bmnm10q03312010.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 March 31, 2010

¨           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 þ     NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 ¨     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 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 Exchange Act). YES ¨     NO þ

As of May 7, 2010, the number of shares outstanding of the registrant’s Class A Common Stock, $0.001 par value, was 10,035,654; the number of shares outstanding of the registrant’s Class B Common Stock, $0.001 par value, was 31,938; and the number of shares outstanding of the registrant’s Class C Common Stock, $0.001 par value, was 31,938.

 
 
 





BIMINI CAPITAL MANAGEMENT, INC.

INDEX



PART I. FINANCIAL INFORMATION
 
     ITEM 1.     FINANCIAL STATEMENTS.
3
          Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009
3
          Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2010 and 2009
4
          Consolidated Statement of Stockholders’ Equity (Deficit) (unaudited) for the three months ended March 31, 2010
5
          Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2010 and 2009
6
          Notes to Consolidated Financial Statements (unaudited)
7
     ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                        AND RESULTS OF OPERATIONS.
25
     ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
36
     ITEM 4T.   CONTROLS AND PROCEDURES.
36
   
PART II. OTHER INFORMATION
  
     ITEM 1.     LEGAL PROCEEDINGS.
37
     ITEM 1A.  RISK FACTORS.
38
     ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
38
     ITEM 6.     EXHIBITS.
39




 
 
 

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BIMINI CAPITAL MANAGEMENT, INC.
  
CONSOLIDATED BALANCE SHEETS
  
   
(Unaudited)
        
   
March 31, 2010
    
December 31, 2009
  
ASSETS:
            
Mortgage-backed securities – held for trading
            
Pledged to counterparty, at fair value
   $ 79,762,923     $ 104,875,798  
Unpledged, at fair value
     22,396,713       14,792,697  
Total mortgage-backed securities
     102,159,636       119,668,495  
Cash and cash equivalents
     5,158,810       6,400,065  
Restricted cash
     950,000       2,530,000  
Principal payments receivable
     35,736       93,029  
Accrued interest receivable
     1,037,619       1,075,052  
Property and equipment, net
     3,957,228       3,976,546  
Prepaids and other assets
     1,202,641       1,266,278  
Assets held for sale
     12,775,070       14,331,850  
Total Assets
   $ 127,276,740     $ 149,341,315  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                
                 
LIABILITIES:
                
Repurchase agreements
   $ 76,719,432     $ 100,271,206  
Junior subordinated notes due to Bimini Capital Trust II
     26,804,440       26,804,440  
Unsettled security transactions
     4,357,594       -  
Accrued interest payable
     105,090       131,595  
Dividends payable  in cash
     -       1,877,944  
Dividends payable in Class A common stock
     -       16,862,469  
Accounts payable, accrued expenses and other
     1,064,808       926,678  
Liabilities related to assets held for sale
     7,687,183       7,621,984  
Total Liabilities
     116,738,547       154,496,316  
 
                
COMMITMENTS AND CONTINGENCIES
                
                 
STOCKHOLDERS' EQUITY (DEFICIT):
                
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 March 31, 2010 and December 31, 2009
     -       -  
Class A Common Stock, $0.001 par value; 98,000,000 shares designated: 10,035,654  shares issued and outstanding as of March 31, 2010 and 2,763,779  shares issued and outstanding as of December 31, 2009
     10,036       2,764  
Class B Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2010 and 31,939 shares issued and outstanding as of December 31, 2009
     32       32  
Class C Common Stock, $0.001 par value; 1,000,000 shares designated, 31,938 shares issued and outstanding as of March 31, 2010 and 31,939 shares issued and outstanding as of December 31, 2009
     32       32  
Additional paid-in capital
     335,886,391       319,191,227  
Accumulated deficit
     (325,358,298 )     (324,349,056 )
Total Stockholders’ Equity (Deficit)
     10,538,193       (5,155,001 )
Total Liabilities and Stockholders’ Equity (Deficit)
   $ 127,276,740     $ 149,341,315  
See Notes to Consolidated Financial Statements
  

BIMINI CAPITAL MANAGEMENT, INC.
  
CONSOLIDATED STATEMENTS OF OPERATIONS
  
(Unaudited)
  
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Interest income
   $ 1,898,094     $ 3,674,403  
Interest expense
     (68,487 )     (253,952 )
Net interest income before interest on junior subordinated notes
     1,829,607       3,420,451  
Interest expense on junior subordinated notes
     (549,981 )     (2,090,432 )
Net interest income
     1,279,626       1,330,019  
(Losses) gains on trading securities
     (1,902,802 )     1,693,609  
Net portfolio (loss) income
     (623,176 )     3,023,628  
                 
Direct REIT operating expenses
     147,187       153,304  
                 
General and administrative expenses:
                
Compensation and related benefits
     418,170       320,247  
Directors' fees and liability insurance
     128,260       111,592  
Audit, legal and other professional fees
     559,468       394,262  
Other administrative
     142,954       122,385  
Total general and administrative expenses
     1,248,852       948,486  
                 
Total expenses
     1,396,039       1,101,790  
                 
(Loss) income from continuing operations
     (2,019,215 )     1,921,838  
                 
Discontinued operations, net of income taxes
     1,009,973       235,547  
                 
Net (loss) income
   $ (1,009,242 )   $ 2,157,385  

Basic and Diluted Net (Loss) Income Per Share of Class A Common Stock:
            
         Continuing operations
   $ (0.24 )   $ 0.72  
         Discontinued operations
     0.12       0.09  
      Total basic net (loss) income per Class A share
   $ (0.12 )   $ 0.81  
Basic and Diluted Net (Loss) Income Per Share of Class B Common Stock
                
         Continuing operations
   $ (0.24 )   $ 0.72  
         Discontinued operations
     0.12       0.09  
      Total basic and diluted net (loss) income per Class B share
   $ (0.12 )   $ 0.81  
Average Shares Outstanding
                
     CLASS A COMMON STOCK - Basic
     8,481,870       2,633,163  
     CLASS A COMMON STOCK - Diluted
     8,481,870       2,640,865  
     CLASS B COMMON STOCK – Basic and diluted
     31,938       31,939  
See Notes to Consolidated Financial Statements
  




 
 
 



BIMINI CAPITAL MANAGEMENT, INC.
  
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
  
(Unaudited)
  
Three Months Ended March 31, 2010
  
   
 
Common Stock,
Amounts at par value
  
Additional
Paid-in
 Capital
  
Accumulated
 Deficit
      
 
Class A
  
Class B
  
Class C
  
Total
  
Balances, January 1, 2010
   $ 2,764     $ 32     $ 32     $ 319,191,227     $ (324,349,056 )   $ (5,155,001 )
Net loss
     -       -       -       -       (1,009,242 )     (1,009,242 )
Dividends paid in shares of Class A Common Stock
     7,241       -       -       16,647,596       -       16,654,837  
Issuance of Class A common shares for board compensation and equity plan share exercises, net
     31       -       -       39,488       -       39,519  
Amortization of equity plan compensation
     -       -       -       8,080       -       8,080  
Balances, March 31, 2010
   $ 10,036     $ 32     $ 32     $ 335,886,391     $ (325,358,298 )   $ 10,538,193  
See Notes to Consolidated Financial Statements
  



 
 
 


BIMINI CAPITAL MANAGEMENT, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(Unaudited)
  
       
   
Three Months Ended March 31,
  
   
2010
    
2009
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net (loss) income
   $ (1,009,242 )   $ 2,157,385  
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
                
Net income from discontinued operations
     (1,009,973 )     (235,547 )
Stock compensation, and equity plan amortization
     47,599       40,663  
Depreciation and amortization
     61,552       182,088  
Losses (gains) on trading securities
     1,902,802       (1,693,609 )
Changes in operating assets and liabilities:
                
Accrued interest receivable
     37,433       203,935  
Prepaids and other assets
     24,392       (813 )
Accrued interest payable
     (26,522 )     (185,043 )
Accounts payable, accrued expenses and other
     (69,503 )     (201,959 )
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
     (41,462 )     267,100  
CASH FLOWS FROM INVESTING ACTIVITIES:
                
From mortgage-backed securities investments:
                
Purchases
     (44,610,199 )     (30,106,576 )
Sales
     57,784,680       105,476,558  
Principal repayments
     6,846,463       7,175,739  
Decrease in restricted cash
     1,580,000       -  
Purchases of property and equipment, and other
     (2,989 )     (9,205 )
NET CASH PROVIDED BY INVESTING ACTIVITIES
     21,597,955       82,536,516  
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from repurchase agreements
     120,839,955       926,057,181  
Principal payments on repurchase agreements
     (144,391,729 )     (1,000,016,476 )
Dividends paid in cash
     (1,877,927 )     -  
NET CASH USED IN FINANCING ACTIVITIES
     (25,429,701 )     (73,959,295 )
CASH FLOWS FROM DISCONTINUED OPERATIONS:
                
Net cash provided by operating activities
     2,631,953       5,600,146  
NET CASH PROVIDED BY DISCONTINUED OPERATIONS
     2,631,953       5,600,146  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
     (1,241,255 )     14,444,467  
CASH AND CASH EQUIVALENTS, beginning of the period
     6,400,065       7,668,581  
CASH AND CASH EQUIVALENTS, end of the period
   $ 5,158,810     $ 22,113,048  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
            
Cash paid during the period for:
            
Interest
   $ 605,747     $ 2,529,427  
Income taxes
   $ 130,000     $ -  
                 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
  
Securities acquisitions settled in later period
   $ 4,357,594     $ -  
Dividends paid in shares of Class A Common Stock
   $ 16,861,973     $ -  
                 
See Notes to Consolidated Financial Statements
  

 
 
 


BIMINI CAPITAL MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2010

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Bimini Capital Management, Inc., a Maryland corporation (“Bimini Capital”), was originally 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 operates in a single business segment.

Bimini Capital’s website is located at http://www.biminicapital.com.

Liquidity

The financing market utilized by the Company to fund its MBS portfolio, as well as the market for MBS securities, have stabilized after undergoing unprecedented turmoil in 2008 and early 2009.  However, conditions in the market, while stable, are far from the condition that existed prior to the crisis. The Company has taken significant steps to reduce the leverage in its balance sheet and reduce its debt service costs, and it was able to generate earnings over the course of 2009.  The Company has also expanded its access to repurchase agreement funding.  However, market conditions are still constrained, especially in light of the significant actions of the Federal Government with respect to their explicit support of the Government Sponsored Entities (“GSE’s”) and the actions of the Federal Reserve with their direct involvement in the agency MBS securities market – the primary market in which the Company invests. Accordingly, the Company has expanded on the steps taken in 2008 to augment its existing leveraged MBS portfolio with its alternative investment strategy.  The Company’s alternative investment strategy that utilizes derivative MBS has been elevated to a core element of its investment strategy and liquidity management. However, the Company’s ability to utilize this element of our investment strategy is limited because such investments do not satisfy the asset criteria to meet REIT qualifications.  Further, 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.

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“GAAP”). 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, the prepayment speeds used to calculate amortization and accretion of premiums and discounts on MBS, and certain discontinued operations related items including asset valuation allowances and fair values of retained interests.

Discontinued Operations

On November 3, 2005, Bimini Capital acquired Opteum Financial Services, LLC.  Upon closing of the transaction, Opteum became a wholly-owned taxable REIT subsidiary of Bimini Capital. This entity, which was previously referred to as “OFS,” was renamed Orchid Island TRS, LLC (“OITRS”) effective July 3, 2007.   Hereinafter, any historical mention, discussion or references to Opteum Financial Services, LLC or to OFS now means OITRS.


 
 
 


During the second quarter of 2007, the Company closed OITRS’ wholesale and conduit mortgage loan origination channels and, during the second and third quarters of 2007, sold substantially all of the operating assets of OITRS.  Therefore, all of OITRS’s assets were considered as held for sale, and OITRS was then reported as a discontinued operation for all periods presented following applicable accounting standards.  At March 31, 2010, the remaining assets and liabilities are considered to be contingent and continue to be recorded by OITRS pursuant to the terms of the disposal of the operations, with the exception of retained interests, the disposal of which has been delayed as a result of the turmoil in the financial markets and a significant lack of investor interest in such securities. However, while the market for such retained interests is temporarily inactive as a result of continued deterioration in the underlying collateral, the Company has made every effort to market such securities to known market participants who have been active in the past.  Accordingly, all current and prior financial information related to OITRS and the mortgage banking business is presented as discontinued operations in the accompanying consolidated financial statements. Refer to Note 11 - Discontinued Operations.

Terminology

As used in this document, discussions related to “Bimini Capital,” the parent company, the registrant, and to REIT qualifying activities or the general management of Bimini Capital’s portfolio of MBS refer to “Bimini Capital Management, Inc.”  Further, discussions related to Bimini Capital’s taxable REIT subsidiary or non-REIT eligible assets refer to OITRS and its consolidated subsidiaries. Discussions relating to “the Company” refer to the consolidated entity (the combination of Bimini Capital and OITRS).

Consolidation

The accompanying consolidated financial statements include the accounts of Bimini Capital and its wholly-owned subsidiary, OITRS, as well as the wholly-owned subsidiaries of OITRS.  OITRS is reported as a discontinued operation for all periods presented.  All inter-company accounts and transactions have been eliminated from the consolidated financial statements.

As further described in Note 5, Bimini Capital historically had a common share investment in a trust used in connection with the issuance of Bimini Capital’s junior subordinated notes.  Pursuant to the applicable accounting guidance for variable interest entities, 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.
 
Statement of Comprehensive Income (Loss)
 
In accordance with FASB ASC 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

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 represents cash held on deposit as collateral with the repurchase agreement counterparty. Such amount may be used to make principal and interest payments on the related repurchase agreements.

The Company and its subsidiaries maintain cash balances at two banks.  Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000.  At March 31, 2010, uninsured deposits were approximately $4.7 million.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, and interest only securities or inverse interest only securities representing interest in or obligations backed by pools of mortgage loans (collectively, MBS).  MBS transactions are recorded on the trade date.


 
 
 


In accordance with FASB ASC 320, Investments - Debt and Equity Securities, the Company classifies its investments in MBS into one of three categories: trading, available-for-sale or held-to-maturity. All MBS securities held by Bimini Capital are reflected in the Company's financial statements at their estimated fair value.

The fair value of the Company’s investments in MBS is governed by FASB ASC 820, Fair Value Measurements and Disclosures.  The definition of fair value in FASB ASC 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 MBS pass-through securities is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized.  For interest only securities, the income is accrued based on the carrying value and the effective yield.  Cash received is first applied to accrued interest and then to reduce the 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 inverse interest only 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 the period are recorded in earnings and reported as (losses) gains on trading securities in the accompanying consolidated statements of operations.

Financial Instruments

FASB ASC 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 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 10 of the financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, principal payments receivable, accrued interest receivable, repurchase agreements, accrued interest payable and accounts payable and other liabilities generally approximates their carrying value as of March 31, 2010 and December 31, 2009, due to the short-term nature of these financial instruments.

It is impracticable to estimate the fair value of the Company’s junior subordinated notes.  Currently, there is a limited market for these types of instruments and it is unclear what interest rates would be available to the Company for similar financial instruments. Information regarding carrying amounts, effective interest rates and maturity dates for these instruments is presented in the Note 5 to the 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.

Bimini Capital’s property and equipment as of March 31, 2010 and December 31, 2009, is presented net of accumulated depreciation of approximately $627,000 and $604,000, respectively. Depreciation expense was approximately $22,000 and $25,000 for the three months ended March 31, 2010 and 2009, respectively.
 
 

 
 
 


Repurchase Agreements

The Company finances the acquisition of the majority of its MBS through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which securities are pledged as collateral to secure a short-term loan equal in value to a specified percentage (generally between 93 and 95 percent) of the market value of the pledged collateral. While used as collateral, the borrower retains beneficial ownership of the pledged collateral, including the right to distributions. At the maturity of a repurchase agreement, the borrower is required to repay the loan and concurrently receive the pledged collateral from the lender or, with the consent of the lender, renew such agreement at the then prevailing financing rate. Margin calls, whereby a lender requires that the Company pledge additional securities or cash as collateral to secure borrowings under its repurchase agreements with such a lender, are routinely experienced by the Company when the value of the MBS pledged as collateral declines or as a result of principal amortization or due to changes in market interest rates, spreads or other market conditions.

The Company’s repurchase agreements typically have terms ranging from one month to six months at inception, with some having longer terms.  Should a counterparty decide not to renew a repurchase agreement at maturity, the Company must either refinance elsewhere or be in a position to satisfy the obligation.  If, during the term of a repurchase agreement, a lender should file 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.  At March 31, 2010, the Company had outstanding balances under repurchase agreements with one lender with a maximum amount at risk (the difference between the amount loaned to the Company, including interest payable, and the fair value of securities pledged by the Company as collateral, including accrued interest on such securities, of $2.8 million; see Note 4.

Share-Based Compensation

The Company follows the provisions of FASB ASC 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. Forfeitures, or an indication that forfeitures may occur, would result in a revised forfeiture rate and are 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.

Reverse Stock Split

On March 12, 2010, the Company executed a one-for-ten reverse stock split of its Class A, Class B and Class C common stock.  Prior to effecting the reverse split, at December 31, 2009 the Company had 27,637,789 shares of Class A common stock outstanding and 319,388 shares each of its Class B and Class C common stock outstanding.  Further, in connection with the dividend paid on January 19, 2010, the Company issued an additional 72,414,462 shares of Class A common stock which brought the total shares outstanding of Class A common stock to 100,052,251 at January 19, 2010. Upon consummation of the reverse split, as of March 12, 2010 issued and outstanding shares of Class A, Class B and Class C common stock were 10,052,225, 31,938 and 31,938, respectively. All references in the accompanying financial statements to the number of common shares and per-share amounts for all periods have been restated to reflect the reverse stock split.

Earnings Per Share

The Company follows the provisions of FASB ASC 260, Earnings Per Share, which requires companies with complex capital structures, common stock equivalents or two (or more) classes of securities that participate in the declared dividends 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.

All basic and diluted weighted average share and per-share amounts in these financial statements have been adjusted for all periods presented to reflect the March 12, 2010 reverse stock split.

Income Taxes

Bimini Capital has elected to be taxed as a REIT under the Code. Bimini Capital will generally not be subject to federal income tax on its REIT taxable income to the extent that Bimini Capital distributes its REIT taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income to its stockholders, of which 85% generally must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other requirements. At March 31, 2010, 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, Discontinued Operations, OITRS is a taxpaying entity for income tax purposes and is taxed separately from Bimini Capital.   The Company files federal and state tax returns for both the REIT and the taxable REIT subsidiary.  Generally, returns for all periods after 2005 remain open for examination.

Recent Accounting Pronouncements

In February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements, (“ASU 2010-09”) which amends ASC 855, Subsequent Events, to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures.  ASU 2010-09 requires SEC filers to evaluate subsequent events through the date the financial statements are issued and exempts SEC filers from disclosing the date through which subsequent events have been evaluated.  The ASU was effective immediately upon issuance.  The implementation of this new accounting guidance did not have a material impact on the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which requires additional disclosures related to the transfers in and out of the fair value hierarchy and the activity of Level 3 financial instruments. This ASU also provides clarification for the classification of financial instruments and the discussion of inputs and valuation techniques. The new disclosures and clarification are effective for interim and annual reporting periods after December 15, 2009, except for the disclosures related to the activity of Level 3 financial instruments. Those disclosures are effective for periods beginning after December 15, 2010 and for interim periods within those years. The implementation of this new accounting guidance did not have any impact on the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash, a Consensus of the FASB Emerging Issues Task Force.  The purpose of this ASU was to eliminate diversity in practice by requiring classification of the stock portion of a dividend payment as a share issuance if there is a limit on the cash portion of the dividend payment.  The Company applied this new accounting guidance as of December 31, 2009 for its dividend declared in November 2009 and paid in January 2010.


 
 
 


In June 2009, the FASB issued Statement of Financial Accounting No. 167 (“FAS 167), Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, which was subsequently incorporated into ASC 810, Consolidation.  FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. FAS 167 is effective for periods  beginning after November 15, 2009. The implementation of this new accounting guidance did not have any impact on the Company’s financial statements.

In June 2009, the FASB issued Statement of Financial Accounting No. 166 (“FAS 166”), Accounting for Transfers of Financial Assets, which was subsequently incorporated into ASC 860, Transfers and Servicing,  FAS 166 is a revision of FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require disclosure of more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. FAS 166 also eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and requires additional disclosures. FAS 166 is effective for periods beginning after November 15, 2009. Earlier application was prohibited. The Company adopted FAS 166 on January 1, 2010. The implementation of this new accounting guidance did not have any impact on the Company’s financial statements.

NOTE 2.   MORTGAGE-BACKED SECURITIES

The following are the carrying values of the Company’s MBS:

(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Pass-Through Certificates:
            
Hybrid Arms
   $ 36,272     $ 67,036  
Adjustable-rate Mortgages
     13,865       32,598  
Fixed-rate Mortgages
     33,973       5,242  
Total Pass-Through Certificates
     84,110       104,876  
Mortgage Derivative Certificates:
                
MBS Derivatives
     18,050       14,793  
Totals
   $ 102,160     $ 119,669  

As of March 31, 2010, investments with a carrying value of approximately $336,000 have contractual maturities less than 24 months.  All of the remainder of Bimini Capital's MBS investments have contractual maturities greater than 24 months. Actual maturities of MBS investments are generally shorter than stated contractual maturities. Actual maturities of Bimini Capital's MBS investments are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

NOTE 3.   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. Class B common shares are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.

The Class C common shares are not included in the basic EPS computation as these shares do not have participation rights. The Class C common shares are not included in the computation of diluted Class A EPS as the conditions for conversion to Class A shares were not met.


 
 
 


The Company has dividend eligible stock incentive plan shares that were outstanding during the three months ended March 31, 2010 and 2009. For the three months ended March 31, 2009, a weighted average of 531 of these unvested incentive plan shares are included in the basic and diluted per share computations, as they have dividend participation rights. The stock incentive plan shares have no contractual obligation to share in losses. Since there is no such obligation, the incentive plan shares are not included in the three months ended March 31, 2010 basic and diluted EPS computations, even though they are participating securities.

The Company has also issued stock incentive plan shares that are not dividend eligible.  At March 31, 2009, 6,709 of such plan shares were outstanding and are included in the diluted per share computations. There were none of these shares outstanding during the three months ended March 31, 2010.

As discussed in Note 6, on November 9, 2009, the Company’s Board of Directors declared a special dividend giving stockholders the option to make an election to receive payment of the dividend in cash or in shares of its Class A Common Stock, subject to an aggregate cash limitation.  These shares were not included in the calculation of basic earnings per share until January 19, 2010 because they were not yet issued.  They were not included in the diluted per share calculation prior to issuance because their inclusion prior to this date would have been anti-dilutive.

The table below reconciles the numerators and denominators of the basic and diluted EPS.

(in thousands, except per-share information)
   
Three Months Ended March31,
  
   
2010
    
2009
  
Basic and diluted EPS per Class A common share:
            
Income (loss) available to Class A common shares:
            
Continuing operations
   $ (2,012 )   $ 1,899  
Discontinued operations
     1,006       233  
    $ (1,006 )   $ 2,132  
Weighted average common shares:
                
Class A common shares outstanding at the balance sheet date
     10,036       2,695  
Unvested dividend-eligible stock incentive plan shares outstanding at the balance sheet date
     -       1  
Effect of weighting
     (1,554 )     (63 )
Weighted average shares-basic
     8,482       2,633  
Effect of dilutive stock incentive plan shares
     -       8  
Weighted average shares-diluted
     8,482       2,641  
                 
Earnings (loss) per Class A common share – basic and diluted:
                
Continuing operations
   $ (0.24 )   $ 0.72  
Discontinued operations
     0.12       0.09  
    $ (0.12 )   $ 0.81  

 
 
 


   
Three Months Ended March31,
  
   
2010
    
2009
  
Basic and diluted EPS per Class B common share:
            
Income (loss) available to Class B common shares:
            
Continuing operations
   $ (7 )   $ 23  
Discontinued operations
     4       2  
    $ (3 )   $ 25  
Weighted average common shares:
                
Class B common shares outstanding at the balance sheet date
     32       32  
Effect of weighting
     -       -  
Weighted average shares- basic and diluted
     32       32  
                 
Earnings (loss) per Class B common share – basic and diluted:
                
Continuing operations
   $ (0.24 )   $ 0.72  
Discontinued operations
     0.12       0.09  
    $ (0.12 )   $ 0.81  

NOTE 4.   REPURCHASE AGREEMENTS

As of March 31, 2010, Bimini Capital had outstanding repurchase obligations of approximately $76.7 million with a net weighted average borrowing rate of 0.26%. These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $80.0 million.  As of December 31, 2009, Bimini Capital had outstanding repurchase obligations of approximately $100.3 million with a net weighted average borrowing rate of 0.30%.  These agreements were collateralized by MBS with a fair value of approximately $105.2 million.

As of March 31, 2010 and December 31, 2009, Bimini Capital's repurchase agreements had remaining maturities as summarized below:

(in thousands)
   
OVERNIGHT
(1 DAY OR LESS)
    
BETWEEN 2 AND
30 DAYS
    
BETWEEN 31 AND
90 DAYS
    
GREATER THAN
90 DAYS
    
TOTAL
  
March 31, 2010
                              
Agency-Backed Mortgage--Backed Securities:
                              
Fair market value of securities sold, including accrued interest receivable
   $ -     $ 18,643     $ 61,389     $ -     $ 80,032  
Repurchase agreement liabilities associated with these securities
   $ -     $ 18,622     $ 58,097     $ -     $ 76,719  
Net weighted average borrowing rate
     -       0.27 %     0.26 %     -       0.26 %
December 31, 2009
                                        
Agency-Backed Mortgage--Backed Securities:
                                        
Fair market value of securities sold, including accrued interest receivable
   $ -     $ 67,599     $ 37,644     $ -     $ 105,243  
Repurchase agreement liabilities associated with these securities
   $ -     $ 65,120     $ 35,151     $ -     $ 100,271  
Net weighted average borrowing rate
     -       0.31 %     0.29 %     -       0.30 %


 
 
 


Summary information regarding the Company’s amounts at risk with individual counterparties greater than 10% of the Company’s equity at March 31, 2010 and December 31, 2009 is as follows:

 (in thousands)
Repurchase Agreement Counterparties
  
Amount
at Risk(1)
    
Weighted Average Maturity of Repurchase Agreements in Days
  
March 31, 2010
            
MF Global, Inc.
   $ 2,758       59  
December 31, 2009
                
MF Global, Inc.
   $ 4,929       38  

 (1)
Equal to the fair value of securities sold, plus accrued interest income, minus the sum of repurchase agreement liabilities, plus accrued interest expense.

NOTE 5.  TRUST PREFERRED SECURITIES

As of March 31, 2010 and December 31, 2009, Bimini Capital sponsored one statutory trust, known as Bimini Capital Trust II (“BCTII”) of which 100% of the common equity is owned by the Bimini Capital, 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 the trust are the sole assets of that trust.

The BCTII trust preferred securities and Bimini Capital's BCTII Junior Subordinated Notes have a fixed-rate of interest until December 15, 2010, of 7.8575% and thereafter, through maturity in 2035, the rate will float at a spread of 3.50% over the prevailing three-month LIBOR rate. 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. As of March 31, 2010 and December 31, 2009, the outstanding principal balance on the junior subordinated debt securities owed to BCTII is $26.8 million.

The trust is a variable interest entity pursuant to FASB ASC 810 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 applicable 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 investments in BCTII are not a variable interest, Bimini Capital is not the primary beneficiary of the trusts. 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. For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTII as interest expense.

NOTE 6.  CAPITAL STOCK

Reverse Stock Split

On March 12, 2010, the Company executed a one-for-ten reverse stock split Class A, Class B and Class C common stock.  All references in the accompanying financial statements to the number of common shares and per-share amounts for all periods presented have been adjusted to reflect the reverse stock split.

Issuances of Common Stock

During the three months ended March 31, 2010, the Company issued a total of 30,874 shares of its Class A Common Stock to its independent directors for the payment of director fees.

On January 19, 2010, the Company issued 7,241,446 shares of its Class A common stock in connection with a special dividend described more fully below.

There were no issuances of the Company's Class B Common Stock and Class C Common Stock.

Dividends

On November 9, 2009, the Company’s Board of Directors declared a $6.50 per share special dividend to the holders of its dividend eligible securities on the record date of December 9, 2009.  Subject to an aggregate cash limitation of approximately $1.9 million, stockholders had the option to make an election to receive payment of the dividend in cash or in shares of its Class A Common Stock.  Stockholders that elected to receive the dividend entirely in shares received approximately 2.8 shares for each share held.  Stockholders that elected to receive at least a portion of the dividend in cash received approximately $0.69 in cash and 2.5 shares for each share held.  The distribution totaling approximately $1.9 million in cash and 7,241,446 in shares was paid on January 19, 2009.

A liability of $18.7 million was recorded as of December 31, 2009 related to the special dividend mentioned above.  This liability consisted of both the cash portion of the dividend declared and the fair value of the shares of stock to be issued.  The liability was settled in January 2010 for $1.9 million in cash and an increase in stockholders’ equity of $16.8 million, representing the fair value of the shares issued.
 
 
On April 1, 2010, the Company's Board of Directors declared a $0.03 per share cash dividend to the holders of its dividend eligible securities on the record date of April 15, 2010.  The distribution totaling approximately $314,000 was paid on April 30, 2010.

NOTE 7.    STOCK INCENTIVE PLANS
 
On December 18, 2003, Bimini Capital adopted the 2003 Long Term Incentive Compensation Plan (the “2003 Plan”) to provide Bimini with the flexibility to use stock options and other awards as part of an overall compensation package to provide a means of performance-based compensation to attract and retain qualified personnel. The 2003 Plan was amended and restated in March 2004. Key employees, directors and consultants are eligible to be granted stock options, restricted stock, phantom shares, dividend equivalent rights and other stock-based awards under the 2003 Plan. Subject to adjustment upon certain corporate transactions or events, a maximum of 400,000 shares of the Class A Common Stock (but not more than 10% of the Class A Common Stock outstanding on the date of grant) may be subject to stock options, shares of restricted stock, phantom shares and dividend equivalent rights under the 2003 Plan.

Phantom share awards represent a right to receive a share of Bimini'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 being 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 grant agreements, for periods through December 1, 2014. The Company recognizes compensation expense over the vesting period. Compensation expense recognized for phantom shares during the three months ended March 31, 2010 and 2009 was approximately, $8,000 and $12,000, respectively. Dividends paid on unsettled awards are charged to retained earnings when declared.

A summary of phantom share activity during the three month periods ended March 31, 2010 and 2009 is presented below:

 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
   
Shares
    
Weighted-Average Grant-Date Fair Value
    
Shares
    
Weighted-Average Grant-Date Fair Value
  
Nonvested, at January 1
     102,000     $ 1.58       13,237     $ 5.79  
Granted 
     -       -       -       -  
Vested 
     -       -       (958 )     2.60  
Forfeited
     -       -       (5,040 )     3.24  
Nonvested, at March 31
     102,000     $ 1.58       7,239     $ 7.99  
 
 
 


As of March 31, 2010, there was approximately $137,000 of unrecognized compensation cost related to nonvested phantom share awards.  This cost is expected to be recognized over a remaining weighted-average period of 50.9 months.  All of the remaining unvested awards at March 31, 2010 were granted dividend participation rights.

On April 1, 2010, the Board of Directors granted 302,000 of phantom shares with a grant date fair value of $0.97 and vesting periods of one to five years.

Bimini Capital also has adopted the 2004 Performance Bonus Plan (the “Performance Bonus Plan”). The Performance Bonus Plan is an annual bonus plan that permits the issuance of the Company’s Class A Common Stock in payment of stock-based awards made under the plan.  No stock-based awards have been made and no shares of the Company’s stock have been issued under the Performance Bonus Plan. The Performance Bonus Plan was terminated by the Board of Directors on April 1, 2010.

NOTE 8.  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.
 
On September 17, 2007, a complaint was filed in the U.S. District Court for the Southern District of Florida by William Kornfeld against Bimini Capital, certain of its current and former officers and directors, Flagstone Securities, LLC and BB&T Capital Markets alleging various violations of the federal securities laws and seeking class action certification.  On October 9, 2007, a complaint was filed in the U.S. District Court for the Southern District of Florida by Richard and Linda Coy against the Company, certain of its current and former officers and directors, Flagstone Securities, LLC and BB&T Capital Markets alleging various violations of the federal securities laws and seeking class action certification.  The cases have been consolidated, class certification has been granted, and lead plaintiffs’ counsel has been appointed.  The Company filed a motion to dismiss the case on December 22, 2008, and plaintiffs have filed a response in opposition.  On September 30, 2009, the court granted a partial motion to dismiss and gave plaintiffs until October 12, 2009 to file an amended complaint.  The partial dismissal released defendants Flagstone Securities, LLC, BB&T Capital Markets, Bimini Capital’s former outside directors and certain officers, as well as certain charges contained in the original complaint.  Plaintiffs filed an amended complaint on October 12, 2009 and on October 23, 2009 Bimini Capital filed an answer and affirmative defenses to the amended complaint. At a mediation held on February 12, 2010, the parties reached a tentative settlement of this matter for $2.35 million. As of December 31, 2009, the Company had accrued approximately $0.5 million related to the settlement.  This amount represented the remainder of the $1.0 million retention that the Company was required to pay under the terms of its Directors and Officers insurance policy. As of April 30, 2010, approximately $0.4 million of the accrual remains. The remainder of the settlement and legal fees and costs associated with finalizing the settlement in excess of the $0.4 million accrual will be paid by the insurance carrier.  The settlement is contingent upon the parties' executing a written stipulation of settlement, presenting the settlement to the Court for preliminary approval, providing notice to the Class and an opportunity to opt out of the settlement,  and receiving final approval from the Court at a final fairness hearing.  This process is expected to be completed during the current year.  Bimini Capital made no admission of liability in connection with the settlement.  If the settlement is not finalized, the class action would continue.  While Bimini Capital expects that this settlement will be finalized and approved by the Court, there is no guarantee that the settlement will be finalized.  The failure to finalize the settlement could have a material adverse impact on the Bimini Capital.


 
 
 


A complaint was filed on December 23, 2009 in the Southern District of New York against Bimini Capital, the Bank of New York Mellon ("BNYM"), and Hexagon Securities, LLC ("Hexagon"). It alleges that plaintiff, a note-holder in Preferred Term Securities XX ("PreTSL XX"), 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 December 2009. Plaintiff alleged breach of the indenture and breach of fiduciary duties by BNYM, and tortuous interference with contract and aiding and abetting breach of fiduciary duty by Bimini Capital and Hexagon. Plaintiff also purported to allege derivative claims brought on behalf of Nominal Defendant PreTSL XX.  On February 22, 2010, plaintiff filed an amended complaint, adding derivative claims on behalf of BNYM as trustee, in addition to the prior derivative claims asserted on behalf of PreTSL XX.  Plaintiff has also added a claim for "unjust enrichment" against Bimini Capital and Hexagon.  On March 26, 2010, all Defendants moved to dismiss each count of Plaintiff's amended complaint. Bimini Capital denies that the repurchase was improper and intends to defend the suit vigorously.

NOTE 9.  INCOME TAXES
 
REIT taxable income (loss), as generated by Bimini Capital’s qualifying REIT activities, is computed in accordance with the Code, which is different from the Company’s financial statement net income (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 (loss) and the Company’s financial statement net income (loss) can be substantial and each item can affect several years.  Bimini Capital’s REIT taxable loss for the three-months ended March 31, 2010 is estimated to be $0.5 million. During the three months ended March 31, 2010, a GAAP financial statement loss on MBS sales of approximately $13,000 was realized; for tax purposes, realized capital gains for this period was approximately $0.05 million.  Since there are tax capital losses available to offset the tax capital gains, the tax gains did not increase REIT taxable income for the period ended March 31, 2010.
 
 During the three months ended March 31, 2010, fair value adjustments on the MBS portfolio of approximately $(1.9) million were recorded on the GAAP financial statements; for tax purposes, these fair value adjustments will not be taken into account until the underlying security is sold.  Other differences between GAAP financial statement results and REIT taxable income (loss) include the results of the discontinued operations (which does not impact REIT taxable income), the different tax and book accounting methods used for calculating interest income, and depreciation and amortization.
 
As of March 31, 2010, the Bimini Capital has approximately $56.8 million of remaining capital loss carryforwards available to offset future capital gains. As of March 31, 2010, Bimini Capital has a REIT tax net operating loss carryforward of approximately $1.2 million that is immediately available to offset future REIT taxable income.  The capital loss carryforwards begin to expire in 2012, and the net operating loss carryforwards begin to expire in 2028.
 
Bimini Capital’s REIT taxable loss for the three months ended March 31, 2009 was estimated to be $1.4 million.  During the three months ended March 31, 2009, GAAP financial statement gains of approximately $1.1 million on MBS on the sale of MBS were realized; for tax purposes, the realized gains were approximately $2.7 million.  Since there are tax capital losses available to offset these gains, the tax gains did not increase REIT taxable income for the period ended March 31, 2009.

NOTE 10.   FAIR VALUE
 
The Company measures or monitors all of its MBS on a fair value basis. Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for its mortgage-backed securities, 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.
 
All of the fair value adjustments included in the results from continuing operations resulted from Level 2 fair value methodologies; that is, the Company is able to value the assets based on observable market data for similar instruments. The securities in the Company’s trading portfolio are priced via independent providers, whether those are pricing services or quotations from market-makers in the specific instruments. In obtaining such valuation information from third parties, the Company has evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in the Company’s principal markets.

 
 
 


 
Fair value is used to measure the trading portfolio on a recurring basis.  The fair values as of March 31, 2010 and December 31, 2009 are determined as follows:

(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Quoted Prices in Active Markets for Identical Assets (Level 1)
   $ -     $ -  
Significant Other Observable Inputs (Level 2)
     102,160       119,668  
Significant Unobservable Inputs (Level 3)
     -       -  
Total Fair Value Measurements
   $ 102,160     $ 119,668  

NOTE 11.   DISCONTINUED OPERATIONS

OITRS

The results of the discontinued operations of OITRS included in the accompanying consolidated statements of operations for the three months ended March 31, 2010 and 2009 were as follows:

(in thousands)
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Net interest income (expense)
   $ (7 )   $ 63  
Gain on discontinued mortgage banking activities:
                
Fair value adjustment on retained interests
     1,384       1,274  
Other discontinued mortgage banking activities
     (15 )     491  
Other income, net of non-recurring items
     99       75  
Net servicing loss
     (2 )     (204 )
Other interest expense and loss reserves
     (47 )     (468 )
Revenues, net
     1,412       1,231  
General and administrative expenses
     (402 )     (995 )
Total income from discontinued operations, net of taxes
   $ 1,010     $ 236  

The assets and liabilities of OITRS included in the consolidated balance sheets as of March 31, 2010 and December 31, 2009 were as follows:

(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Assets
            
Cash and cash equivalents
   $ 42     $ 70  
Mortgage loans held for sale (a)
     205       207  
Retained interests, trading (b)
     5,591       5,934  
Receivables (c)
     4,893       6,046  
Prepaids and other assets
     2,044       2,075  
Assets held for sale
   $ 12,775     $ 14,332  
Liabilities
                
Accounts payable, accrued expenses and other (d and e)
     7,687       7,622  
Liabilities related to assets held for sale
   $ 7,687     $ 7,622  


 
 
 


(a) - Mortgage Loans Held for Sale

Mortgage loans held for sale consist of the following as of March 31, 2010 and December 31, 2009:

(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Mortgage loans held for sale,
   $ 2,149     $ 2,149  
Valuation allowance
     (1,944 )     (1,942 )
Total
   $ 205     $ 207  

(b) – Retained interest, trading

The following table summarizes OITRS’s residual interests in securitizations as of March 31, 2010 and December 31, 2009:

 (in thousands)
Series
Issue Date
  
March 31, 2010
    
December 31, 2009
  
HMAC 2004-1
March 4, 2004
   $ 991     $ 757  
HMAC 2004-2
May 10, 2004
     1,237       1,340  
HMAC 2004-3
June 30, 2004
     1,297       1,541  
HMAC 2004-4
August 16, 2004
     963       1,280  
HMAC 2004-5
September 28, 2004
     771       1,016  
HMAC 2004-6
November 17, 2004
     332       -  
OMAC 2005-1
January 31, 2005
     -       -  
OMAC 2005-2
April 5, 2005
     -       -  
OMAC 2005-3
June 17, 2005
     -       -  
OMAC 2005-4
August 25, 2005
     -       -  
OMAC 2005-5
November 23, 2005
     -       -  
OMAC 2006-1
March 23, 2006
     -       -  
OMAC 2006-2
June 26, 2006
     -       -  
              Total
     $ 5,591     $ 5,934  

As of March 31, 2010 and December 31, 2009, key economic assumptions and the sensitivity of the current fair value of residual cash flows to the immediate 10% and 20% adverse change in those assumptions are as follows:

(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Balance sheet carrying value of retained interests – fair value
   $ 5,591     $ 5,934  
Weighted average life (in years)
     9.27       0.22  
Prepayment assumption (annual rate)
     16.58 %     12.65 %
Impact on fair value of 10% adverse change
   $ (193 )   $ (37 )
Impact on fair value of 20% adverse change
   $ (104 )   $ (51 )
Expected credit losses (% of original unpaid principal balance)
     9.57 %     9.08 %
Impact on fair value of 10% adverse change
   $ (431 )   $ (242 )
Impact on fair value of 20% adverse change
   $ (903 )   $ (439 )
Residual cash-flow discount rate
     27.50 %     27.50 %
Impact on fair value of 10% adverse change
   $ (128 )   $ (42 )
Impact on fair value of 20% adverse change
   $ (236 )   $ (83 )
Interest rates on variable and adjustable loans and bonds
  
Forward LIBOR Yield Curve
    
Forward LIBOR Yield Curve
  
Impact on fair value of 10% adverse change
   $ (371 )   $ (113 )
Impact on fair value of 20% adverse change
   $ (507 )   $ (214 )


 
 
 


These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based upon a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of the variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another which may magnify or counteract the sensitivities. To estimate the impact of a 10% and 20% adverse change of the Forward LIBOR curve, a parallel shift in the Forward LIBOR curve was assumed based on the Forward LIBOR curve as of March 31, 2010 and December 31, 2009.

Static pool loss percentages are calculated by using the original unpaid principal balance of each pool of assets as the denominator. The following static pool loss percentages are calculated based upon all OITRS securitizations that have been completed to date:

(in thousands)
Series
Issue Date
Original Unpaid Principal Balance
As of March 31, 2010
Actual Losses
Projected Future Credit Losses
Projected Total Credit Losses
HMAC 2004-1
March 4, 2004
$ 309,710
0.91%
0.88%
1.79%
HMAC 2004-2
May 10, 2004
388,737
1.32%
1.63%
2.95%
HMAC 2004-3
June 30, 2004
417,055
1.33%
1.26%
2.59%
HMAC 2004-4
August 16, 2004
410,123
1.15%
1.09%
2.24%
HMAC 2004-5
September 28, 2004
413,875
1.66%
1.97%
3.62%
HMAC 2004-6
November 17, 2004
761,027
2.26%
1.98%
4.24%
OMAC 2005-1
January 31, 2005
802,625
2.97%
2.43%
5.40%
OMAC 2005-2
April 5, 2005
883,987
3.16%
2.86%
6.02%
OMAC 2005-3
June 17, 2005
937,117
3.87%
4.00%
7.87%
OMAC 2005-4
August 25, 2005
1,321,739
5.60%
5.50%
11.10%
OMAC 2005-5
November 23, 2005
986,277
7.71%
6.76%
14.47%
OMAC 2006-1
March 23, 2006
934,441
8.95%
8.91%
17.86%
OMAC 2006-2
June 26, 2006
491,572
16.54%
15.26%
31.80%
Total
 
$9,058,285
4.92%
4.66%
9.57%

The table below summarizes certain cash flows received from and paid to securitization trusts for the three months ended March 31, 2010 and 2009:

(in thousands)
   
Three months Ended March 31,
  
   
2010
    
2009
  
Net servicing fees paid
   $ (2 )   $ (1 )
Servicing advances and repayments
     1,140       4,346  
Cash flows received on retained interests
     1,728       2,321  

The following information presents quantitative information about delinquencies and credit losses on securitized financial assets as of March 31, 2010 and December 31, 2009:

(in thousands)
As of Date
  
Total Principal Amount of Loans
    
Principal Amount of Loans 60 Days or more delinquent
    
Net Credit Losses
  
March 31, 2010
   $ 3,129,902     $ 746,748     $ 445,266  
December 31, 2009
     3,250,632       797,883       400,920  


 
 
 


(c) – Receivables, net

Receivables consist of the following as of March 31, 2010 and December 31, 2009:

 (in thousands)
   
March 31, 2010
    
December 31, 2009
  
Servicing advances, net of allowance for doubtful accounts of $256,000
   $ 3,561     $ 4,957  
Servicing sales
     936       936  
Others
     396       153  
    $ 4,893     $ 6,046  

Receivables are carried at their estimated collectible amounts.  The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: past transaction activity, current economic conditions and changes in customer payment terms. Amounts that the Company determines are no longer collectible are written off.  Collections on amounts previously written off are included in income as received.

 (d)  - Income taxes

OITRS is a taxpaying entity for income tax purposes and is taxed separately from Bimini Capital.  Therefore, OITRS separately reports an income tax provision or benefit based on its own taxable activities.  As of March 31, 2010 and December 31, 2009, all deferred tax assets are fully provided for with a valuation allowance.  Substantially all of the deferred tax assets are a result of net tax losses incurred.  During the three months ended March 31, 2010 and 2009, a portion of the deferred tax asset valuation allowance was reversed, as the utilization of this portion of the deferred tax asset was deemed more likely than not, due to the utilization of tax net operating losses to offset estimated taxable income for the respective three-month periods; therefore, there are no income tax provisions related to the results of operations.  The income tax provision for the periods ended March 31, 2010 and 2009 differ from the amount determined by applying the statutory Federal rate of 35% to the pre-tax income due primarily to the recording of, and adjustments to, the deferred tax asset valuation allowances.
 
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income within OITRS.  At March 31, 2010, management continues to believe that it is more likely than not that the Company will not realize the full benefits of all deferred tax assets of OITRS;  therefore, an allowance for the full amount of the deferred tax assets has been recorded.
 
As of March 31, 2010, OITRS had an estimated federal net operating loss (“NOL”) carryforward of approximately $273 million, and estimated available state NOLs of $68 million, which begin to expire in 2025, and are fully available to offset future taxable income.
 
During 2008, OITRS re-evaluated a previous tax position with regards to the taxability of excess inclusion income (“EII”).  OITRS holds residual interests in various real estate mortgage investment conduits (“REMICs”), some of which generate EII pursuant to specific provisions of the Code.  OITRS based its previously-held tax position on advice received from tax consultants regarding the taxability of EII, including the aggregation (or non-aggregation) of the tax inputs from all REMICs owned for purposes of the EII tax computation.  As a result of the re-evaluation of the tax position, which included consulting with additional tax experts, OITRS now believes that it is no longer more likely than not that the tax position would be fully sustained upon examination, even though the exact computational methods and the ultimate EII tax due (if any) are still uncertain.  Therefore, OITRS recorded a 2008 tax provision for $1.5 million for taxes that may be due on EII.  Interest through March 31, 2010 has been accrued in the amount of $0.6 million.  OITRS is continuing to research all the tax issues relating to EII and its ownership of the REMICs, and will adjust the tax and interest accrual in future periods as the uncertainty is resolved.
 

 
 
 


(e) – Commitments and Contingencies

Loans Sold to Investors. Generally, OITRS was not exposed to significant credit risk on its loans sold to investors. In the normal course of business, OITRS provided certain representations and warranties during the sale of mortgage loans which obligated it to repurchase loans which are subsequently unable to be sold through the normal investor channels. The repurchased loans were secured by the related real estate properties, and can usually be sold directly to other permanent investors. There can be no assurance, however, that OITRS will be able to recover the repurchased loan value either through other investor channels or through the assumption of the secured real estate.
 
OITRS recognized a liability for the estimated fair value of this obligation at the inception of each mortgage loan sale based on the anticipated repurchase levels and historical experience.
 
Changes in this liability for the three months ended March 31, 2010 and 2009 are presented below:
 
(in thousands)
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Balance—Beginning of period
   $ 5,149     $ 7,303  
Provision
     50       468  
Settlements
     (2 )     (2,622 )
Balance—End of period
   $ 5,197     $ 5,149  

Litigation Contingencies. OITRS is involved in various lawsuits and claims, both actual and potential, including some that it has asserted against others, in which monetary damages and other relief is sought.  The resolution of such lawsuits and claims is inherently unpredictable.  In accordance with GAAP, OITRS accrues for loss contingencies only when it is both probable that a loss has actually been incurred and the amount of such loss is reasonably estimable.  The lawsuits and claims involving OITRS, the most significant of which are described below, relate primarily to contractual disputes arising out of the ordinary course of OITRS's business as previously conducted. 

On June 14, 2007, a complaint was filed in the Circuit Court of the Twelfth Judicial District in and for Manatee County, Florida by Coast Bank of Florida against OITRS seeking monetary damages and specific performance and alleging breach of contract for allegedly failing to repurchase approximately fifty loans.  A mediation hearing was held on February 23, 2010.  The parties have agreed to continue mediation talks but have yet to reach a settlement. In the event a settlement is not reached, the Company believes that the plaintiff’s claims are without merit and it will continue to defend the complaint vigorously.

(f) – Fair Value

OITRS measures or monitors many of its assets on a fair value basis. Fair value is used on a recurring basis for certain assets in which fair value is the primary basis of accounting. Examples of these include, loans held for sale and retained interests. Depending on the nature of the asset or liability, OITRS uses various valuation techniques and assumptions when estimating the instrument’s fair value.

Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, OITRS considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, OITRS looks to active and observable markets to price identical assets or liabilities. If identical assets and liabilities are not traded in active markets, OITRS would look to market observable data for similar assets and liabilities. However, if similar assets and liabilities are not actively traded in observable markets, then OITRS must use alternative valuation techniques to derive a fair value measurement.


 
 
 


The following table presents financial assets measured at fair value on a recurring basis:
 
 
(in thousands)
         
Fair Value Measurements at March 31, 2010, Using
  
   
Fair Value Measurements
    
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
Mortgage loans held for sale
   $ 205     $ -     $ -     $ 205  
Retained interests, trading
     5,591       -       -       5,591  

A reconciliation of activity for the three months ended March 31, 2010 for assets measured at fair value based on significant unobservable (non-market) information (Level 3) is presented in the following table:

(in thousands)
   
Mortgage Loans Held for Sale
    
Retained Interests, Trading
  
Beginning balance
   $ 207     $ 5,934  
Gain (loss) included in earnings
     (16 )     1,384  
Collections, losses and settlements
     14       (1,727 )
Ending Balance
   $ 205     $ 5,591  

Gains and losses included in earnings for the three months ended March 31, 2010 and 2009 are reported in income on discontinued mortgage banking activities.

NOTE 12.   SUBSEQUENT EVENTS

The following events or transactions were not recognized in the consolidated financial statements. The Company evaluated subsequent events through the date these financial statements were issued.

Dividends

At a meeting of the Board of Directors of Bimini Capital on April 1, 2010, the members of the Board declared a common stock dividend of $0.03 per share, which was paid in cash on April 30, 2010 to shareholders of record on April 15, 2010.  The dividend paid on April 30, 2010 totaled $314,000.
 

 
 
 


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

FORWARD-LOOKING STATEMENTS
 
When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (the “Commission”) or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
 
These forward-looking statements are subject to various risks and uncertainties, including, but not limited to, those described or incorporated by reference in Part II - Item 1A - Risk Factors of this Form 10-Q. These and other risks, uncertainties and factors, including those described in reports that the Company files from time to time with the Commission, could cause the Company’s actual results to differ materially from those reflected in such forward-looking statements. All forward-looking statements speak only as of the date they are made and the Company does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

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

Introduction

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

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

On April 18, 2007, the Board of Managers of OITRS, at the recommendation of the Board of Directors of the Company, approved the closure of the wholesale and conduit mortgage loan origination channels.  Both channels ceased accepting new applications for mortgage loans on April 20, 2007.  On May 7, 2007, OITRS signed a binding agreement, later amended, to sell its retail mortgage loan origination channel to a third party.  The transaction closed on June 30, 2007 and OITRS has not operated a mortgage loan origination business since that date.


 
 
 


DIVIDENDS TO STOCKHOLDERS

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

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

As a REIT, Bimini Capital may be subject to a federal excise tax if Bimini Capital distributes less than 85% of its taxable income by the end of the calendar year.  Accordingly, Bimini Capital’s dividends are based on its taxable income, as determined for federal income tax purposes, as opposed to its net income computed in accordance with GAAP (as reported in the accompanying consolidated financial statements).

Results of Operations

PERFORMANCE OVERVIEW

Described below are the Company’s results of operations for the three months ended March 31, 2010, as compared to the Company’s results of operations for the three months ended March 31, 2009. During the year ended December 31, 2007, the Company ceased all mortgage origination business at OITRS, and therefore the results of those operations are reported in the financial statements as discontinued operations.

Loss from continuing operations for the three months ended March 31, 2010 was $2.0 million, compared to income from continuing operations of $1.9 million for the three months ended March 31, 2009. Consolidated net loss for the three months ended March 31, 2010 was $1.0 million, compared to a consolidated net income of $2.2 for the three months ended March 31, 2009. Consolidated net loss per basic and diluted share of Class A Common Stock was $0.12, for the three months ended March 31, 2010, compared to a consolidated net income per basic and diluted share of Class A Common Stock of $0.81, for the comparable prior period.

PERFORMANCE OF BIMINI CAPITAL’S MBS PORTFOLIO

For the three months ended March 31, 2010, the REIT generated $1.83 million of net portfolio interest income, consisting of $1.90 million of interest income from MBS assets offset by $0.07 million of interest expense on repurchase liabilities.  For the comparable period ended March 31, 2009, the REIT generated $3.42 million of net portfolio interest income, consisting of $3.67 million of interest income from MBS assets offset by $0.25 million of interest expense on repurchase liabilities.  During the three months ended March 31, 2010, average investment securities held were approximately 16% lower than the comparable period ended March 31, 2009, and the yield on average interest earning assets was also approximately 355 basis points lower.  The MBS portfolio was reduced slightly near the end of the three month period ended March 31, 2010 in order to avoid elevated prepayments owing to Fannie Mae and Freddie Mac prepayments associated with delinquent loan buy-outs announced during the period.  The MBS portfolio was also reduced relative to the 2009 period in order to fund the extinguishment of approximately 74% of the Company’s junior subordinated debt securities in the second and third quarters of 2009.  Finally, the average yield on the Company’s derivative MBS portfolio decreased in the 2010 period over the comparable period in 2009, representing the bulk of the 355 basis point decline in yield on average interest earning assets.  The combination of the smaller portfolio size and reduced asset yield contributed to a decline in portfolio interest income of approximately $1.78 million compared to the three months ended March 31, 2010.  The decline in portfolio interest income more than offset the decline in repurchase agreement interest expense of $0.19 million, which was attributable in part to a 60 basis point decline in the Company’s average cost of funds.


 
 
 


Interest expense on the Company’s junior subordinated debt securities was $0.55 million for the three months ended March 31, 2010, compared to $2.09 million for the comparable period in the prior year.  During 2009, the Company was able to extinguish $76.3 million of its $103.1 million in outstanding junior subordinated notes.

Bimini Capital had $0.01 million in realized losses (based on security prices from the previous quarter) from the sales of securities in the MBS portfolio during the three months ended March 31, 2010, compared to gains of $1.14 million for the three months ended March 31, 2009. Market value adjustments to the Company’s investment portfolio resulted in unrealized losses of approximately $1.89 million for the three months ended March 31, 2010 compared to $0.56 million of unrealized gains for the same period in 2009.  As a result, (losses)/gains on trading securities were ($1.90) million and $1.69 million, for the three months ended March 31, 2010, and March 31, 2009, respectively.  The declines for the 2010 period were predominantly the result of mark to market adjustments to the Company’s derivative positions, resulting from the Fannie Mae and Freddie Mac buy-out activity described above.

For the three months ended March 31, 2010, Bimini Capital’s general and administrative costs were approximately $1.25 million, compared to approximately $0.95 million for the three months ended March 31, 2009.  Compensation and related benefits were approximately $0.42 million for the three months ended March 31, 2010 representing an increase of approximately $0.1 million from the comparable period in the prior year.  Audit, legal and professional fees were $0.56 million for the three months ended March 31, 2010, representing an increase of approximately $0.17 million. The increase in audit, legal and professional fees was predominantly associated with legal costs.

For the three months ended March 31, 2010, (loss)/income from continuing operations was ($2.02) million compared to $1.92 million for the period ended March 31, 2009.  The decline in interest income of $1.78 million and the increase in general and administrative expenses of $0.32 million negated the decline in interest expense on the Company’s junior subordinated debt of approximately $1.54 million.  Results of continuing operations were further negatively impacted by the $3.59 million reversal of realized and unrealized gains on trading securities (gains/(losses) on trading securities were ($1.90) million and $1.69 million, for the three months ended March 31, 2010, and March 31, 2009, respectively).

As of March 31, 2010, the MBS portfolio consisted of $102.1 million of agency or government MBS at fair value and had a weighted average coupon on assets of 4.45% and a net weighted average borrowing cost of 0.26%.  The following tables summarize Bimini Capital’s agency and government mortgage related securities as of March 31, 2010 and December 31, 2009:

(in thousands)
Asset Category
  
Fair
 Value
Percentage of
Entire
Portfolio
Weighted
Average
Coupon
Weighted
Average
Maturity in
Months
Longest
Maturity
Weighted
Average Coupon
Reset in Months
Weighted
Average
Lifetime Cap
Weighted
Average
Periodic Cap
March 31, 2010
                  
Adjustable-Rate MBS
$
13,865
13.6%
2.57%
203
1-Jan-32
2.12
11.66%
27.38%
Fixed-Rate MBS
  
33,973
33.3%
5.21%
198
1-Oct-37
n/a
n/a
n/a
Hybrid Adjustable-Rate MBS
  
36,272
35.4%
3.85%
355
1-Dec-39
55.03
8.85%
2.00%
Total Mortgage-backed Pass-through
  
84,110
82.3%
4.19%
263
1-Dec-39
40.40
9.63%
6.86%
Derivative MBS
  
18,050
17.7%
5.65%
247
15-Aug-38
n/a
n/a
n/a
Total Mortgage Assets
$
102,160
100.0%
4.45%
263
1-Dec-39
40.40
n/a
6.86%
December 31, 2009
                  
Adjustable-Rate MBS
$
32,598
27.2%
3.75%
261
1-Oct-35
4.87
11.16%
10.34%
Fixed-Rate MBS
  
5,242
4.4%
6.50%
333
1-Oct-37
n/a
n/a
n/a
Hybrid Adjustable-Rate MBS
  
67,036
56.0%
4.45%
338
1-Dec-39
40.27
9.45%
2.00%
Total Mortgage-backed Pass-through
  
104,876
87.6%
4.33%
305
1-Dec-39
28.69
10.01%
4.40%
Derivative MBS
  
14,793
12.4%
5.59%
240
25-Jan-39
n/a
n/a
n/a
Total Mortgage Assets
$
119,669
100.0%
4.49%
305
1-Dec-39
28.69
n/a
4.40%


 
 
 


(in thousands)
   
March 31, 2010
    
December 31, 2009
  
Agency
  
Fair Value
    
Percentage of
Entire Portfolio
    
Fair Value
    
Percentage of
Entire Portfolio
  
Fannie Mae
   $ 87,037       85.20 %   $ 108,775       90.9 %
Freddie Mac
     15,123       14.80 %     10,894       9.1 %
Total Portfolio
   $ 102,160       100.00 %   $ 119,669       100.0 %

Entire Portfolio
  
March 31, 2010
    
December 31, 2009
  
Weighted Average Pass Through Purchase Price
   $ 103.66     $ 103.13  
Weighted Average Derivative Purchase Price
     5.11       4.66  
Weighted Average Pass Through Current Price
   $ 104.28     $ 103.79  
Weighted Average Derivative Current Price
   $ 5.16     $ 4.93  
Effective Duration (1)
     2.643       1.593  

(1) Effective duration of 2.643 indicates that an interest rate increase of 1.0% would be expected to cause a 2.643% decline in the value of the MBS in the Company’s investment portfolio at March 31, 2010.  An effective duration of 1.593 indicates that an interest rate increase of 1.0% would be expected to cause a 1.593% decline in the value of the MBS in the Company’s investment portfolio at December 31, 2009. These figures include the derivative securities in the portfolio.

Bimini Capital’s portfolio of pass-through MBS (“PT MBS”) will typically be comprised of adjustable-rate MBS, fixed-rate MBS and hybrid adjustable-rate MBS. Bimini Capital seeks to acquire low duration assets that offer high levels of protection from mortgage prepayments. Although the duration of an individual asset can change as a result of changes in interest rates, Bimini Capital strives to maintain a PT MBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying Bimini Capital’s portfolio of PT MBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from Bimini Capital’s investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales.

The duration of Bimini Capital’s IO and IIO portfolio will vary greatly owing to the structural features of the securities.  While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IO’s may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. With respect to IIO’s, prepayments affect their durations in a similar fashion to that of IO’s, but the floating rate nature of their coupon (which is inversely related to the level of one month LIBOR) cause their price movements – and model duration - to be affected by changes in both prepayments and one month LIBOR – both current and anticipated levels.  As a result, the duration of IIO securities will also vary greatly.

Prepayments on the loans underlying Bimini Capital’s MBS can alter the timing of the cash flows from the underlying loans to the Company. As a result, Bimini Capital gauges the interest rate sensitivity of its assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments. Although some of the fixed-rate MBS in Bimini Capital’s portfolio are collateralized by loans with a lower propensity to prepay when the contract rate is above prevailing rates, their price movements track securities with like contract rates and therefore exhibit similar effective duration.

Bimini Capital faces the risk that the market value of its assets will increase or decrease at different rates than that of its liabilities, including its hedging instruments.  Accordingly, the Company assesses its interest rate risk by estimating the duration of its assets and the duration of its liabilities. Bimini Capital generally calculates duration using various third party models.  However, empirical results and different third party models may produce different duration numbers for the same securities.


 
 
 


The following sensitivity analysis shows the estimated impact on the fair value of Bimini Capital's interest rate-sensitive investments as of March 31, 2010, assuming rates instantaneously fall 100 basis points, rise 100 basis points and rise 200 basis points:

(in thousands)
         
Interest Rates Fall 100 BPS
    
Interest Rates Rise 100 BPS
    
Interest Rates Rise 200 BPS
  
Adjustable Rate MBS
                        
Fair Value
   $ 13,865    
 
    
 
    
 
  
Change in Fair Value
           $ 112     $ (112 )   $ (224 )
Change as a % of Fair Value
             0.81 %     (0.81 )%     (1.62 )%
Fixed Rate MBS
                                
Fair Value
   $ 33,973                          
Change in Fair Value
           $ 1,199     $ (1,199 )   $ (2,398 )
Change as a % of Fair Value
             3.53 %     (3.53 )%     (7.06 )%
Hybrid Adjustable Rate MBS
                                
Fair Value
   $ 36,272                          
Change in Fair Value
           $ 1,118     $ (1,118 )   $ (2,237 )
Change as a % of Fair Value
             3.08 %     (3.08 )%     (6.17 )%
Derivative MBS
                                
Fair Value
   $ 18,050                          
Change in Fair Value
           $ 271     $ (271 )   $ (541 )
Change as a % of Fair Value
             1.50 %     (1.50 )%     (3.00 )%
Portfolio Total
                                
Fair Value
   $ 102,160                          
Change in fair Value
           $ 2,700     $ (2,700 )   $ (5,400 )
Change as a % of Fair Value
             2.64 %     (2.64 )%     (5.29 )%
Cash
                                
Fair Value
   $ 5,159                          


 
 
 


The table below reflects the same analysis presented above but with the figures in the columns that indicate the estimated impact of a 100 basis point fall or rise adjusted to reflect the impact of convexity.

(in thousands)
         
Interest Rates Fall 100 BPS
    
Interest Rates Rise 100 BPS
    
Interest Rates Rise 200 BPS
  
Adjustable Rate MBS
                        
Fair Value
   $ 13,865    
 
    
 
    
 
  
Change in Fair Value
           $ 78     $ (133 )   $ (319 )
Change as a % of Fair Value
             0.56 %     (0.97 )%     (2.30 )%
Fixed Rate MBS
                                
Fair Value
   $ 33,973                          
Change in Fair Value
           $ 934     $ (1,335 )   $ (2,777 )
Change as a % of Fair Value
             2.75 %     (3.93 )%     (8.18 )%
Hybrid Adjustable Rate MBS
                                
Fair Value
   $ 36,272                          
Change in Fair Value
           $ 503     $ (1,405 )   $ (3,093 )
Change as a % of Fair Value
             1.39 %     (3.87 )%     (8.53 )%
Derivative MBS
                                
Fair Value
   $ 18,050                          
Change in Fair Value
           $ (2,155 )   $ 928     $ 64  
Change as a % of Fair Value
             (11.94 )%     5.14 %     0.35 %
Portfolio Total
                                
Fair Value
   $ 102,160                          
Change in fair Value
           $ (641 )   $ (1,946 )   $ (6,126 )
Change as a % of Fair Value
             (0.63 )%     (1.91 )%     (6.00 )%
Cash
                                
Fair Value
   $ 5,159                          

In addition to changes in interest rates, other factors impact the fair value of Bimini Capital's interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of Bimini Capital's assets would likely differ from that shown above and such difference might be material and adverse to Bimini Capital's stockholders.


 
 
 


The table below shows Bimini Capital’s average investments held, total interest income, yield on average earning assets, average repurchase obligations outstanding, interest expense, average cost of funds, net interest income and net interest spread for the quarter ended March 31, 2010, and the twenty-four previous quarters for Bimini Capital’s portfolio of MBS securities only. The data in the table below does not include information pertaining to discontinued operations at OITRS.

RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED
(in thousands)
Quarter Ended
  
Average
Investment
Securities Held
    
Total Interest Income
    
Quarterly Retrospective Adj.
    
Premium Lost due to Paydowns
    
Yield on Average Interest Earning Assets (1)
    
Average Balance of Repurchase Agreements Outstanding
    
Interest Expense (2)
    
Average Cost of Funds (2)
    
Net Interest Income
    
Net Interest Spread
    
Trust Preferred Interest Expense
  
March 31, 2010
   $ 110,914       1,898       -       23       6.76 %   $ 88,495       68       0.31 %   $ 1,830       6.45 %   $ 550  
December 31, 2009
     112,973       1,784       -       1,554       0.82 %     80,904       59       0.29 %     1,725       0.52 %     617  
September 30, 2009
     100,386       2,882       -       1,787       4.37 %     65,712       69       0.42 %     2,813       3.95 %     982  
June 30, 2009
     92,949       2,683       -       627       8.85 %     72,312       105       0.58 %     2,578       8.27 %     1,204  
March 31, 2009
     131,756       3,674       -       277       10.31 %     111,715       254       0.91 %     3,420       9.41 %     1,933  
December 31, 2008
     199,338       3,093       -       458       5.29 %     174,701       1,114       2.55 %     1,979       2.74 %     1,933  
September 30, 2008
     375,239       6,149       -