolling interests and to Bimini Capital in proportion to their relative ownership interests in Orchid.  The following is a roll forward of the noncontrolling interest during the nine months ended September 30, 2014.
 
(in thousands)
     
Balance, January 1, 2014
  $ 31,615  
Issuance of common shares of Orchid Island Capital, Inc.
    122,318  
Net income attributed to noncontrolling interest
    18,767  
Amortization of Orchid Island Capital, Inc. equity plan compensation
    41  
Cash dividends paid to noncontrolling interest
    (12,954 )
Balance, September 30, 2014
  $ 159,787  


 
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The following table summarizes the operating results of Orchid (excluding intercompany transactions) for the nine and three months ended September 30, 2014, which are reflected in the consolidated statements of operations for the nine and three months ended September 30, 2014.
 
(in thousands)
           
   
Nine Months Ended
   
Three Months Ended
 
   
September 30, 2014
   
September 30, 2014
 
Interest income
  $ 19,658     $ 9,286  
Interest expense
    (1,905 )     (818 )
Net interest income
    17,753       8,468  
Unrealized gains (losses) on mortgage-backed securities
    8,720       (1,404 )
Realized gains (losses) on mortgage-backed securities
    1,931       (1,960 )
(Losses) gains on derivative instruments
    (4,364 )     3,057  
Net portfolio income
    24,040       8,161  
                 
Expenses:
               
Accrued incentive compensation
    450       225  
Directors' fees and liability insurance
    405       165  
Audit, legal and other professional fees
    406       160  
Direct REIT operating expenses
    124       36  
Other administrative
    183       66  
Total expenses
    1,568       652  
                 
Net income
  $ 22,472     $ 7,509  

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

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and note