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Sunset of Reduced Tax Rate Provisions

 

 

Several of the tax considerations described herein are subject to a sunset provision in the Code as it is presently written. The sunset provisions generally provide that, for taxable years beginning after December 31, 2010, certain provisions that are currently in the Code will revert back to a prior version of those provisions. These provisions include provisions related to the reduced maximum income tax rate for long term capital gains of 15% (rather than 20%) for taxpayers taxed at individual rates, the application of the 15% tax rate to qualified dividend income, and certain other tax rate provisions described herein. The impact of this reversion is not discussed herein. Consequently, you should consult your tax advisor regarding the effect of sunset provisions on an investment in our common stock.

 

State, Local and Foreign Taxes

 

 

We and/or our stockholders may be subject to taxation by various states, localities or foreign jurisdictions, including those in which we or a stockholder transacts business, owns property or resides. We may own properties located in numerous jurisdictions and may be required to file tax returns in some or all of those jurisdictions. The state, local and foreign tax treatment may differ from the federal income tax treatment described above. Consequently, you should consult your tax advisor regarding the effect of state, local and foreign income and other tax laws upon an investment in the common stock.

 

ITEM 1A.  RISK FACTORS.

RISKS RELATED TO OUR BUSINESS

 

No assurance can be given that the actions taken by the U.S. Government for the purpose of seeking to stabilize the financial and credit markets and stimulate the economy will achieve the intended effect on, or benefit to, our business, and further government or market developments could adversely affect us.

 

 

In response to the financial issues affecting the banking system, the financial and housing markets and the economy as a whole, the U.S. Government has implemented a number of initiatives intended to bolster the banking system, the financial and housing markets and the economy as a whole.  These actions include: (i) the Emergency Economic Stabilization Act of 2008 (“EESA”), which established the Troubled Asset Relief Program (“TARP”), (ii) the voluntary Capital Purchase Program (“CPP”), which was implemented under authority provided in the EESA and gives the U.S. Treasury the authority to purchase up to $250 billion of senior preferred shares in qualifying U.S. controlled banks, saving associations, and certain bank and savings and loan holding companies engaged only in financial activities, (iii) a program to purchase $200 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and $1.25 trillion in RMBS issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, (iv) the establishment of a temporary guaranty program designed to stabilize the money market fund industry, (v) the creation of a new funding mechanism, the Financial Stability Trust, that will provide financial institutions with bridge financing until such institutions can raise capital in the capital markets, (vi)  the creation of a Public-Private Investment Fund for private investors to purchase mortgages and mortgage-related assets from financial institutions, (vii) the Term Asset-Back Securities Loan Facility with the goal of increasing securitization activity for various consumer and commercial loans and other financial assets, including student loans, automobile loans and leases, credit card receivables, SBA small business loans and commercial mortgage-backed securities and (viii) the American Recovery and Reinvestment Act of 2009 (“ARRA”), which includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs.  For a more detailed description of these initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trends and Recent Market Impacts.”

 

 

No assurance can be given that these initiatives will have a beneficial impact on the banking system, financial market or housing market.  To the extent the markets do not respond favorably to these initiatives or if these initiatives do not function as intended, the pricing, supply, liquidity and value of our assets and the availability of financing on attractive terms may be materially adversely affected.

 

 

 

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Interest rate mismatches between our Agency RMBS and our borrowings used to fund purchases of our Agency RMBS may reduce our net interest margin during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Our portfolio includes Agency RMBS backed by ARMs, hybrid ARMs, and fixed-rate mortgages and the mix of these securities in the portfolio may be increased or decreased over time. Additionally, the interest rates on ARMs and hybrid ARMS may vary over time based on changes in a short-term interest rate index, of which there are many.

 

 

We finance our acquisitions of Agency RMBS with short-term financing ARMs that have interest rates based on indices and repricing terms similar to, but perhaps with shorter maturities than, the interest rate indices and repricing terms of these securities.  During periods of rising short-term interest rates, the income we earn on our Agency RMBS will not change (with respect to Agency RMBS backed by fixed-rate mortgage loans) or will not increase at the same rate (with respect to Agency RMBS backed by ARMs and hybrid ARMs) as our related financing costs, which may reduce our net interest margin or result in losses.

 

 

Interest rate fluctuations will also cause variances in the yield curve, which illustrates the relationship between short-term and longer-term interest rates.  If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve) or exceed long-term interest rates (an inversion of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on the related Agency RMBS because the related Agency RMBS may bear interest based on longer-term rates than our borrowings.  Consequently, a flattening or inversion of the yield curve may reduce our net interest margin or result in losses.

 

 

Additionally, to the extent cash flows from Agency RMBS are reinvested in new Agency RMBS, the spread between the yields of the new Agency RMBS and available borrowing rates may decline, which could reduce our net interest margin or result in losses.  Any one of the foregoing risks could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We are currently a defendant in securities class action lawsuits and may incur expenses that are not covered by insurance in the defense of these lawsuits.  Any expenses incurred that are not reimbursed by insurance could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We have been named as a defendant in two lawsuits alleging various violations of the federal securities laws and seeking class action certification.  See “Business—Legal Proceedings,” for a description of these lawsuits.  These cases involve complex legal proceedings, the outcomes of which are difficult to predict.  An unfavorable outcome or settlement of these lawsuits that is not covered by insurance could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We depend primarily on two individuals to operate our business, and the loss of one or both of  such persons could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We depend substantially on two individuals, Robert E. Cauley, our Chairman and Chief Executive Officer, and G. Hunter Haas, our President, Chief Investment Officer and Chief Financial Officer, to manage our business.  We depend on the diligence, experience and skill of Mr. Cauley and Mr. Haas in managing all aspects of our business, including the selection, acquisition, structuring and monitoring of securities portfolios and associated borrowings. Although we have entered into contracts with Mr. Cauley and Mr. Haas that encourage their continued employment, those contracts may not prevent either Mr. Cauley or Mr. Haas from leaving our company. The loss of either of them could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

 

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The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. Government, may adversely affect our business.

 

 

The payments we receive on the Agency RMBS in which we invest depend upon a steady stream of payments on the mortgages underlying the securities and are guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.  Ginnie Mae is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the United States.  Fannie Mae and Freddie Mac are U.S. Government-sponsored entities, or GSEs, but their guarantees are not backed by the full faith and credit of the United States.

 

 

Since 2007, Fannie Mae and Freddie Mac have reported substantial losses and a need for substantial amounts of additional capital.  In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the recent credit market disruption, Congress and the U.S. Treasury undertook a series of actions to stabilize these GSEs and the financial markets generally.  The Housing and Economic Recovery Act of 2008 was signed into law on July 30, 2008, and established the Federal Housing Finance Agency, or FHFA, with enhanced regulatory authority over, among other things, the business activities of Fannie Mae and Freddie Mac and the size of their portfolio holdings.  On September 7, 2008, in response to the deterioration in the financial condition of Fannie Mae and Freddie Mac, the FHFA placed Fannie Mae and Freddie Mac into conservatorship, which is a statutory process pursuant to which the FHFA will operate Fannie Mae and Freddie Mac as conservator in an effort to stabilize the entities, and together with the U.S. Treasury and the U.S. Federal Reserve, has undertaken actions designed to boost investor confidence in Fannie Mae and Freddie Mac, support the availability of mortgage financing and protect taxpayers.  Appointing FHFA as conservator of both Fannie Mae and Freddie Mac allows the FHFA to control the actions of the two GSEs without forcing them to liquidate, which would be the case under receivership.  In addition, the U.S. Treasury has taken steps to capitalize and provide financing to Fannie Mae and Freddie Mac and agreed to purchase direct obligations and Agency RMBS issued or guaranteed by Fannie Mae or Freddie Mac.  For a more detailed description of the actions taken by the U.S. Government with respect to Fannie Mae and Freddie Mac, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trends and Recent Market Impacts.”

 

 

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury, in announcing the actions, noted that the guarantee structure of Fannie Mae and Freddie Mac required examination and that changes in the structures of the entities were necessary to reduce risk to the financial system.  The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to historical measurements.  Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes Agency RMBS and could have broad adverse market implications as well as negatively impact us.

 

 

The problems faced by Fannie Mae and Freddie Mac resulting in their being placed into federal conservatorship have stirred debate among some federal policy makers regarding the continued role of the U.S. Government in providing liquidity for the residential mortgage market.  Following expiration of the current authorization, each of Fannie Mae and Freddie Mac could be dissolved and the U.S. Government could decide to stop providing liquidity support of any kind to the mortgage market.  If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically, we would not be able to acquire Agency RMBS from these companies, which would drastically reduce the amount and type of Agency RMBS available for investment, which are our only targeted investments.

 

 

Our income could be negatively affected in a number of ways depending on the manner in which related events unfold.  For example, the current credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rate we receive from Agency RMBS, thereby tightening the spread between the interest we earn on our portfolio of targeted investments and our cost of financing that portfolio.  A reduction in the supply of Agency RMBS could also increase the prices of Agency RMBS we seek to acquire by reducing the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio.

 

 

 

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As indicated above, recent legislation has changed the relationship between Fannie Mae and Freddie Mac and the U.S. Government and requires Fannie Mae and Freddie Mac to reduce the amount of mortgage loans they own or for which they provide guarantees on Agency RMBS.  The effect of the actions taken by the U.S. Government remain uncertain.  Furthermore, the scope and nature of the actions that the U.S. Government will ultimately undertake are unknown and will continue to evolve.  Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. Government, and could also nationalize or eliminate these GSEs entirely.  Any law affecting these GSEs may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac.  As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac Agency RMBS.  It is also possible that such laws could adversely impact the market for such securities and spreads at which they trade.  All of the foregoing could materially adversely affect the pricing, supply, liquidity and value of our target assets and otherwise materially adversely affect our business, operations and financial condition and our ability to pay distributions to our stockholders.

 

 

Increased levels of prepayments on the mortgages underlying our Agency RMBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on ARMS, hybrid ARMs and fixed-rate mortgage loans.  When we acquire Agency RMBS, we anticipate that the underlying mortgages will prepay at a projected rate, generating an expected yield. When borrowers prepay their mortgage loans faster than expected, it results in corresponding prepayments on the related Agency RMBS that are faster than expected. Faster-than-expected prepayments could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders in various ways, including the following:

 

 

A portion of our Agency RMBS backed by ARMs and hybrid ARMs may initially bear interest at rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If an Agency RMBS backed by ARMs or hybrid ARMs is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that Agency RMBS while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

 

 

If we are unable to acquire new Agency RMBS to replace the prepaid Agency RMBS, our returns on capital may be lower than if we were unable to quickly acquire new Agency RMBS.

 

 

While we seek to minimize prepayment risk, we must balance prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us from prepayment or other such risks.

 

 

Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our Agency RMBS, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

During the second half of 2008, the U.S. Government, through the Federal Housing Authority, or FHA, and the Federal Deposit Insurance Corporation, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. One such program is the Hope for Homeowners program, which is effective from October 1, 2008 through September 30, 2011 and will enable certain distressed borrowers to refinance their mortgages into FHA-insured loans.  The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.

 

 

In addition, in February 2008 the U.S. Treasury announced the Homeowner Affordability and Stability Plan, or HASP, which is multi-faceted plan intended to prevent residential mortgage foreclosures by, among other things:

 

 

·	allowing certain homeowners whose homes are encumbered by Fannie Mae or Freddie Mac conforming mortgages to refinance those mortgages into lower interest rate mortgages with either Fannie Mae or Freddie Mac;

 

 

·	creating the Homeowner Stability Initiative, which is intended to utilize various incentives for banks and mortgage servicers to modify residential mortgage loans with the goal of reducing monthly mortgage principal and interest payments for certain qualified homeowners; and

 

 

 

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·	allowing judicial modifications of Fannie Mae and Freddie Mac conforming residential mortgages loans during bankruptcy proceedings.

 

 

It is likely that loan modifications would result in increased prepayments on some Agency RMBS.  These loan modification programs, as well as legislative or regulatory actions, including amendments to the bankruptcy laws that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the Agency RMBS in which we invest, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed.

 

 

In many cases, our determination of the fair value of our assets is based on valuations provided by third-party dealers and pricing services, however, valuations of certain assets are often difficult to obtain or are unreliable.  Therefore, we can and do value assets, to the extent third-party valuations are not reasonably available, based upon our judgment. Our valuations, for many reasons, may differ from those that could be obtained from third-party dealers and pricing services.  In general, dealers and pricing services heavily disclaim their valuations.  Additionally, dealers may claim to finish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty.  Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another.  The valuation process has been particularly difficult recently as market events have made valuations of certain assets more difficult and unpredictable and the disparity of valuations provided by third-party dealers has widened.

 

 

Our business, financial condition and results of operations and our ability to make distributions to our shareholders could be materially adversely affected if our fair value determinations of these assets were materially higher than the values that would exist if a ready market existed for these assets.

 

 

We may incur increased borrowing costs which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Our borrowing costs under repurchase agreements are generally adjustable and correspond to short-term interest rates, such as LIBOR or a short-term Treasury index, plus or minus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, without limitation:

 

 

·	the movement of interest rates;

 

 

·	the availability of financing in the market; and

 

 

·	the value and liquidity of our Agency RMBS.

 

 

Most of our borrowings are collateralized borrowings in the form of repurchase agreements. If the interest rates on these repurchase agreements increase, our business, financial condition and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

 

 

 

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Interest rate caps on the ARMs and hybrid ARMs backing our Agency RMBS may reduce our net interest margin during periods of rising interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan. Our borrowings typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, our financing costs could increase without limitation while caps could limit the interest we earn on the ARMs and hybrid ARMs backing our Agency RMBS. This problem is magnified for ARMs and hybrid ARMs that are not fully indexed. Further, some ARMs and hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on Agency RMBS backed by ARMs and hybrid ARMs than necessary to pay interest on our related borrowings.  Interest rate caps on Agency RMBS backed by ARMs and hybrid ARMs could reduce our net interest margin if interest rates were to increase beyond the level of the caps, which could materially adversely affect our business, financial condition and results of operation and our ability to pay distributions to our stockholders.

 

 

Our leverage strategy could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Under normal market conditions, we generally seek to borrow between eight and 12 times the amount of our equity, although at times our borrowings may be above or below this range.  We incur this indebtedness by borrowing against a substantial portion of the market value of our Agency RMBS. Our total indebtedness, however, is not expressly limited by our policies and will depend on our and our prospective lenders’ estimates of the stability of our portfolio’s cash flow. As a result, there is no limit on the amount of leverage that we may incur. We face the risk that we might not be able to meet our debt service obligations or a lender’s margin requirements from our income and, to the extent we cannot, we might be forced to liquidate some of our Agency RMBS at unfavorable prices. Our use of leverage could materially adversely affect our business, financial condition and results of operation and our ability to pay distribution to our stockholders.  For example:

 

 

A majority of our borrowings are secured by our Agency RMBS, generally under repurchase agreements. A decline in the market value of the Agency RMBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency RMBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency RMBS, we would experience losses.

 

 

A default under an Agency RMBS that constitutes collateral for a loan could also result in an involuntary liquidation of the Agency RMBS, including any cross-collateralized Agency RMBS. This would result in a loss to us of the difference between the value of the Agency RMBS upon liquidation and the amount borrowed against the Agency RMBS.

 

 

To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which could jeopardize our qualification as a REIT. Losing our REIT qualification would cause us to lose tax advantages applicable to REITs and would decrease profitability and distributions to stockholders.

 

 

If we experience losses as a result of our leverage policy, such losses would reduce the amounts available for distribution to stockholders.

 

 

 

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We depend on borrowings to purchase our Agency RMBS and reach our desired amount of leverage. If we fail to obtain or renew sufficient funding on favorable terms or at all, we will be limited in our ability to acquire Agency RMBS, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We depend on borrowings to fund acquisitions of Agency RMBS and reach our desired amount of leverage. Accordingly, our ability to achieve our investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms.  In addition, we must be able to renew or replace our maturing borrowings on a continuous basis.  The current dislocation and weakness in the broader mortgage markets could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing.  This could potentially increase our financing costs and reduce our liquidity. If we cannot renew or replace maturing borrowings on favorable terms or at all, we may have to sell our Agency RMBS under adverse market conditions, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Adverse market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Adverse market developments, including a sharp or prolonged rise in interest rates, a change in prepayment rates or increasing market concern about the value or liquidity of one or more types of Agency RMBS, might reduce the market value of our portfolio, which might cause our lenders to require us to post additional collateral. Any requirement for additional collateral might compel us to liquidate our assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or any of our lenders file for bankruptcy, which may make it difficult for us to recover our collateral in the event of a bankruptcy filing.

 

 

Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay if we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that any of our lenders files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either our lenders or us.

 

 

Because the assets that we acquire might experience periods of illiquidity, we might be prevented from selling our Agency RMBS at favorable times and prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Although we generally plan to hold our Agency RMBS until maturity, they are now classified as trading securities in the financial statements which would indicate a much shorter holding period, there may be circumstances in which we sell certain of these securities. Agency RMBS generally experience periods of illiquidity. Such conditions are more likely to occur for derivative RMBS because such securities are generally traded in markets much less liquid than the non-derivative Agency RMBS market. As a result, we may be unable to dispose of our Agency RMBS at advantageous times and prices or in a timely manner. The lack of liquidity might result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale. The illiquidity of Agency RMBS could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

 

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Hedging against interest rate exposure may not completely insulate us from interest rate risk and could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

To the extent consistent with our qualification as a REIT, we may enter into interest rate cap or swap agreements or pursue other hedging strategies, including the purchase of puts, calls or other options and futures contracts in order to hedge the interest rate risk of our portfolio. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal prepayments, the type of Agency RMBS we hold, and other changing market conditions. Hedging may fail to protect or could adversely affect us because, among other things:

 

 

·	hedging can be expensive, particularly during periods of rising and volatile interest rates;

 

 

·	available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

 

 

·	the duration of the hedge may not match the duration of the related liability;

 

 

·	certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge;

 

 

·	the amount of income that a REIT may earn from certain hedging transactions is limited by federal income tax provisions governing REITs;

 

 

·	the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

 

 

·	the counterparty in the hedging transaction may default on its obligation to pay.

 

 

Because of the foregoing risks, our hedging activity could materially adversely affect our business, financial condition and results of operation and our ability to pay distributions to our stockholders.

 

 

We may not be able to purchase interest rate caps on terms or prices that reduce our interest rate and prepayment risks, which could cause us to suffer a loss in the event of significant changes in interest rates.

 

 

Our policies permit us to purchase interest rate caps to help us reduce our interest rate and prepayment risks associated with investments in Agency RMBS. This strategy helps us reduce our exposure to significant changes in interest rates. A cap contract is ultimately of no benefit to us unless interest rates exceed the cap rate. If we purchase interest rate caps but do not experience a corresponding increase in interest rates, the costs of buying the caps would reduce our earnings. Alternatively, we may decide not to enter into a cap transaction due to its expense, and we could suffer losses if interest rates later rise substantially. Anyone of these outcomes could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio.  Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy.

 

 

We rely on analytical models and information and data supplied by third parties.  These models and data may be used to value assets or potential asset acquisitions and dispositions and also in connection with our asset management activities.  If our models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon could expose us to potential risks.  Our reliance on models and data may induce us to purchase certain assets at prices that are too high, to sell certain other assets at prices that are too low, or to miss favorable opportunities altogether.  Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.

 

 

Some models, such as prepayment models, may be predictive in nature.  The use of predictive models has inherent risks.  For example, such models may incorrectly forecast future behavior, leading to potential losses.  In addition, the predictive models used by us may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices.  Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation, and are therefore more speculative and of more limited reliability.

 

 

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All valuation models rely on correct market data input.  If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect.  However, even if market data is inputted correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose values are particularly sensitive to various factors.  If our market data inputs are incorrect or our model prices differ substantially from market prices, our business, financial condition and results of operations and our ability to make distributions to our shareholders could be materially adversely affected.

 

 

We may change our investment strategy and asset allocation without notice or stockholder consent, which may result in riskier investments.

 

 

Our Board of Directors has the authority to change our investment strategy or asset allocation at any time without notice to or consent from our stockholders.  To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this prospectus.  A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations.  Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than as described in this annual report.

 

 

Our Chairman and Chief Executive Officer, Mr. Cauley, owns shares of our Class B Common Stock, which may tend to encourage undue risks in managing our company in order to cause a conversion of these shares.

 

 

In connection with our formation, Mr. Cauley was issued 11,178 shares of our Class B Common Stock. These shares of Class B Common Stock will begin to convert to shares of Class A Common Stock when stockholders’ equity attributable to Class A Common Stock is not less than $150.00 per share. Accordingly, Mr. Cauley may be encouraged to take undue risks in managing our company in an attempt to increase stockholders’ equity and cause a conversion of these shares. See “Description of Capital Stock—Common Stock—Conversion Rights.”

 

 

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or a clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

 

 

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

 

 

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction most likely will result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. In addition, we may not always be able to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

 

 

 

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We may enter into derivative contracts that could expose us to unexpected economic losses in the future.

 

 

Swaps and certain options and other custom instruments are subject to the risk of non-performance by the swap or option counterparty, including risks relating to the creditworthiness of the counterparty. In addition, we also are subject to the risk of the failure of any of the exchanges or clearing houses on which we trade.  To the extent consistent with our qualification as a REIT, we may enter into swap agreements, including interest rate swaps. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease exposure to long term or short term interest rates (in the United States or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as security prices, baskets of equity securities, or inflation rates. Swap agreements can take many different forms and are known by a variety of names. We are not precluded from any particular form of swap or option agreement if we determine it is consistent with our investment objectives and policies.

 

 

Swap agreements tend to shift investment exposure from one type of investment to another. Depending on how they are used, swap agreements may increase or decrease the overall volatility of our portfolio. The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency, individual equity values or other factors that determine the amounts of payments due to and from us. If a swap agreement calls for payments or collateral transfers by us, we must be prepared to make such payments and transfers when due. Additionally, if a counterparty’s creditworthiness declines, the value of swap agreements with the counterparty can be expected to decline, potentially resulting in losses by us.

 

 

The U.S. Commodity Futures Trading Commission and certain commodity exchanges have established limits referred to as speculative position limits or position limits on the maximum net long or net short position that any person or group of persons may hold or control in particular futures and options. Limits on trading in options contracts also have been established by the various options exchanges. It is possible that trading decisions may have to be modified and that positions held may have to be liquidated to avoid exceeding such limits. Such modification or liquidation, if required, could adversely affect our operations and profitability.

 

 

Part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances, such as the early termination of the derivative agreement caused by any event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open derivative positions with the respective counterparty and could also include other fees and charges. These potential payments will be contingent liabilities and therefore may not appear on our balance sheet. The economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

 

 

Competition might prevent us from acquiring Agency RMBS at favorable yields, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Our net income largely depends on our ability to acquire Agency RMBS at favorable spreads over our borrowing costs. In acquiring Agency RMBS, we compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that purchase Agency RMBS, many of which have greater financial resources than we do. Additionally, we may also compete with the U.S. Federal Reserve and the U.S. Treasury to the extent that those entities purchase Agency RMBS pursuant to their respective Agency RMBS purchase programs.  Additionally, many of our competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act. As a result, we may not be able to acquire sufficient Agency RMBS at favorable spreads over our borrowing costs, which would materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

 

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Terrorist attacks and other acts of violence or war may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our Agency RMBS or the securities markets in general. Losses resulting from these types of events are uninsurable. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economies. They also could result in economic uncertainty in the United States or abroad. Adverse economic conditions could harm the value of the property underlying our Agency RMBS or the securities markets in general, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

We are highly dependent on communications and information systems operated by third parties, and systems failures could significantly disrupt our business, which may, in turn, adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell, finance and hedge our investments. These systems are operated by third parties and, as a result, we have limited ability to ensure continued operation. In the event of systems failure or interruption, we will have limited ability to affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, including Agency RMBS trading activities, which could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

If we issue debt securities, our operations may be restricted and we will be exposed to additional risk.

 

 

If we decide to issue debt securities in the future, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our Class A Common Stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating restrictions could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

 

 

If we fail to maintain relationships with AVM, L.P. and its affiliate, III Associates, or if we do not establish relationships with other repurchase agreement trading, clearing and administrative service providers, our business, financial condition and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

 

 

We have engaged AVM, L.P. and its affiliate, III Associates, to provide us with certain repurchase agreement trading, clearing and administrative services. If we are unable to maintain our relationships with AVM and III Associates or we are unable to establish successful relationships with other repurchase agreement trading, clearing and administrative service providers, our business, financial condition and results of operations and our ability to pay distributions to our stockholders could be materially adversely affected.

 

 

 

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LEGAL AND TAX RISKS

If we fail to qualify as a REIT, we will be subject to federal income tax as a regular corporation and may face a substantial tax liability.

We intend to operate in a manner that allows us to qualify as a REIT for federal income tax purposes. However, REIT qualification involves the satisfaction of numerous requirements (some on an annual or quarterly basis) established under technical and complex provisions of the Code, as amended, or regulations under the Code, for which only a limited number of judicial or administrative interpretations exist. The determination that we qualify as a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For instance, a lack of acces to adequate financing may prevent us from maintaining a portfolio of sufficient size to satisfy the REIT qualification requirements.  Such could be the case when market conditions become severely distressed and/or the Company’s financial condition deteriorates materially. Accordingly, it is not certain we will be able to qualify and remain qualified as a REIT for federal income tax purposes. Even a technical or inadvertent violation of the REIT requirements could jeopardize our REIT qualification. Furthermore, Congress or the Internal Revenue Service, or IRS, might change the tax laws or regulations and the courts might issue new rulings, in each case potentially having a retroactive effect that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

•

we would be taxed as a regular domestic corporation, which, among other things, means that we would be unable to deduct distributions to stockholders in computing taxable income and would be subject to federal income tax on our taxable income at regular corporate rates;

•

any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders, and could force us to liquidate assets at inopportune times, causing lower income or higher losses than would result if these assets were not liquidated; and

•

unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification, and our cash available for distribution to its stockholders therefore would be reduced for each of the years in which we do not qualify as a REIT.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. We may also be subject to certain federal, state and local taxes on our income and property. Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to our stockholders at unfavorable times or when we do not have funds readily available for distribution. Thus, compliance with REIT requirements may hinder our ability to operate solely with the goal of maximizing profits.

In addition, the REIT provisions of the Code impose a 100% tax on income from "prohibited transactions." Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale to customers in the ordinary course of business, other than foreclosure property. This 100% tax could impact our ability to sell mortgage-related securities at otherwise opportune times if we believe such sales could result in our being treated as engaging in prohibited transactions. However, we would not be subject to this tax if we were to sell assets through a taxable REIT subsidiary. We will also be subject to a 100% tax on certain amounts if the economic arrangements between us and our taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties.

 

 

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Complying with REIT requirements may limit our ability to hedge effectively, which could in turn leave us more exposed to the effects of adverse changes in interest rates.

The REIT provisions of the Code may substantially limit our ability to hedge mortgage-related securities and related borrowings by generally requiring us to limit our income in each year from qualified hedges, together with any other income not generated from qualified REIT real estate assets, to less than 25% of our gross income. In addition, we must limit our aggregate gross income from non-qualified hedges, fees, and certain other non-qualifying sources, to less than 5% of our annual gross income. As a result, we may in the future have to limit the use of hedges or implement hedges through a taxable REIT subsidiary. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we fail to satisfy the 25% or 5% limitations, unless our failure was due to reasonable cause and not due to willful neglect and we meet certain other technical requirements, we could lose our REIT qualification. Even if our failure was due to reasonable cause, we may have to pay a penalty tax equal to the amount of income in excess of certain thresholds, multiplied by a fraction intended to reflect our profitability.

Dividends paid by REITs are not qualified dividends eligible for reduced tax rates.

In general, the current maximum federal income tax rate for “qualified dividends” paid to individual U.S. stockholders is 15%. Dividends paid by REITs, however, are generally not qualified dividends eligible for the reduced rates. The more favorable rates applicable to regular corporate dividends, which are usually qualified dividends, could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our Class A Common Stock.

To maintain our REIT qualification, we may be forced to borrow funds on unfavorable terms or sell our MBS portfolio securities at unfavorable prices to make distributions to our stockholders.

As a REIT, we must distribute at least 90% of our annual net taxable income (excluding net capital gains) to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to federal corporate income tax. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under the Code. From time to time, we may generate taxable income greater than our income for financial reporting purposes from, among other things, amortization of capitalized purchase premiums, or our net taxable income may be greater than our cash flow available for distribution to our stockholders. If we do not have other funds available in these situations, we could be required to borrow funds, sell a portion of our mortgage-related securities at unfavorable prices or find other sources of funds in order to meet the REIT distribution requirements and to avoid corporate income tax and the 4% excise tax. These other sources could increase our costs or reduce equity and reduce amounts available to invest in mortgage-related securities.

Reliance on legal opinions or statements by issuers of mortgage-related securities could result in a failure to comply with REIT gross income or asset tests.

When purchasing mortgage-related securities, we may rely on opinions of counsel for the issuer or sponsor of such securities, or statements made in related offering documents, for purposes of determining whether and to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under the REIT gross income tests. The inaccuracy of any such opinions or statements may adversely affect our REIT qualification and could result in significant corporate-level tax.

Possible legislative or other actions affecting REITs could adversely affect us and our stockholders.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Our business may be harmed by changes to the laws and regulations affecting us, including changes to securities laws and changes to the Code provisions applicable to the taxation of REITs. New legislation may be enacted into law, or new interpretations, rulings or regulations could be adopted, any of which could adversely affect us and our stockholders, potentially with retroactive effect.

 

 

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We may recognize excess inclusion income that would increase the tax liability of our stockholders.

If we recognize excess inclusion income and that is allocated to our stockholders, this income cannot be offset by net operating losses of our stockholders. If the stockholder is a tax-exempt entity, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a foreign person, such income would be subject to federal income tax withholding without reduction or exemption pursuant to any otherwise applicable income tax treaty. In addition, to the extent our stock is owned by tax-exempt "disqualified organizations," such as government-related entities that are not subject to tax on unrelated business taxable income, although Treasury regulations have not yet been drafted to clarify the law, we may incur a corporate level tax at the highest applicable corporate tax rate on the portion of our excess inclusion income that is allocable to such disqualified organizations.

Excess inclusion income could result if we hold a residual interest in a real estate mortgage investment conduit, or REMIC. Excess inclusion income also could be generated if we were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a relationship to the payments received on our mortgage-related securities securing those debt obligations (i.e., if we were to own an interest in a taxable mortgage pool). However, Treasury regulations have not been issued regarding the allocation of excess inclusion income to stockholders of a REIT that owns an interest in a taxable mortgage pool. We do not expect to acquire significant amounts of residual interests in REMICs, other than interests owned by our taxable REIT subsidiary, which is treated as a separate taxable entity for these purposes. We intend to structure borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. We do, however, expect to enter into various repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgaged securities if we should default on our obligations.

A portion of our distributions may be deemed a return of capital for U.S. federal income tax purposes.

The amount of our distributions to the holders of our Class A Common Stock in a given year may not correspond to REIT taxable income for that year. To the extent our distributions exceed our REIT taxable income, the distribution will be treated as a return of capital for federal income tax purposes. A return of capital distribution will not be taxable to the extent of a stockholder's tax basis in our shares but will reduce a stockholder's basis in our shares of Class A Common Stock.

Our reported GAAP financial results differ from the taxable income results that drive our dividend distributions.

Our dividend distributions are driven by the dividend distribution requirements under the REIT tax laws and our profits as calculated for tax purposes pursuant to the Code. Our reported results for GAAP purposes differ materially from both our cash flows and our REIT taxable income. As a result of the significant differences between GAAP and REIT taxable income accounting, stockholders and analysts must undertake a complex analysis to understand our tax results and dividend distribution requirements. This complexity may hinder the trading of our stock or may lead observers to misinterpret our results.

Legislation related to corporate governance has increased our costs of compliance and our liability.

Enacted and proposed laws, regulations and standards relating to corporate governance and disclosure requirements applicable to public companies, including the Sarbanes-Oxley Act of 2002, have increased the costs of corporate governance, reporting and disclosure practices. These costs may increase in the future due to our continuing implementation of compliance programs mandated by these requirements. In addition, these new laws, rules and regulations create new legal bases for administrative enforcement, civil and criminal proceedings against us in case of non-compliance, thereby increasing our risks of liability and potential sanctions.

 

 

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Failure to maintain an exemption from the Investment Company Act would harm our results of operations.

We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we fail to qualify for this exemption, our ability to use leverage would be substantially reduced and we would be unable to conduct our business. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on, and interests in, real estate. Under the current interpretation of the SEC staff, in order to qualify for this exemption, we must maintain at least 55% of our assets directly in these qualifying real estate interests, with at least 25% of remaining assets invested in real estate-related securities. Mortgage-related securities that do not represent all of the certificates issued with respect to an underlying pool of mortgages may be treated as separate from the underlying mortgage loans and, thus, may not qualify for purposes of the 55% requirement. Therefore, our ownership of these mortgage-related securities is limited by the provisions of the Investment Company Act.

In satisfying the 55% requirement under the Investment Company Act, we treat as qualifying interests mortgage-related securities issued with respect to an underlying pool as to which we hold all issued certificates. If the SEC or its staff adopts a contrary interpretation of such treatment, we could be required to sell a substantial amount of our mortgage-related securities under potentially adverse market conditions. Further, in order to ensure that we at all times qualify for the exemption under the Investment Company Act, we may be precluded from acquiring mortgage-related securities whose yield is higher than the yield on mortgage-related securities that could be purchased in a manner consistent with the exemption. These factors may lower or eliminate our net income.

OITRS may be obligated to repurchase certain mortgage loans it originated if applicable underwriting requirements were not satisfied.  Such repurchases could adversely affect the financial condition of OITRS and further limit its ability to repay amounts owed to us.

Prior to discontinuing its operations in April 2007, OITRS originated residential mortgage loans.  Those loans were typically sold to Fannie Mae, and the related mortgage servicing rights were typically sold to third-party servicing companies.  Fannie Mae and the servicing companies have made repurchase claims to OITRS regarding certain residential mortgage loans that were originated by OITRS.  These claims result from a default by a borrower under a loan followed by a rescission of mortgage insurance coverage due to an alleged underwriting deficiency.  To date, OITRS has generally demonstrated compliance with underwriting requirements or otherwise resolved these demands without being required to repurchase loans or pay for losses incurred on the loans.  However, if OITRS is required to repurchase loans or pay losses incurred on a significant number of loans, then the financial condition of OITRS and its already limited ability to repay debt that it owes to us will be adversely affected.

There may be a limited market for our Class A Common Stock in the future.

On October 29, 2007, NYSE Regulation, Inc. notified us that our average global market capitalization over a consecutive thirty trading day period had fallen below the NYSE Euronext’s minimum quantitative continued listing criteria for REITs of $25 million.  As a result, trading in our Class A Common Stock on the NYSE Euronext was suspended prior to the market opening on November 5, 2007 and our Class A Common Stock was subsequently delisted.  Currently our Class A Common Stock is traded on the OTC bulletin board.  We may apply to list our Class A Common Stock on another national securities market in the future, however, no assurance can be given that our Class A Common Stock will be approved for listing on such national securities market.  Until such time that our Class A Common Stock is approved for listing on another national securities market, the ability to buy and sell our Class A Common Stock may be limited and this may continue to depress or result in a decline in the market price of our Class A Common Stock.  Additionally, until such time that our Class A Common Stock is approved for listing on another national securities market, our ability to raise capital through the sale of additional securities may be limited.

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

Our executive offices and principal administrative offices are located at 3305 Flamingo Drive, Vero Beach, Florida, 32963, in a building which we own. This property is adequate for our business as currently conducted.

 
 

 

 

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ITEM 3. LEGAL PROCEEDINGS.

We are involved in various lawsuits and claims, both actual and potential, including some that we have asserted against others, in which monetary and other damages are sought. Except as described below, these lawsuits and claims relate primarily to contractual disputes arising out of the ordinary course of our business. The outcome of such lawsuits and claims is inherently unpredictable. However, we believe that, in the aggregate, the outcome of all lawsuits and claims involving us will not have a material effect on our consolidated financial position or liquidity; however, any such outcome may be material to the results of operations of any particular quarterly reporting period in which costs, if any, are recognized. See also Notes 10 and 13 to our accompanying consolidated financial statements.

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.  On February 3, 2009, Coast filed a motion for leave to file an amended complaint which was granted on March 16, 2009.  OITRS answered the amended complaint on May 4, 2009, and filed an amended answer on September 16, 2009.  The amended complaint differs from the original complaint in that it raises new facts and changes the nature of the claims.  A mediation hearing was held on February 23, 2010, however no settlement was reached.  The parties agreed to continue mediation talks for an additional 4 week period.  In the event a settlement is not reached, Bimini Capital believes the plaintiff’s claims in this matter are without merit and we intend to vigorously defend this case.

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 us, certain of our 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.  We 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. Bimini Capital has accrued approximately $0.5 million related to the settlement which is the remainder of its $1.0 million retention that it was required to pay under the terms of its Directors and Officers insurance policy.  The remainder of the settlement and legal fees and costs associated with finalizing the settlement will be paid by the D&O 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 take approximately 3 to 6 months.  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 tortious 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.  Bimini Capital denies that the repurchase was improper and intends to defend the suit vigorously.

 

 

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PART II

ITEM 4. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET INFORMATION

Through March 11, 2010, our Class A Common Stock traded over the counter under the symbol “BMNM.OB.”  Beginning March 12, 2010, following the reverse stock split, our Class A common stock trades over the counter under the symbol “BMNMD.OB”. After April 8, 2010, our Class A Common Stock will revert back to trading under the symbol “BMNM.OB.”

On March 12, 2010, the last sales price of the Class A Common Stock was $1.29 per share. The following table is a summary of historical price information and dividends declared and paid per common share, adjusted for the March 12, 2010 reverse stock split, for all quarters of 2009 and 2008:

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
2009
High		$	0.80			$	1.80			$	3.50			$	6.30			$	6.30
Low			0.30				0.50				0.90				2.00				0.30
Close			0.50				1.00				2.80				2.40				2.40
Dividends declared per share			-				-				-				7.00				7.00
2008
High		$	6.00			$	4.30			$	3.20			$	2.40			$	6.00
Low			1.80				2.40				1.50				0.30				0.30
Close			3.10				2.70				1.70				0.40				0.40
Dividends declared per share			-				-				-				-				-

As of December 31, 2009, we had 2,763,779 shares of Class A Common Stock outstanding, which were held by 504 holders of record. The 504 holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of 92 beneficial owners of our Class A Common Stock.

As of December 31, 2009, we had 31,939 shares of Class B Common Stock outstanding, which were held by 2 holders of record and 31,939 shares of Class C Common Stock outstanding, which were held by one holder of record. There is no established public trading market for our Class B Common Stock or Class C Common Stock.

DIVIDEND DISTRIBUTION POLICY

      In order to maintain our qualification as a REIT under the Code, we must make distributions to our stockholders each year in an amount at least equal to:

•

90% of our REIT taxable income (computed without regard to our deduction for dividends paid and our net capital gains);

•

plus 90% of the excess of net income from foreclosure property over the tax imposed on such income by the Code;

•

minus any excess non-cash income that exceeds a percentage of our income.

In general, our distributions will be applied toward these requirements if paid in the taxable year to which they relate, or in the following taxable year if the distributions are declared before we timely file our tax return for that year, the distributions are paid on or before the first regular distribution payment following the declaration, and we elect on our tax return to have a specified dollar amount of such distributions treated as if paid in the prior year. Distributions declared by us in October, November or December of one taxable year and payable to a stockholder of record on a specific date in such a month are treated as both paid by us and received by the stockholder during such taxable year, provided that the distribution is actually paid by us by January 31 of the following taxable year.

 

 

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We anticipate that distributions generally will be taxable as ordinary income to our stockholders, although a portion of such distributions may be designated by us as capital gain or may constitute a return of capital, as occurred in 2006 and 2007. We furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.

EQUITY COMPENSATION PLAN INFORMATION

The plan documents for the plans described in the footnotes below are included as Exhibits to this Form 10-K, and are incorporated herein by reference in their entirety. The following table provides information as of December 31, 2009 regarding the number of shares of Class A Common Stock that may be issued under our equity compensation plans.

Plan Category		Total number of securities to be issued upon exercise of outstanding options, warrants and rights (a)								Weighted-average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders (1)			102,000				(2	)			-				214,861				(3	)
Equity compensation plans not approved by security holders (4)			-								-				-
Total			102,000								-				214,861

(1)  Equity compensation plans approved by shareholders include the Bimini Capital Management, Inc. 2003 Long Term Incentive Plan (the “LTI Plan”).  This plan was approved by shareholders on December 18, 2003, prior to our initial public offering.  The LTI Plan is a broad-based equity incentive plan that permits the grant of stock options, restricted stock, phantom shares, dividend equivalent rights and other stock-based awards.  Subject to adjustment upon certain corporate transactions or events, a maximum of 400,000 shares of Class A Common Stock (but no more than 10% of the number of shares of Class A Common Stock outstanding on any particular grant date) may be subject to awards under the LTI Plan.

(2)  Represents the aggregate number of shares of Class A Common Stock remaining to be issued upon settlement of phantom share awards granted pursuant to the LTI Plan and outstanding as of December 31, 2009.

(3)  Represents the maximum number of shares remaining available for future issuance under the terms of the LTI Plan irrespective of the 10% limitation described in footnote 1 above.  Taking into account the 10% limitation and the number of shares of Class A Common Stock outstanding as of December 31, 2009, the maximum number of shares remaining available for future issuance under the terms of the LTI Plan as of December 31, 2009, was 91,239 shares.

(4)  Equity compensation plans not approved by shareholders include the Bimini Capital Management, Inc. 2004 Performance Bonus Plan (the “Performance Bonus Plan”).  The Performance Bonus Plan is an annual bonus plan that permits the issuance of Class A Common Stock in payment of awards made under the plan.  There is no limit on the number of shares available for issuance under the Performance Bonus Plan.  No shares have ever been issued under the Performance Bonus Plan and no equity based awards have ever been made under the Performance Bonus Plan.

ISSUER PURCHASES OF EQUITY SECURITIES

We have not repurchased any shares of our equity securities during 2009.

 

ITEM 5.  SELECTED FINANCIAL DATA

Not Applicable.

 

 

 

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ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

 

When used in this Annual Report on Form 10-K, in future filings with the 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 I - Item 1A - Risk Factors” of this Form 10-K. These and other risks, uncertainties and factors, including those described in reports that the Company files from time to time with the Commission, could cause the Company’s actual results to differ materially from those reflected in such forward-looking statements. All forward-looking statements speak only as of the date they are made and the Company does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

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

Introduction

As used in 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 attempts to earn a return on the spread between the yield on its assets and its costs, including the interest expense on the funds it borrows. It generally, when market conditions are not under severe stress as they are currently, intends to borrow between eight and twelve times the amount of its equity capital in an attempt to enhance its returns to stockholders. This leverage may be adjusted above or below this range to the extent management or the Company’s Board of Directors deems necessary or appropriate.  For purposes of this calculation, Bimini Capital treats its 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 to sell its retail mortgage loan origination channel to a third party. OITRS has not operated in the mortgage loan origination business since the second quarter of 2007, and the results of the mortgage origination business are reported as discontinued operations.

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.

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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

2009 v. 2008 PERFORMANCE OVERVIEW

Described below are the Company’s results of operations for the year ended December 31, 2009, as compared to the Company’s results of operations for the year ended December 31, 2008.  During the year ended December 31, 2007, the Company ceased all mortgage origination business at OITRS. OITRS results of operations are reported in the financial statements as discontinued operations.

Consolidated net income for the year ended December 31, 2009, was approximately $45.7 million, compared to a consolidated net loss of approximately $56.4 million for the year ended December 31, 2008. Consolidated net income per basic and diluted share of Class A Common Stock was $16.37 and $11.86, respectively, for the year ended December 31, 2009, compared to a consolidated net loss per basic and diluted share of Class A Common Stock of $22.04 for the comparable prior period.

The consolidated net income in 2009 was driven primarily by gains recorded on the extinguishment of debt of $42.0 million and $5.6 million of income from REIT operations, reflecting a substantially higher net interest margin on a smaller MBS portfolio.  The average MBS portfolio employed for 2009 was approximately $109.5 million, versus $424.3 million for 2008.  The weighted average borrowing cost on our repurchase agreement funding was 0.59% for 2009 versus 4.71% for 2008.  In addition, because we were able to extinguish $74 million of the trust preferred debt during 2009, interest expense associated with such debt was reduced from $8.4 million in 2008 to $5.1 million in 2009.  Finally, reflecting the implementation of the alternative investment strategy for all of 2009 versus less than half of 2008, the average yield on our portfolio increased from 5.67% in 2008 to 6.19% in 2009, in spite of generally much lower yields being available in the market in 2009, and prepayment speeds that in 2009 were higher on average than in 2008.

 The consolidated net loss in 2008 was driven primarily by negative mark-to-market adjustments on the retained interest of OITRS of $41.0 million and lower net interest income from the MBS portfolio resulting from reduced size of the portfolio.   The reduction in the size of the MBS portfolio was necessitated by the need to fund the wind down of discontinued operations of OITRS, primarily the repayment of debt guaranteed by the Company and the servicing advance obligations.  The servicing advance obligation and the debt guaranteed by the Company were eliminated and retired, respectively, during 2008.

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During 2008, owing to reduced access to repurchase agreement funding, the Company instituted an alternative investment strategy utilizing interest only and inverse interest only securities.  Such assets are held for trading with fluctuations in their market value reflected in earnings for the period in which they occur.

For the year ended December 31, 2009, Bimini Capital's REIT taxable income was approximately $40.1 million, prior to the application of the dividends paid deduction of $19.5 million and the utilization of $20.6 million of the tax net operating loss carryforwards.  These two items reduced REIT taxable income to zero, in accordance with the Code.  The utilization of the tax net operating loss carryforward resulted in approximately $0.1 million of alternative minimum tax being due for the year 2009.

During 2009, Bimini Capital's most significant items and transactions being accounted for differently for REIT tax purposes than for GAAP purposes include:  the loss from discontinued operations, which does not impact the REIT’s taxable income;  interest on the MBS portfolio;  the accounting for debt issuance costs;  net gains realized on certain MBS sales;  and the effect of equity plan stock awards.  The interest on the MBS portfolio is being recognized on a different accounting method for tax purposes.   The debt issuance costs are amortized over different periods for tax purposes, so the amount of unamortized debt issuance costs written-off as part of the cancellation of debt transaction was greater for tax purposes.  Net gains on MBS sales for tax purposes are considered capital gains, so these gains have been offset by the REIT’s previously realized capital loss carryovers.  The future deduction of equity plan stock compensation against REIT taxable income is uncertain as to the amount, because the tax impact is measured at the fair value of the shares as of a future date, and this amount may be greater than or less than the financial statement expense already recognized by the Company.  In addition, the tax treatment for dividends paid on unvested equity plan awards is to deduct them as compensation.

As of December 31, 2009, the REIT has approximately $57.3 million of remaining tax capital loss carryforwards available to offset future tax capital gains. As of December 31, 2009 the REIT has remaining tax NOL carryforwards of approximately $0.7 million that are immediately available to offset future REIT taxable income.  The tax capital loss carryforwards begin to expire in 2012, and the tax net operating loss carryforwards begin to expire in 2028.

PERFORMANCE OF BIMINI CAPITAL’S MBS PORTFOLIO

For the year ended December 31, 2009, the REIT generated $10.5 million of net portfolio interest income, consisting of $11.0 million of interest income from MBS assets offset by $0.5 million of interest expense on repurchase liabilities.  Portfolio net interest income increased approximately $2.8 million compared to the year ended December 31, 2008.  The increase is due primarily to a wider net interest margin available in the market, as a result of substantially lower funding costs, which offset the effects of a substantially smaller portfolio.  The results were also positively impacted by the Company’s implementation of its alternative investment strategy in the third quarter of 2008, which employed interest only (IO) and inverse interest only (IIO) securities.  In particular, IIO securities benefited from lower levels of one month LIBOR and still relatively slow prepayments in 2009.  The Company’s IO and IIO securities are not pledged as part of a repurchase agreement borrowing.

For the year ended December 31, 2009, the REIT’s general and administrative costs were $3.9 million compared to $5.6 million for the year ended December 31, 2008. The decrease in general and administrative expenses was primarily the result of a reduction in employee compensation expense. The reduction in employee compensation expense was directly attributable to a lower number of employees.  Operating expenses, which include trading costs, fees and other direct costs, were $0.6 million for the year ended December 31, 2009 compared to $0.7 million for the year ended December 31, 2008.

During the year ended December 31, 2009 the Company had approximately $1.5 million in gains from the sale of securities compared to gains of approximately $0.3 million for the year ended December 31, 2008.  Market value adjustments to the Company’s investment portfolio resulted in unrealized gains of approximately $3.2 million for the year ended December 31, 2009 compared to $0.1 million for the same period in 2008.  The favorable market movements were driven by low levels of LIBOR and relatively slow prepays in the case of IIO securities, and the involvement of the Federal Reserve’s quantitative easing program – involving the outright purchase of approximately $1.0 trillion  of MBS in 2009 – in the case of pass-through MBS.

 

 

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As of December 31, 2009, Bimini Capital’s MBS portfolio consisted of $119.7 million of agency or government MBS at fair value, all of which were classified as trading.  This portfolio had a weighted average coupon of 4.49% and a net weighted average repurchase agreement borrowing cost of 0.30%. The following tables summarize Bimini Capital’s agency and government mortgage related securities as of December 31, 2009 and 2008:

(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
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%
December 31, 2008
Adjustable-Rate MBS	$	70,632	41.0%	4.79%	276	1-Jan-36	7.76	10.37%	10.11%
Fixed-Rate MBS		24,884	14.5%	6.50%	356	1-Sep-38	n/a	n/a	n/a
Hybrid Adjustable-Rate MBS		63,068	36.6%	5.03%	335	1-Apr-38	49.65	10.03%	2.00%
Total Mortgage-backed Pass-through		158,584	92.1%	5.15%	312	1-Sep-38	27.52	10.21%	5.13%
Derivative MBS		13,524	7.9%	5.64%	348	25-Jan-38	0.34	n/a	n/a
Total Mortgage Assets	$	172,108	100.0%	5.19%	315	1-Sep-38	25.02	n/a	5.13

(in thousands)

		December 31,
		2009								2008
Agency		Fair Value				Percentage of Entire Portfolio				Carrying Value				Percentage of Entire Portfolio
Fannie Mae		$	108,775				90.9	%		$	141,364				82.1	%
Freddie Mac			10,894				9.1	%			30,744				17.9	%
Total Portfolio		$	119,669				100.0	%		$	172,108				100.0	%

		December 31,
Entire Portfolio		2009				2008
Weighted Average Pass-through  Purchase Price			103.13				102.05
Weighted Average Derivative Purchase Price			4.66				6.86
Weighted Average Current Price			103.79				101.10
Weighted Average Derivative Current Price			4.93				6.98
Effective Duration (1)			1.593				1.279

(1) An effective duration of 1.593 indicates that an interest rate increase of 1% 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.  Likewise, an effective duration of 1.279 indicates that an interest rate increase of 1% would be expected to cause a 1.279% decline in the value of the MBS in the Company’s investment portfolio at December 31, 2008.

In evaluating Bimini Capital’s MBS portfolio assets and their performance, Bimini Capital’s management team primarily evaluates these critical factors: asset performance in differing interest rate environments, duration of the security, yield to maturity, potential for prepayment of principal and the market price of the investment.

 

 

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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 – current and anticipated levels with respect to both.  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.

 

 

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The following sensitivity analysis shows the estimated impact on the fair value of Bimini Capital's interest rate-sensitive investments as of December 31, 2009, 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		$	32,598
Change in fair Value						$	287			$	(287	)		$	(574	)
Change as a % of Fair Value							0.88	%			(0.88	)%			(1.76	)%
Fixed-rate MBS
Fair Value		$	5,242
Change in fair Value						$	146			$	(146	)		$	(292	)
Change as a % of Fair Value							2.79	%			(2.79	)%			(5.58	)%
Hybrid Adjustable-rate MBS
Fair Value		$	67,036
Change in fair Value						$	1,350			$	(1,350	)		$	(2,700	)
Change as a % of Fair Value							2.01	%			(2.01	)%			(4.03	)%
Derivatives
Fair Value		$	14,793
Change in Fair Value						$	123			$	(123	)		$	(246	)
Change as a % of Fair Value							0.83	%			(0.83	)%			(1.66	)%
Portfolio Total
Fair Value		$	119,669
Change in fair Value						$	1,906			$	(1,906	)		$	(3,812	)
Change as a % of Fair Value							1.59	%			(1.59	)%			(3.19	)%
Cash
Fair Value		$	8,930

 

 

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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		$	32,598
Change in fair Value						$	105			$	(418	)		$	(992	)
Change as a % of Fair Value							0.32	%			(1.28	)%			(3.04	)%
Fixed-rate MBS
Fair Value		$	5,242
Change in fair Value						$	85			$	(181	)		$	(392	)
Change as a % of Fair Value							1.62	%			(3.46	)%			(7.47	)%
Hybrid Adjustable-rate MBS
Fair Value		$	67,036
Change in fair Value						$	609			$	(1,878	)		$	(4,285	)
Change as a % of Fair Value							0.91	%			(2.80	)%			(6.39	)%
Derivatives
Fair Value		$	14,793
Change in Fair Value						$	(1,023	)		$	560			$	328
Change as a % of Fair Value							(6.92	)%			3.79	%			(2.23	)%
Portfolio Total
Fair Value		$	119,669
Change in fair Value						$	(223	)		$	(1,917	)		$	(5,341	)
Change as a % of Fair Value							(0.19	)%			(1.60	)%			(4.46	)%
Cash
Fair Value		$	8,930

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.

 

 

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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 December 31, 2009, and the twenty-three 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
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				-				568				5.95	%			326,577				4,193				5.14	%			1,956				0.81	%			1,933
June 30, 2008			519,614				6,787				-				415				4.91	%			471,732				5,448				4.62	%			1,339				0.29	%			1,933
March 31, 2008			602,948				10,112				-				652				6.28	%			584,597				7,590				5.19	%			2,522				1.08	%			1,933
December 31, 2007			972,236				11,364				(345	)			-				4.68	%			944,832				10,531				4.46	%			833				0.22	%			1,933
September 30, 2007			1,536,265				24,634				(404	)			-				6.41	%			1,497,409				20,998				5.61	%			3,636				0.81	%			1,933
June 30, 2007			2,375,216				26,970				(6,182	)			-				4.54	%			2,322,727				33,444				5.76	%			(6,475	)			(1.22	%)			1,933
March 31, 2007			2,870,265				38,634				1,794				-				5.38	%			2,801,901				37,405				5.34	%			1,229				0.04	%			1,933
December 31, 2006			2,944,397				31,841				(4,013	)			-				4.33	%			2,869,210				39,448				5.50	%			(7,607	)			(1.17	%)			1,933
September 30, 2006			3,243,674				43,051				3,523				-				5.31	%			3,151,813				42,683				5.42	%			368				(0.11	%)			1,933
June 30, 2006			3,472,921				54,811				13,395				-				6.31	%			3,360,421				41,674				4.96	%			13,137				1.35	%			1,933
March 31, 2006			3,516,292				40,512				1,917				-				4.61	%			3,375,777				36,566				4.33	%			3,946				0.28	%			1,933
December 31, 2005			3,676,175				43,140				3,249				-				4.69	%			3,533,486				35,337				4.00	%			7,803				0.69	%			1,858
September 30, 2005			3,867,263				43,574				4,348				-				4.51	%			3,723,603				32,345				3.48	%			11,230				1.03	%			973
June 30, 2005			3,587,629				36,749				2,413				-				4.10	%			3,449,744				26,080				3.02	%			10,668				1.07	%			454
March 31, 2005			3,136,142				31,070				1,013				-				3.96	%			2,976,409				19,731				2.65	%			11,339				1.31	%			-
December 31, 2004			2,305,748				20,463				1,250				-				3.55	%			2,159,891				10,796				2.00	%			9,667				1.55	%			-
September 30, 2004			1,573,343				11,017				-				-				2.80	%			1,504,919				4,253				1.13	%			6,764				1.67	%			-
June 30, 2004			1,512,481				10,959				-				-				2.90	%			1,452,004				4,344				1.20	%			6,615				1.70	%			-
March 31, 2004			871,140				7,194				-				-				3.30	%			815,815				2,736				1.34	%			4,458				1.96	%			-

(1)	Adjusted for premium lost on paydowns

(2)	Excludes Trust Preferred Interest

The net interest figures in the table above exclude interest associated with the trust preferred debt, which is reflected in the last column separately. The net interest income figures reflect the quarterly retrospective adjustment, where applicable.  As a result of the entire MBS portfolio being classified as held for trading for the year ended December 31, 2008, there are no longer quarterly retrospective adjustments.  For the year ended December 31, 2009, the net margin was 52 basis points on a portfolio of MBS securities classified entirely as held for trading.

PERFORMANCE OF DISCONTINUED OPERATIONS OF OITRS

As stated above, the Company has sold or discontinued all residential mortgage origination activities at OITRS.  The principal business activities of OITRS were the origination and sale of mortgage loans.  In addition, as part of the securitization of loans sold, OITRS retained an interest in the resulting residual interest cash flows more fully described below.  Finally, OITRS serviced the loans securitized as well as some loans sold on a whole loan basis.  As of December 31, 2009, there are no remaining originated mortgage servicing rights and mortgage loans held for sale are immaterial and not likely to result in meaningful income or loss.  Such assets are also held for sale.

 

 

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Losses realized on the OITRS activities for the year ended December 31, 2009, were $1.9 million compared to $49.9 million for the year ended December 31, 2008.  The fair value adjustment of retained interest, trading was $0.2 million and $(41.0) million for the years ended December 31, 2009 and 2008, respectively.  The retained interests in securitizations represent residual interests in loans originated or purchased by OITRS prior to securitization.  The total fair market value of these retained interests was approximately $5.9 million as of December 31, 2009. Fluctuations in value of retained interests are primarily driven by projections of future interest rates (the forward LIBOR curve), the discount rate used to determine the present value of the residual cash flows and prepayment and loss estimates on the underlying mortgage loans. There was no material fluctuation in value for the year ended December 31, 2009.

Other factors affecting the performance of OITRS for the year ended December 31, 2009, were gains realized on the sale of some of the few remaining mortgage loans, the payoff at par of a security held for sale and marked at an 85% discount to par at December 31, 2008, legal fees associated with various litigation matters stemming from the discontinued loan origination operations, and the allocation of certain overhead costs, such as audit and management compensation costs.

The table below provides details of OITRS’s gain/(loss) on mortgage banking activities for the years ended December 31, 2009 and 2008.  OITRS recognized a gain or loss on the sale of mortgages held for sale only when the loans were actually sold.

GAINS/(LOSSES) ON MORTGAGE BANKING ACTIVITIES

(in thousands)

		Years Ended December 31,
		2009				2008
Fair Value adjustment of retained interests, trading		$	167			$	(40,998	)
Gain/(loss) on sales of mortgage loans			244				(557	)
Change in market value of security held for sale			485				(27	)
Change in market value of mortgage loans held for sale			20				(76	)
Gain/(loss) on mortgage banking activities		$	916			$	(41,658	)

For the years ended December 31, 2009 and 2008, OITRS had net servicing losses of approximately $0.3 million and $1.6 million, respectively.  For 2009, the results merely reflect carryover costs associated with servicing transferred in 2008.  The results for the 2008 were driven primarily by negative fair value adjustments to the MSRs (inclusive of run-off of the servicing portfolio).

Liquidity and Capital Resources

Our principal sources of cash generally consist of borrowings under repurchase agreements, payments of principal and interest we receive on our MBS portfolio, and cash flows received by OITRS from the residual interests and the collection of prior servicing advances that are used to repay intercompany debt.  Our principal uses of cash are the repayment of principal and interest on our repurchase agreements, purchases of MBS, funding our operations and, to the extent dividends are declared, making dividend payments on our capital stock.

During 2009 the Company generated substantial REIT taxable income which was to a large extent derived from the two debt extinguishments described below.  Such REIT taxable income was distributed in two dividends, a five cent dividend distributed in November 2009 and a second sixty-five cent dividend paid in January of 2010.  In accordance with Internal Revenue Service (“IRS”) Revenue Procedure 2009-15, the second dividend was paid with a combination of cash and stock.  The Company elected to make the minimum required cash distribution allowed by IRS regulations in an effort to preserve liquidity.  Payment of the full dividend in cash would have caused the Company to reduce its balance sheet further through asset sales and thus impaired its ability to generate sufficient earnings in the future to cover its costs.

As of December 31, 2009, Bimini Capital had funding in place pursuant to a master repurchase agreement with one counterparty.  The counterparty to this agreement is not an affiliate of Bimini Capital. The agreement is secured by Bimini Capital’s pass-through MBS and bears interest rates that are based on a spread to LIBOR.

 

 

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As of December 31, 2009, Bimini Capital had an obligation outstanding under the repurchase agreement of approximately $100.3 million with a net weighted average borrowing cost of 0.30%. Securing the repurchase agreement obligation as of December 31, 2009, were PT MBS with an estimated fair value, including accrued interest, of $105.2 million and a weighted average maturity of 315 months.  As of December 31, 2009, Bimini Capital had outstanding repurchase agreement obligations with maturities through March 3, 2010.  Subsequent to year-end and through March 12, 2010, the Company has been able to maintain its repurchase facilities with comparable terms to those that existed at December 31, 2010 with maturities through June 10, 2010.

As of December 31, 2009, Bimini Capital had amounts at risk greater than 10% of the equity of the Company with the following counterparty:

(in thousands)

Repurchase Agreement Counterparties		Amount at Risk(1)				Weighted Average Maturity of Repurchase Agreements in Days
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.

Bimini Capital’s master repurchase agreements have no stated expiration, but can be terminated at any time at Bimini Capital’s option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party.  A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction.

As discussed above, increases in short-term interest rates could negatively impact the valuation of Bimini Capital’s PT MBS portfolio.  Should this occur, Bimini Capital’s repurchase agreement counterparties could initiate margin calls, thus inhibiting our liquidity or forcing us to sell assets.

As a result of the closure of the mortgage origination operations at OITRS, the Company had to amortize the financing line associated with retained interest in securitizations and meet the advancing obligations associated with OITRS’s then remaining mortgage servicing rights. Accordingly, during the year ended December 31, 2008, the Company undertook a series of asset sales intended to raise funds necessary to support the cash needs of OITRS and maintain adequate liquidity.

Given the limited funding in the repurchase market available to the Company, the Company opted to augment its existing leveraged PT MBS portfolio with alternative sources of income.  The Company incorporated an alternative investment strategy in 2008 utilizing derivative mortgage-backed securities collateralized by MBS with comparable borrower and prepayment characteristics to the securities currently in the portfolio.  Such securities are not funded in the repurchase market but instead are owned free and clear.  The leverage inherent in the securities replaces the leverage obtained by acquiring pass-through securities and funding them in the repurchase market.

In May 2005, Bimini Capital completed a private offering of $51.6 million of trust preferred securities of Bimini Capital Trust I (“BCTI”) resulting in the issuance by Bimini Capital of $51.6 million of junior subordinated notes. During the year ended December 31, 2009, the Company entered into an agreement with Taberna Capital Management, LLC (Taberna), the collateral manager of certain collateralized debt obligations issued in 2005 and collateralized by, among other securities, the trust preferred capital securities sold by BCTI in May of 2005.  Pursuant to the terms of the 2009 agreement, the obligations under the trust preferred capital securities issued by BCTI were discharged and the securities redeemed.  Concurrently, Bimini Capital redeemed its junior subordinated notes issued to BCTI. Bimini recognized a gain of approximately $32.4 million on the extinguishment of this debt.

 

 

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In addition, in October 2005, Bimini Capital completed a private offering of an additional $51.5 million of trust preferred securities of Bimini Capital Trust II (“BCTII”) resulting in the issuance by Bimini Capital of an additional $51.5 million of junior subordinated notes. On October 21, 2009, the Company purchased $24 million of trust preferred capital securities issued by BCT II. The Company acquired the trust preferred capital securities for $10.8 million in cash. In conjunction with the Offer, Bimini Capital offered separate consideration to certain security holders, estimated at approximately $3.3 million, for their consent to accept the offer.  The total cost for the transaction, including fees was approximately $14.5 million.  The Company cancelled the trust preferred capital securities and the $24.74 million of its junior subordinated notes issued to BCT II.  Bimini Capital recognized a gain of approximately $9.6 million on the extinguishment of this debt.  As of December 31, 2009, $26.8 million of the trust preferred securities of BCT II remain outstanding.

Bimini Capital attempts to ensure that the income generated from available investment opportunities, when the use of leverage is employed for the purchase of assets, exceeds the cost of its borrowings. However, the issuance of debt at a fixed-rate for any long-term period, considering the use of leverage, could create an interest rate mismatch if Bimini Capital is not able to invest at yields that exceed the interest rates of the Company’s junior subordinated notes and other borrowings.

Outlook

During 2009, the Company executed two transactions whereby $74 million of its $100 million trust preferred debt was extinguished early.  As a result, the Company’s balance sheet is substantially less leveraged and the associated interest charges have been reduced accordingly.  The repurchase agreement funding markets, while still not functioning as before the financial crisis, have returned to a level of functionality so that most firms managing levered agency PT MBS portfolios have adequate access to funding. However, Bimini Capital, owing to our small portfolio and limited profitable operating history, still has limited access to repurchase agreement funding.  While our funding sources are limited, the funding we do obtain is at extremely low levels.  Further, we have been able to offset the limited access to funding with our alternative investment strategy.  The combination of the low funding levels and the alternative investment strategy has enabled the Company to generate the largest Net Interest Margin (“NIM”), in percentage terms, in our brief operating history.

 Nonetheless, the reduced size of the portfolio in relation to the Company’s operating expenses will constrain the earnings potential of the Company in the near term.  Given the limited access to funding and the reduced size of our portfolio, even with the benefit of our alternative investment strategy, no assurance can be made of our ability to generate sufficient net interest income to cover all of our costs.  Our ability to generate sufficient net interest income to cover our costs will also be impacted by our funding costs, which in turn will depend on how long funding rates will remain at current levels.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company’s significant accounting policies are described in Note 1 to the Company’s accompanying Consolidated Financial Statements.

GAAP requires the Company’s management to make some complex and subjective decisions and assessments. The Company’s most critical accounting policies involve decisions and assessments which could significantly affect reported assets and liabilities, as well as reported revenues and expenses. The Company believes that all of the decisions and assessments upon which its financial statements are based were reasonable at the time made based upon information available to it at that time. Management has identified its most critical accounting policies to be the following:

MORTGAGE-BACKED SECURITIES

The Company’s investments in MBS are classified as held for trading.  Changes in fair value of securities held for trading are recorded through the statement of operations. The Company’s MBS have fair values determined by management based on the average of third-party broker quotes received and/or by independent pricing sources when available. Because the price estimates may vary to some degree between sources, management must make certain judgments and assumptions about the appropriate price to use to calculate the fair values for financial reporting purposes. Alternatively, management could opt to have the value of all of its positions in MBS determined by either an independent third-party pricing source or do so internally based on management’s own estimates. Management believes pricing on the basis of third-party broker quotes is the most consistent with the definition of fair value described in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures.

 

 

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REPURCHASE AGREEMENTS

We finance the acquisition of our PT 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.

INCOME RECOGNITION

All securities are either MBS pass-through securities, interest only securities or inverse interest only securities. Income on MBS pass-through securities is based on the stated interest rate of the security. Premium or discount present at the date of purchase is not amortized. For inverse interest only and interest only securities classified as held for trading, the income is accrued based on the carrying value and the effective yield. As cash is received it 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. The new effective yield is calculated based on the carrying value at the end of the previous reporting period, the new prepayment estimates and the contractual terms of the security.  Changes in fair value during the period are recorded in earnings and reported as fair value adjustment-held for trading securities in the accompanying consolidated statement of operations.

INCOME TAXES

Bimini Capital has elected to be taxed as a REIT under the Code. As further described below, Bimini Capital’s subsidiary, OITRS a taxpaying entity for income tax purposes and is taxed separately from Bimini Capital. 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.

OITRS and its activities are subject to corporate income taxes and the applicable provisions of FASB ASC 740, Income Taxes. All of the consequences of OITRS’s income tax accounting are included in discontinued operations.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent management believes deferred tax assets will not be fully realized in future periods, a provision is recorded so as to reflect the net portion, if any, of the deferred tax asset management expects to realize.

Off-Balance Sheet Arrangements

As discussed above, OITRS previously pooled loans that it had originated or purchased and then sold them or securitized them to obtain long-term financing for its assets. Securitized loans were transferred to a trust where they served as collateral for asset-backed bonds, which the trust primarily issued to the public. OITRS held approximately $5.9 million of retained interests from securitizations as of December 31, 2009.  In addition, OITRS retained the servicing related to the loans sold or securitized.  While such servicing has since been sold and or surrendered, advances made prior to such transactions continued to be collected as the underlying properties are liquidated.

The cash flows associated with OITRS’s securitization activities for the years ended December 31, 2009 and 2008, were as follows:

(in thousands)

	Years Ended December 31,
		2009				2008
Net servicing fees received (paid)		$	(25	)		$	1,082
Net servicing repayments (advances)			14,254				(6,579	)
Cash flows received on retained interests			9,834				12,701

 

 

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ITEM 6A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

 

 

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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements

	Page
Management’s Report on Internal Control over Financial Reporting	60
Reports of Independent Registered Public Accounting Firms	61
Consolidated Balance Sheets at December 31, 2009 and 2008	63
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008	64
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009 and 2008	66
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008	67
Notes to Consolidated Financial Statements	69

 

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management of Bimini Capital Management, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

(i)   pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

(ii)  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

 

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making its assessment of the effectiveness of internal control, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2009.

 

The Company’s registered public accounting firm has issued an attestation report on the Company’s internal control over financial reporting. The report is included herein.

 

 
 

 

/s/ Robert E. Cauley

Robert E. Cauley

Chairman and Chief Executive Officer

/s/ G. Hunter Haas

G. Hunter Haas IV

President, Chief Investment Officer,

Chief Financial Officer and Treasurer

 

 

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Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Bimini Capital Management, Inc.

Vero Beach, Florida

 

We have audited Bimini Capital Management, Inc.’s (the Company) internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Bimini Capital Management, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bimini Capital Management as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended and our report dated March 15, 2010 expressed an unqualified opinion thereon.

 

 

 

 

West Palm Beach, Florida                                                                                              /s/ BDO Seidman, LLP

March 15, 2010                                                                                                   Certified Public Accountants

 

 

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Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Bimini Capital Management, Inc.

Vero Beach, Florida

 

We have audited the accompanying consolidated balance sheets of Bimini Capital Management, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bimini Capital Management, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Notes 1 and 12 to the consolidated financial statements, Bimini Capital Management, Inc. adopted the fair value option provisions of FASB Accounting Standards Codification No. 825, Financial Instruments effective January 1, 2008.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bimini Capital Management, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2010 expressed an unqualified opinion thereon.

 

 

West Palm Beach, Florida                                                                                                 /s/ BDO Seidman, LLP

March 15, 2010                                                                                                     Certified Public Accountants

 

 

 

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BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
		December 31,
		2009				2008
ASSETS
Mortgage-backed securities – held for trading
Pledged to counterparty, at fair value		$	104,875,798			$	158,444,253
Unpledged, at fair value			14,792,697				13,664,242
Total mortgage-backed securities			119,668,495				172,108,495
Cash and cash equivalents			6,400,065				7,668,581
Restricted cash			2,530,000				-
Principal payments receivable			93,029				187,779
Accrued interest receivable			1,075,052				887,536
Property and equipment, net			3,976,546				4,062,116
Prepaids and other assets			1,266,278				4,590,601
Assets held for sale			14,331,850				43,287,020
Total Assets		$	149,341,315			$	232,792,128
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Repurchase agreements		$	100,271,206			$	148,695,082
Junior subordinated notes due to Bimini Capital Trust I			-				51,550,000
Junior subordinated notes due to Bimini Capital Trust II			26,804,440				51,547,000
Accrued interest payable			131,595				983,069
Dividends payable  in cash			1,877,944				-
Dividends payable in Class A common stock			16,862,469				-
Accounts payable, accrued expenses and other			926,678				480,655
Liabilities related to assets held for sale			7,621,984				10,431,330
Total Liabilities			154,496,316				263,687,136
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT (adjusted for reverse stock split.  See Note 7.)
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 at December 31, 2009 and 2008			-				-
Class A common stock, $0.001 par value; 98,000,000 shares designated; 2,763,779 shares issued and outstanding at December 31, 2009 and 2,620,702 shares issued and outstanding at December 31, 2008			2,764				2,621
Class B common stock, $0.001 par value; 1,000,000 shares designated, 31,939 shares issued and outstanding at December 31, 2009 and 2008			32				32
Class C common stock, $0.001 par value; 1,000,000 shares designated, 31,939 shares issued and outstanding at December 31, 2009 and 2008			32				32
Additional paid-in capital			319,191,227				339,148,411
Accumulated deficit			(324,349,056	)			(370,046,104	)
Stockholders’ Deficit			(5,155,001	)			(30,895,008	)
Total Liabilities and Stockholders’ Deficit		$	149,341,315			$	232,792,128
See Notes to Consolidated Financial Statements

 

 

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BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
		Years Ended December 31,
		2009				2008
Interest income		$	11,024,210			$	26,139,769
Interest expense			(487,770	)			(18,392,702	)
Net interest income before interest on junior subordinated notes			10,536,440				7,747,067
Interest expense on junior subordinated notes			(5,110,729	)			(8,361,727	)
Net interest income (expense)			5,425,711				(614,660	)
Fair value adjustment - held for trading securities			3,249,745				62,831
Gain on sale of mortgage-backed securities, net			1,511,359				316,916
Net interest and non-interest income (loss)			10,186,815				(234,913	)
Direct REIT operating expenses			595,574				700,119
General and administrative expenses:
Compensation and related benefits			1,473,027				2,760,455
Directors' fees and liability insurance			492,396				671,569
Audit, legal and other professional fees			1,459,721				890,725
Other administrative			474,780				1,235,214
Total general and administrative expenses			3,899,924				5,557,963
Total expenses			4,495,498				6,258,082
Gain on debt extinguishments			42,026,708				-
Income (loss) from continuing operations, before income taxes			47,718,025				(6,492,995	)
Provision for income taxes			145,000				-
Income (loss) from continuing operations			47,573,025				(6,492,995	)
Loss from discontinued operations, net of tax			(1,875,977	)			(49,883,568	)
Net income (loss)		$	45,697,048			$	(56,376,563	)

 

 

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BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
		Years Ended December 31,
		2009				2008
Basic Net Income (Loss) Per Share of Class A Common Stock:
Continuing operations		$	17.04			$	(2.54	)
Discontinued operations			(0.67	)			(19.50	)
Total basic net income (loss) per Class A share		$	16.37			$	(22.04	)
Diluted Net Income (Loss) Per Share of Class A Common Stock:
Continuing operations		$	12.35			$	(2.54	)
Discontinued operations			(0.49	)			(19.50	)
Total diluted net income (loss) per Class A share		$	11.86			$	(22.04	)
Basic And Diluted Net Income (Loss) Per Share of Class B Common Stock
Continuing operations		$	17.02			$	(2.45	)
Discontinued operations			(0.68	)			(18.80	)
Total basic and diluted net loss per Class B share		$	16.34			$	(21.25	)
Average Shares Outstanding
CLASS A COMMON STOCK - Basic			2,759,821				2,527,355
CLASS A COMMON STOCK - Diluted			3,807,623				2,527,355
CLASS B COMMON STOCK – Basic and diluted			31,939				31,939
See Notes to Consolidated Financial Statements

 

 

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BIMINI CAPITAL MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

	Common Stock Amounts at par value						Additional Paid-in Capital		Accumulated Deficit		Total
	Class A		Class B		Class C
Balances, January 1, 2008	$	2,486	$	32	$	32	$	338,264,531	$	(315,383,637)	$	22,883,444
Cumulative effect adjustment upon adoption of FASB ASC No. 825		-		-		-		-		1,714,096		1,714,096
Net loss		-		-		-		-		(56,376,563)		(56,376,563)
Issuance of Class A common shares for board compensation and equity plan share exercises		135		-		-		210,513		-		210,648
Amortization of equity plan compensation		-		-		-		673,367		-		673,367
Balances, December 31, 2008	$	2,621	$	32	$	32	$	339,148,411	$	(370,046,104)	$	(30,895,008)
Net income		-		-		-		-		45,697,048		45,697,048
Issuance of Class A common shares for board compensation and equity plan share exercises		143		-		-		148,909		-		149,052
Amortization of equity plan compensation		-		-		-		74,889		-		74,889
Dividends declared		-		-		-		(20,180,982)		-		(20,180,982)
Balances, December 31, 2009	$	2,764	$	32	$	32	$	319,191,227	$	(324,349,056)	$	(5,155,001)

 

 

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BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
		Years Ended December 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	45,697,048			$	(56,376,563	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss from discontinued operations			1,875,977				49,883,568
Stock compensation			223,941				884,814
Depreciation and amortization			468,540				760,891
Gain on sale of mortgage-backed securities, net			(1,511,359	)			(316,916	)
Fair value adjustments, mortgage-backed securities			(3,249,745	)			(62,831	)
Gain on debt extinguishments			(42,026,708	)			-
Changes in operating assets and liabilities:
Accrued interest receivable			(187,516	)			2,749,766
Prepaids and other assets			162,848				97,258
Accrued interest payable			179,811				(2,889,031	)
Accounts payable, accrued expenses and other			446,024				(165,001	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES			2,078,861				(5,434,045	)
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases			(152,804,373	)			(189,780,332	)
Sales			184,173,880				617,526,604
Principal repayments			25,926,346				92,729,319
(Increase) decrease in restricted cash			(2,530,000	)			8,800,000
Purchases of property and equipment			(9,205	)			(13,218	)
NET CASH PROVIDED BY INVESTING ACTIVITIES			54,756,648				529,262,373
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements			1,644,414,837				4,026,420,312
Principal payments on repurchase agreements			(1,692,838,713	)			(4,555,903,001	)
Cash paid to extinguish long-term debt			(32,509,426	)			-
Cash dividends paid			(1,440,570	)			-
NET CASH USED IN FINANCING ACTIVITIES			(82,373,872	)			(529,482,689	)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Net cash provided by operating activities			24,269,847				4,038,182
Net cash used in financing activities			-				(18,000,000	)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS			24,269,847				(13,961,818	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(1,268,516	)			(19,616,179	)
CASH AND CASH EQUIVALENTS, Beginning of the year			7,668,581				27,284,760
CASH AND CASH EQUIVALENTS, End of the year		$	6,400,065			$	7,668,581

 

 

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BIMINI CAPITAL MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
	Years Ended December 31,
		2009		2008
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest	$	5,044,964	$	30,914,333
Cash paid during the year for income taxes	$	-	$	-
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Securities transferred from available-for-sale to trading (at fair value)	$	-	$	1,714,096
Assets and liabilities retired through debt extinguishment transactions:
Investment in Bimini Capital Trust I	$	1,550,000	$	-
Investment in Bimini Capital Trust II		742,560
Unamortized debt issuance costs		495,150		-
Junior subordinated notes due to Bimini Capital Trust I		34,050,000		-
Junior subordinated notes due to Bimini Capital Trust II		10,680,014
Accrued interest payable due to Bimini Capital Trust I and II		1,031,285		-
Cash dividends declared and paid in future period	$	1,877,944	$	-

See Notes to Consolidated Financial Statements

 

 

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BIMINI CAPITAL MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

NOTE 1.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

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 material presence 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 our investment strategy and liquidity management, however is limited because such investments do not satisfy the criteria for REIT qualifications.  However, if cash resources are, at any time, insufficient to satisfy the Company’s liquidity requirements, such as when cash flow from operations are materially negative, the Company may be required to pledge additional assets to meet margin calls, liquidate assets, sell additional debt or equity securities or pursue other financing alternatives.

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.

The Company has evaluated all subsequent events for potential recognition and disclosure through March 15, 2010, the date of the filing of this Form 10-K.

Effective July 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”), Accounting Standards Codification, (“the Codification”), which is now the source of authoritative GAAP.  While the Codification did not change GAAP, all existing authoritative accounting literature, with certain exceptions, was superseded and incorporated into the Codification,  As a result, pre-Codification references to GAAP have been eliminated.

 

 

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Discontinued Operations

On November 3, 2005, Bimini Mortgage 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 December 31, 2009, the remaining assets and liabilities are considered to be contingent and remain on OITRS’s books 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 13 - 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 6, Bimini Capital historically had a common share investment in two trusts 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 trusts have not been consolidated in the financial statements of Bimini Capital, and accordingly, these investments have been accounted for on the equity method.

 

Condensed Statement of Comprehensive Income (Loss)

 

In accordance with FASB ASC 220, Comprehensive Income, a condensed 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 carrying amount of cash equivalents and restricted cash approximates their fair value as of December 31, 2009 and 2008.

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 December 31, 2009, uninsured deposits were approximately $5.9 million.

 

 

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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.  Realized gains and losses on the sale of MBS are determined based on the specific identified cost of the security.

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.

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. Through December 31, 2007, the Company classified all of its securities acquired prior to June 30, 2007 as available-for-sale and all securities acquired after June 30, 2007 as trading.  On January 1, 2008, in connection with the adoption of the fair value option within FASB ASC 825, Financial Instruments, the Company transferred its remaining available-for-sale securities to trading and accordingly, recognized a $1.7 million fair value adjustment. All MBS securities held by Bimini Capital are reflected in the Company's financial statements at their estimated fair value.

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 a fair value adjustment-held for 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 12 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 December 31, 2009 and 2008, 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 6 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.

 

 

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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 December 31, 2009, 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) to any single lender of $4.9 million related to repurchase agreements, as described in Note 5.

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 attached to 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 the effect of the reverse split, the Company had 27,637,789 shares of Class A common stock outstanding at December 31, 2009 and 319,388 shares each of its Class B and Class C common stock.  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.  This brought the total shares outstanding of Class A common stock to 100,052,251 at January 19, 2010. Upon consummation of the reverse split, issued and outstanding shares of Class A, Class B and Class C common stock were 10,052,225, 31,939 and 31,939, respectively, as of March 12, 2010. 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.

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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 C Common Stock, totaling 31,939 shares, 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.

Shares distributed in January 2010 pursuant to the Company’s November 9, 2009 special dividend declaration are included in the calculation of diluted weighted average shares as of the declaration date.  These shares were not included in the calculation of basic weighted average shares because the shares were not issued yet.

All basic and diluted weighted average share and per-share amounts have been adjusted 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 December 31, 2009, management of the Company believes they have complied with Code requirements and Bimini Capital continues to qualify as a REIT. As further described in Note 13, 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.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentations.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“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 Company is in the process of reviewing the potential impact of ASU No. 2010-06; however, the adoption of this ASU is not expected to have a material impact to the consolidated 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 ASU seeks 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 for its dividend declared in November 2009 and paid in January 2010.

In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value.  This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using either, (a) a valuation technique that uses the quoted price of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when traded as assets, or (b) another valuation technique that is consistent with the principles of FASB ASC 820.  The Company adopted the guidance provided in this ASU on October 1, 2009.  The implementation of this new accounting guidance did not have any impact on the Company’s financial statements.

 

 

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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 that begin after November 15, 2009. Earlier application is prohibited. The Company adopted FAS 167 on January 1, 2010 and does not expect the implementation to have any impact on its consolidated 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 is prohibited. The recognition and measurement provisions of FAS 166 shall be applied to transfers that occur on or after the effective date. The Company adopted FAS 166 on January 1, 2010 and does not expect the implementation to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting No. 165 (“FAS 165”), Subsequent Events, which was subsequently incorporated into ASC 855, Subsequent Events.  FAS 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  Although there is new terminology, the standard is based on the same principles as those that previously existed.  The Company adopted FAS 165 on April 1, 2009. The implementation of these provisions did not have a material impact on the consolidated financial statements operations.

In April 2009, the FASB issued Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which was subsequently incorporated into ASC 820, Fair Value Measurements and Disclosures. This FSP provides additional guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability (or similar assets or liabilities).  The FSP gives specific factors to evaluate if there has been a decrease in normal market activity and if so, provides a methodology to analyze transactions or quoted prices and make necessary adjustments to fair value in accordance with Statement 157. The objective is to determine the point within a range of fair value estimates that is most representative of fair value under current market conditions.  The adoption of FSP FAS 157-4 on July 1, 2009 did not have a material effect on the consolidated financial statements.

Additionally, in conjunction with FSP FAS 157-4, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other Than Temporary Impairments, which were subsequently incorporated into ASC 320, Investments-Debt and Equity Securities. The objective of the new guidance is to make impairment guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments (OTTI) on debt and equity securities in financial statements.  The guidance revises the OTTI evaluation methodology. Previously the analytical focus was on whether the company had the "intent and ability to retain its investment in the debt security for a period of time sufficient to allow for any anticipated recovery in fair value". Now the focus is on whether (1) the Company has the intent to sell the Investment Securities, (2) it is more likely than not that it will be required to sell the Investment Securities before recovery, or (3) it does not expect to recover the entire amortized cost basis of the Investment Securities. Further, the security is analyzed for credit loss, (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the statement of earnings, while the balance of impairment related to other factors will be recognized in OCI. FAS 115-2 and FAS 124-2 were effective for all interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have any effect on the consolidated financial statements.

In April, 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which was subsequently incorporated into ASC 825, Financial Instruments. The guidance requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.  The Company adopted FSP FAS 107-1 and APB 28-1 on April 1, 2009.

 
 

 

 

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 NOTE 2.                      MORTGAGE-BACKED SECURITIES

The following are the carrying values of Bimini Capital’s MBS portfolio:

(in thousands)

		December 31,
		2009				2008
Pass-Through Certificates:
Hybrid Arms		$	67,036			$	63,068
Adjustable-rate Mortgages			32,598				70,632
Fixed-rate Mortgages			5,242				24,884
Total Pass-Through Certificates			104,876				158,584
Mortgage Derivative Certificates:
MBS Derivatives			14,793				13,524
Totals		$	119,669			$	172,108

As of December 31, 2009 all 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.  PROPERTY AND EQUIPMENT

 

The composition of property and equipment follows:

(in thousands)

		December 31,
		2009				2008
Land		$	2,247			$	2,247
Buildings and improvements			1,825				1,816
Computer equipment			261				261
Office furniture and equipment			248				248
			4,581				4,572
Less accumulated depreciation and amortization			604				510
Property and equipment, net		$	3,977			$	4,062

Depreciation of property and equipment totaled $95,000 in 2009 and $127,000 in 2008.

NOTE 4.                      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 years ended December 31, 2009 and 2008. For the year ended December 31, 2009, a weighted average of 54,411 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 year ended December 31, 2008 basic EPS computations, even though they are participating securities.

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As discussed in Note 7, on November 9, 2009, the Company’s Board of Directors declared a special dividend to the holders of its dividend eligible securities on the record date of December 9, 2009.  This dividend gave shareholders 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.  In accordance with Accounting Standards Update No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash, issued in January 2010, a weighted average of 1,044,488 shares associated with this distribution was included in the calculation of diluted weighted average shares as of the declaration date.  These shares were not included in the calculation of basic weighted average shares because the shares were not yet due for issuance.

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

(in thousands, except per-share information)

		Years Ended December 31,
		2009				2008
Basic and diluted EPS per Class A common share:
Income (loss) available to Class A common shares:
Continuing operations			47,030				(6,415	)
Discontinued operations			(1,855	)			(49,283	)
		$	45,175			$	(55,698	)
Weighted average common shares:
Class A common shares outstanding at the balance sheet date			2,764				2,621
Unvested dividend-eligible stock incentive plan shares outstanding at the balance sheet date			102				-
Effect of weighting			(106	)			(94	)
Weighted average shares-basic			2,760				2,527
Effect of dilutive stock incentive plan shares			4				-
Effect of shares to be issued in 2010 as part of dividend declared in 2009			1,044				-
Weighted average shares-diluted			3,808				2,527
Earnings (loss) per Class A common share:
Basic:
Continuing operations		$	17.04			$	(2.54	)
Discontinued operations			(0.67	)			(19.50	)
		$	16.37			$	(22.04	)
Diluted:
Continuing operations		$	12.35				(2.54	)
Discontinued operations			(0.49	)			(19.50	)
		$	11.86				(22.04	)
Basic and diluted EPS per Class B common share:
Income (loss) available to Class B common shares:
Continuing operations			543				(78	)
Discontinued operations			(21	)			(601	)
		$	522			$	(679	)
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		$	17.02			$	(2.45	)
Discontinued operations			(0.68	)			(18.80	)
		$	16.34			$	(21.25	)

 

 

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NOTE 5.     REPURCHASE AGREEMENTS

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% and these agreements were collateralized by MBS with a fair value of approximately $105.2 million.  As of December 31, 2008, Bimini Capital had outstanding repurchase obligations of approximately $148.7 million with a net weighted average borrowing rate of 1.89%, and these agreements were collateralized by MBS with a fair value of approximately $159.1 million.

As of December 31, 2009 and 2008, 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
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	%
December 31, 2008
Agency-Backed Mortgage--Backed Securities:
Fair market value of securities sold, including accrued interest receivable		$	-			$	159,130			$	-			$	-			$	159,130
Repurchase agreement liabilities associated with these securities		$	-			$	148,695			$	-			$	-			$	148,695
Net weighted average borrowing rate			-				1.89	%			-				-				1.89	%

Summary information regarding the Company’s amounts at risk with individual counterparties greater than 10% of the Company’s equity at December 31, 2009 and 2008 is as follows:

 (in thousands)

Repurchase Agreement Counterparties		Amount at Risk(1)				Weighted Average Maturity of Repurchase Agreements in Days
December 31, 2009
MF Global, Inc.		$	4,929				38
December 31, 2008
MF Global, Inc.		$	10,270				11

(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 6.                      TRUST PREFERRED SECURITIES

As of December 31, 2008, Bimini Capital sponsored two statutory trusts, known as Bimini Capital Trust I (“BCTI”) and 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 by each trust are the sole assets of that trust.

 

 

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As further described below, during the year ended December 31, 2009, Bimini Capital entered into agreements pursuant to which all of the obligations under the trust preferred capital securities issued by BCTI and $24.7 million of the obligations under the trust preferred capital securities issued by BCTII were discharged. The Company recorded gains of approximately $42.0 million on these debt extinguishments. Obligations related to these statutory trusts are presented below.

(In thousands)

		December 31,
		2009				2008
Junior subordinated notes owed to Bimini Capital Trust I (BCTI)		$	-			$	51,550
Junior subordinated notes owed to Bimini Capital Trust II (BCTII)		$	26,804			$	51,547

The BCTI trust preferred securities and Bimini Capital's BCTI Junior Subordinated Notes had a fixed-rate of interest until 2010, of 7.61% and thereafter, through maturity in 2035, the rate would float at a spread of 3.30% over the prevailing three-month LIBOR rate.

On April 21, 2009, the Company extinguished approximately $51.6 million of its junior subordinated notes issued to BCTI for consideration totaling approximately $18.0 million, recognizing a gain (after all costs and expenses were recognized) of approximately $32.4 million.

 

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.

On October 21, 2009, the Company extinguished approximately $24.7 million of its junior subordinated notes issued to BCTII for consideration totaling approximately $14.5 million, recognizing a gain (after all costs and expenses were recognized) of approximately $9.6 million.

 

Pursuant to the applicable accounting rules, each trust has been considered to be a variable interest entity 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 each 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 BCTI and BCTII have not been considered to be a variable interest, Bimini Capital has not been considered to be the primary beneficiary of the trusts. Therefore, Bimini Capital has not consolidated the financial statements of BCTI and BCTII into its financial statements.  The accompanying consolidated financial statements present Bimini Capital's BCTI and BCTII Junior Subordinated Notes issued to the trusts as liabilities and Bimini Capital's investments in the common equity securities of BCTI and BCTII as assets. For financial statement purposes, Bimini Capital records payments of interest on the Junior Subordinated Notes issued to BCTI and BCTII as interest expense.

NOTE 7.  CAPITAL STOCK

Authorized Shares

The total number of shares of capital stock which the Company has the authority to issue is 110,000,000 shares. The Board of Directors has the authority to classify any unissued shares by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares.

Common Stock

Of the 100,000,000 authorized shares of common stock, 98,000,000 shares were designated as Class A Common Stock, 1,000,000 shares were designated as Class B Common Stock and 1,000,000 shares were designated as Class C Common Stock. Holders of shares of common stock have no sinking fund or redemption rights and have no preemptive rights to subscribe for any of the Company’s securities. All common shares have a $0.001 par value.

 

 

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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 have been restated to reflect the reverse stock split

Class A Common Stock

Each outstanding share of Class A Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. Holders of shares of Class A Common Stock are not entitled to cumulate their votes in the election of directors.

Subject to the preferential rights of any other class or series of stock and to the provisions of the Company's charter, as amended, regarding the restrictions on transfer of stock, holders of shares of Class A Common Stock are entitled to receive dividends on such stock if, as and when authorized and declared by the Board of Directors.

Class B Common Stock

Each outstanding share of Class B Common Stock entitles the holder to one vote on all matters submitted to a vote of common stockholders, including the election of directors. Holders of shares of Class B Common Stock are not entitled to cumulate their votes in the election of directors. Holders of shares of Class A Common Stock and Class B Common Stock shall vote together as one class in all matters except that any matters which would adversely affect the rights and preferences of Class B Common Stock as a separate class shall require a separate approval by holders of a majority of the outstanding shares of Class B Common Stock. Holders of shares of Class B Common Stock are entitled to receive dividends on each share of Class B Common Stock 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.

Each share of Class B Common Stock shall automatically be converted into one share of Class A Common Stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A Common Stock, calculated on a pro forma basis as if conversion of the Class B Common Stock (or portion thereof to be converted) had occurred, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class B Common Stock to be converted into Class A Common Stock in any quarter shall not exceed an amount that will cause the stockholders' equity attributable to the Class A Common Stock calculated as set forth above to be less than $150.00 per share; provided further, that such conversions shall continue to occur until all shares of Class B Common Stock have been converted into shares of Class A Common Stock; and provided further, that the total number of shares of Class A Common Stock issuable upon conversion of the Class B Common Stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A Common Stock.

Class C Common Stock

No dividends will be paid on the Class C Common Stock. Holders of shares of Class C Common Stock are not entitled to vote on any matter submitted to a vote of stockholders, including the election of directors, except that any matters that would adversely affect the rights and privileges of the Class C Common Stock as a separate class shall require the approval of a majority of the Class C Common Stock.

 

 

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Each share of Class C Common Stock shall automatically be converted into one share of Class A Common Stock on the first day of the fiscal quarter following the fiscal quarter during which the Company's Board of Directors were notified that, as of the end of such fiscal quarter, the stockholders' equity attributable to the Class A Common Stock, calculated on a pro forma basis as if conversion of the Class C Common Stock had occurred and giving effect to the conversion of all of the shares of Class B Common Stock as of such date, and otherwise determined in accordance with GAAP, equals no less than $150.00 per share (adjusted equitably for any stock splits, stock combinations, stock dividends or the like); provided, that the number of shares of Class C Common Stock to be converted into Class A Common Stock shall not exceed an amount that will cause the stockholders' equity attributable to the Class A Common Stock calculated as set forth above to be less than $150.00 per share; and provided further, that such conversions shall continue to occur until all shares of Class C Common Stock have been converted into shares of Class A Common Stock and provided further, that the total number of shares of Class A Common Stock issuable upon conversion of the Class C Common Stock shall not exceed 3% of the total shares of common stock outstanding prior to completion of an initial public offering of Bimini Capital's Class A Common Stock.

Issuances of Common Stock

During the years ended December 31, 2009 and 2008, the Company issued 9,781 and 12,080 shares, respectively, of its Class A Common Stock to Bimini employees pursuant to the terms of the stock incentive plan phantom share grants (see Note 8).

During the years ended December 31, 2009 and 2008, the Company issued 133,296 and 122,482 shares, respectively, of its Class A Common Stock for payment of Director fees.  In addition, the Company also paid its directors cash compensation of approximately $114,950 during 2008.

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 $0.50 per share cash dividend to the holders of its dividend eligible securities on the record date of November 16, 2009. The distribution totaling approximately $1.4 million was paid on November 20, 2009.

Also 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 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 a pro forma basis, assuming that the settlement of the special dividend was reflected in Stockholders Equity at December 31, 2009, total consolidated stockholders’ equity would be approximately $11.6 million.

 
 

Preferred Stock

General

After the reclassification of authorized shares described above, there are 10,000,000 authorized shares of preferred stock, with a $0.001 per share par value. The Company's Board of Directors has the authority to classify any unissued shares of preferred stock and to reclassify any previously classified but unissued shares of any series of preferred stock previously authorized by the Board of Directors.  Prior to issuance of shares of each class or series of preferred stock, the Board of Directors is required by the Company’s charter to fix the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such class or series.

 

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Classified and Designated Shares

Pursuant to the Company’s supplementary amendment of its charter, effective November 3, 2005, and by resolutions adopted on September 29, 2005, the Company’s Board of Directors classified and designated 1,800,000 shares of the authorized but unissued preferred stock, $0.001 par value, as Class A Redeemable Preferred Stock and 2,000,000 shares of the authorized but unissued preferred stock as Class B Redeemable Preferred Stock.

 
 

Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock

The Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock rank equal to each other and shall have the same preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms; provided, however that the redemption provisions of the Class A Redeemable Preferred Stock and the Class B Redeemable Preferred Stock differ.  Each outstanding share of Class A Redeemable Preferred Stock and Class B Redeemable Preferred Stock shall have one-fifth of a vote on all matters submitted to a vote of stockholders (or such lesser fraction of a vote as would be required to comply with the rules and regulations of the NYSE relating to the Company’s right to issue securities without obtaining a stockholder vote). Holders of shares of preferred stock shall vote together with holders of shares of common stock as one class in all matters that would be subject to a vote of stockholders.

The previously outstanding shares of Class A Redeemable Preferred Stock were converted into Class A Common Stock on April 28, 2006. No shares of the Class B Redeemable Preferred Stock have ever been issued.

Ownership Limitations

Bimini Capital’s amended charter, subject to certain exceptions, contains certain restrictions on the number of shares of stock that a person may own. Bimini Capital’s amended charter contains a stock ownership limit that prohibits any person from acquiring or holding, directly or indirectly, applying attribution rules under the Code, shares of stock in excess of 9.8% of the total number or value of the outstanding shares of Bimini Capital’s common stock, whichever is more restrictive, or Bimini Capital’s stock in the aggregate. Bimini Capital’s amended charter further prohibits (i) any person from beneficially or constructively owning shares of Bimini Capital’s stock that would result in Bimini Capital being "closely held" under Section 856(h) of the Code or otherwise cause Bimini Capital to fail to qualify as a REIT, and (ii) any person from transferring shares of Bimini Capital’s stock if such transfer would result in shares of Bimini Capital’s stock being owned by fewer than 100 persons. Bimini Capital’s Board of Directors, in its sole discretion, may exempt a person from the stock ownership limit. However, Bimini Capital’s Board of Directors may not grant such an exemption to any person whose ownership, direct or indirect, of an excess of 9.8% of the number or value of the outstanding shares of Bimini Capital’s stock (whichever is more restrictive) would result in Bimini Capital being "closely held" within the meaning of Section 856(h) of the Code or otherwise would result in failing to qualify as a REIT. The person seeking an exemption must represent to the satisfaction of Bimini Capital’s Board of Directors that it will not violate the aforementioned restriction. The person also must agree that any violation or attempted violation of any of the foregoing restrictions will result in the automatic transfer of the shares of stock causing such violation to the trust (as defined below). Bimini Capital’s Board of Directors may require a ruling from the IRS or an opinion of counsel, in either case in form and substance satisfactory to Bimini Capital’s Board of Directors in its sole discretion, to determine or ensure Bimini Capital’s qualification as a REIT.

On January 28, 2008, the Board of Directors of the Company adopted resolutions decreasing the maximum ownership limit with respect to the Company’s outstanding shares of capital stock from 9.8% to 4.98%.  Subject to limitations, the Board of Directors may from time to time increase or decrease the maximum ownership limit; provided, however, that any decrease may only be made prospectively as to subsequent stockholders (other than a decrease as a result of a retroactive change in existing law that would require a decrease to retain the Company’s status as a real estate investment trust under the Internal Revenue Code, in which case such decrease shall be effective immediately).

Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of Bimini Capital’s stock that will or may violate any of the foregoing restrictions on transferability and ownership, or any person who would have owned shares of Bimini Capital’s stock that resulted in a transfer of shares to the trust in the manner described below, will be required to give notice immediately to Bimini Capital and provide Bimini Capital with such other information as Bimini Capital may request in order to determine the effect of such transfer on the Company.

 

 

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If any transfer of shares of Bimini Capital’s stock occurs which, if effective, would result in any person beneficially or constructively owning shares of Bimini Capital’s stock in excess or in violation of the above transfer or ownership limitations, then that number of shares of Bimini Capital’s stock the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the prohibited owner shall not acquire any rights in such shares. Such automatic transfer shall be deemed to be effective as of the close of business on the business day prior to the date of such violative transfer. Shares of stock held in the trust shall be issued and outstanding shares of Bimini Capital’s stock. The prohibited owner shall not benefit economically from ownership of any shares of stock held in the trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of stock held in the trust. The trustee of the trust shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the trust, which rights shall be exercised for the exclusive benefit of the charitable beneficiary. Any dividend or other distribution paid prior to the discovery by Bimini Capital that shares of stock have been transferred to the trustee shall be paid by the recipient of such dividend or distribution to the trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the trustee. Any dividend or distribution so paid to the trustee shall be held in trust for the charitable beneficiary. The prohibited owner shall have no voting rights with respect to shares of stock held in the trust and, subject to Maryland law, effective as of the date that such shares of stock have been transferred to the trust, the trustee shall have the authority (at the trustee's sole discretion) (i) to rescind as void any vote cast by a prohibited owner prior to the discovery by Bimini Capital that such shares have been transferred to the trust, and (ii) to recast such vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if Bimini Capital has already taken irreversible corporate action, then the trustee shall not have the authority to rescind and recast such vote.

Within 20 days after receiving notice from Bimini Capital that shares of Bimini Capital’s stock have been transferred to the trust, the trustee shall sell the shares of stock held in the trust to a person, whose ownership of the shares will not violate any of the ownership limitations set forth in Bimini Capital’s amended charter. Upon such sale, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the prohibited owner and to the charitable beneficiary as follows. The prohibited owner shall receive the lesser of (i) the price paid by the prohibited owner for the shares or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other such transaction), the market price, as defined in Bimini Capital’s amended charter, of such shares on the day of the event causing the shares to be held in the trust and (ii) the price per share received by the trustee from the sale or other disposition of the shares held in the trust, in each case reduced by the costs incurred to enforce the ownership limits as to the shares in question. Any net sale proceeds in excess of the amount payable to the prohibited owner shall be paid immediately to the charitable beneficiary. If, prior to the discovery by Bimini Capital that shares of Bimini Capital’s stock have been transferred to the trust, such shares are sold by a prohibited owner, then (i) such shares shall be deemed to have been sold on behalf of the trust and (ii) to the extent that the prohibited owner received an amount for such shares that exceeds the amount that such prohibited owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the trustee upon demand.

In addition, shares of Bimini Capital’s stock held in the trust shall be deemed to have been offered for sale to Bimini Capital, or Bimini Capital’s designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the trust (or, in the case of a devise or gift, the market price at the time of such devise or gift) and (ii) the market price on the date Bimini Capital, or Bimini Capital’s designee, accept such offer. Bimini Capital shall have the right to accept such offer until the trustee has sold the shares of stock held in the trust. Upon such a sale to Bimini Capital, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the prohibited owner.

NOTE 8.   STOCK INCENTIVE PLANS

 

As discussed in Note 7, outstanding stock incentive plan shares were adjusted for all periods presented to give effect to the reverse split.

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.

 

 

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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 years ended December 31, 2009 and 2008 was approximately, $75,000 and $673,000, respectively. Phantom share awards may or may not include dividend equivalent rights.  Dividends paid on unsettled phantom shares are charged to retained earnings when declared.

A summary of phantom share activity during the years ended December 31, 2009 and 2008 is presented below:

		Years Ended December 31,
		2009								2008
		Shares				Weighted-Average Grant-Date Fair Value				Shares				Weighted-Average Grant-Date Fair Value
Nonvested at January 1			13,237			$	5.79				12,738			$	113.62
Granted			102,000				1.58				25,000				2.60
Vested			(8,197	)			7.36				(13,875	)			58.93
Forfeited			(5,040	)			3.24				(10,626	)			58.16
Nonvested at December 31			102,000			$	1.58				13,237			$	5.79

As of December 31, 2009, there was approximately $145,000 of total unrecognized compensation cost related to non-vested phantom share awards.  That cost is expected to be recognized over a weighted-average period of 53.9 months.

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.

NOTE 9.

SAVINGS INCENTIVE PLAN

Bimini Capital’s employees have the option to participate in the Bimini Capital Management, Inc., 401K Plan (the “Plan”). Under the terms of the Plan, eligible employees can make tax-deferred 401(k) contributions, and at Bimini Capital’s sole discretion, Bimini Capital can match the employees’ contributions. For the years ended December 31, 2009 and 2008, Bimini Capital made 401(k) matching contributions of approximately $34,490 and $30,000, respectively.

 

NOTE 10.                      COMMITMENTS AND CONTINGENCIES

Outstanding Litigation

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

 

 

 

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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 us, certain of our 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.  We 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 defendant’s 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. The Company has accrued approximately $0.5 million related to the settlement which is the remainder of its $1.0 million retention that it was required to pay under the terms of its Directors and Officers insurance policy.  The remainder of the settlement and legal fees and costs associated with finalizing the settlement will be paid by the D&O 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 take approximately 3 to 6 months.  Defendants made no admission of liability in connection with the settlement.  If the settlement is not finalized, the class action would continue.  While the Company 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 Company.

 

A complaint was filed on December 23, 2009 in the Southern District of New York against Bimini Capital Management, Inc. ("Bimini"), 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’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 tortious interference with contract and aiding and abetting breach of fiduciary duty by Bimini 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 and Hexagon.  Bimini denies that the repurchase was improper and intends to defend the suit vigorously.  Accordingly, the Company has not recognized any liabilities relating to this claim as of December 31, 2009.

 

Guarantees

Bimini Capital guaranteed the performance of OITRS with respect to certain contractual obligations arising in connection with the sale of mortgage servicing rights by OITRS. During the year ended December 31, 2009, the Company entered into an agreement with the counterparty to the sale of the mortgage servicing rights which terminated this guarantee.

NOTE 11.  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 Bimini Capital’s REIT taxable income (loss) and the Company’s financial statement net income (loss) can be substantial and each item can affect several years.

Year 2009

For the year ended December 31, 2009, Bimini Capital's REIT taxable income was approximately $40.1 million, prior to the application of the dividends paid deduction of $19.5 million and the utilization of $20.6 million of the tax net operating loss carryforwards.  These two items reduced REIT taxable income to zero, in accordance with the Code.  The utilization of the tax net operating loss carryforward resulted in approximately $0.1 million of alternative minimum tax being due for the year 2009.

 

 

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During 2009, Bimini Capital's most significant items and transactions being accounted for differently for REIT tax purposes than for GAAP purposes include:  the loss from discontinued operations, which does not impact the REIT’s taxable income;  interest on the MBS portfolio;  the accounting for debt issuance costs;  net gains realized on certain MBS sales;  and the effect of equity plan stock awards.  The interest on the MBS portfolio is being recognized on a different accounting method for tax purposes.   The debt issuance costs are amortized over different periods for tax purposes, so the amount of unamortized debt issuance costs written-off as part of the cancellation of debt transaction was greater for tax purposes.  Net gains on MBS sales for tax purposes are considered capital gains, so these gains have been offset by the REIT’s previously realized capital loss carryovers.  The future deduction of equity plan stock compensation against REIT taxable income is uncertain as to the amount, because the tax impact is measured at the fair value of the shares as of a future date, and this amount may be greater or less than the financial statement expense already recognized by the Company.  In addition, the tax treatment for dividends paid on unvested equity plan awards is to deduct them as compensation.

As of December 31, 2009, the REIT has approximately $57.3 million of remaining tax capital loss carryforwards available to offset future tax capital gains. As of December 31, 2009 the REIT has remaining tax net operating loss carryforwards of approximately $0.7 million that are immediately available to offset future REIT taxable income.  The tax capital loss carryforwards begin to expire in 2012, and the tax net operating loss carryforwards begin to expire in 2028.

Year 2008

For the year ended December 31, 2008, Bimini Capital's REIT taxable loss was approximately $14.2 million.  During 2008, Bimini Capital's most significant items and transactions being accounted for differently for REIT tax purposes than for GAAP purposes include: the loss from discontinued operations; interest on the MBS portfolio and on the inter-company loans with OITRS; equity plan stock awards; the accounting for debt issuance costs and depreciation of property and equipment; and gains (losses) realized on certain MBS sales.  The interest on the MBS portfolio is being recognized on a different accounting method for tax purposes. The debt issuance costs and the property and equipment are being amortized and depreciated over different useful lives for tax purposes.  The future deduction of equity plan stock compensation against REIT taxable income is uncertain as to the amount, because the tax impact is measured at the fair value of the shares as of a future date, and this amount may be greater than or less than the financial statement expense already recognized by the Company.

As of December 31, 2008, the REIT has approximately $66.5 million of tax capital loss carryforwards available to offset future tax capital gains. As of December 31, 2008 the REIT had tax net operating loss carryforwards of approximately $21.3 million that are immediately available to offset future REIT taxable income.  The tax capital loss carryforwards begin to expire in 2012, and the tax net operating loss carryforwards begin to expire in 2027.

NOTE 12.   FAIR VALUE

On January 1, 2008, in connection with the adoption of FASB ASC 825, Financial Instruments, Bimini Capital elected, to transfer its available-for-sale portfolio of MBS to trading.  The election was made to provide consistent accounting treatment for all MBS investments, since the investment intent for all security holdings is consistent. The securities transferred had similar characteristics to the Company’s existing trading portfolio, including issuer, credit quality, yield, duration and remaining term. As a result of electing to record these securities at fair value pursuant to the provisions of SFAS No. 159, the Company recorded the following adjustment to beginning accumulated deficit:

(in thousands)

Balance at January 1, 2008 (after adoption)		$	296,118
Balance at December 31, 2007 (prior to adoption)			(294,404	)
Cumulative effect of adopting the fair value option		$	1,714

 

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.

 

 

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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 December 31, 2009 and 2008 are determined as follows:

(in thousands)

		December 31,
		2009				2008
Quoted Prices in Active Markets for Identical Assets (Level 1)		$	-			$	-
Significant Other Observable Inputs (Level 2)			119,668				172,108
Significant Unobservable Inputs (Level 3)			-				-
Total Fair Value Measurements		$	119,668			$	172,108

NOTE 13.   DISCONTINUED OPERATIONS

OITRS

Beginning in April 2007, the Board of Managers of OITRS, at the recommendation of and with the approval of the Board of Directors of Bimini Capital, began a process that would eventually result in the sale or closure of all business operations within OITRS.  The decision to sell and/or close OITRS was made after evaluation of, among other things, short and long-term business prospects for OITRS, and its inability to recover from large operating losses. All OITRS assets are classified as held for sale, and OITRS has been accounted for as a discontinued operation beginning in the second quarter of 2007.  Following is a summary of significant events associated with the Company’s discontinued operations:

As of December 31, 2009, the remaining assets and liabilities of OITRS consist of contingent assets or liabilities that remain pursuant to the terms of the disposal of the operations, with the exception of mortgage loans held for sale and 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 deteriorations 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.

The results of discontinued operations of OITRS included in the accompanying consolidated statements of operations for the years ended December 31, 2009 and 2008 were as follows:

(in thousands)

		Years ended December 31,
		2009				2008
Interest income, net		$	254			$	12
Interest expense			-				20
Net interest income(deficiency)			254				(8	)
Gain (loss) on discontinued mortgage banking activities:
Fair value adjustment on retained interests			167				(40,998	)
Other discontinued mortgage banking activities			749				(660	)
Other income and expenses, net of non-recurring items			57				1,954
Net servicing loss			(289	)			(1,591	)
Other interest expense and loss reserves			(468	)			(2,005	)
Revenues (deficiency of revenues), net			470				(43,308	)
General and administrative expenses			(2,346	)			(5,031	)
Loss before provision for income taxes			(1,876	)			(48,339	)
Provision for income taxes			-				(1,545	)
Total loss from discontinued operations, net of taxes		$	(1,876	)		$	(49,884	)

 

 

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The assets and liabilities of OITRS as of December 31, 2009 and 2008 were as follows:

		December 31,
		2009				2008
Assets
Cash and cash equivalents		$	70			$	35
Mortgage loans held for sale (a)			207				464
Retained interests(b)			5,934				15,601
Receivables, net (c)			6,046				23,792
Prepaids and other assets			2,075				3,395
Assets held for sale		$	14,332			$	43,287
Liabilities
Accounts payable, accrued expenses and other (d),(e)		$	7,622			$	10,431
Liabilities related to assets held for sale		$	7,622			$	10,431

(a) – Mortgage loans held for sale, net

 

Mortgage loans held for sale consist of the following as of December 31, 2009 and 2008:

 (in thousands)

		December 31,
		2009				2008
Mortgage loans held for sale		$	2,149			$	3,022
Valuation allowance			(1,942	)			(2,558	)
		$	207			$	464

(b) – Retained interests

      The following table summarizes OITRS’s residual interests in securitizations as of December 31, 2009 and 2008:

(in thousands)

			December 31,
Series	Issue Date		2009				2008
HMAC 2004-1	March 4, 2004		$	757			$	2,441
HMAC 2004-2	May 10, 2004			1,340				2,735
HMAC 2004-3	June 30, 2004			1,541				1,281
HMAC 2004-4	August 16, 2004			1,280				1,867
HMAC 2004-5	September 28, 2004			1,016				3,080
HMAC 2004-6	November 17, 2004			-				1,846
OMAC 2005-1	January 31, 2005			-				999
OMAC 2005-2	April 5, 2005			-				169
OMAC 2005-3	June 17, 2005			-				1,181
OMAC 2005-4	August 25, 2005			-				2
OMAC 2005-5	November 23, 2005			-				-
OMAC 2006-1	March 23, 2006			-				-
OMAC 2006-2	June 26, 2006			-				-
Total			$	5,934			$	15,601

 

 

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At December 31, 2009 and 2008, 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)

		December 31,
		2009				2008
Balance sheet carrying value of retained interests – fair value		$	5,934			$	15,601
Weighted average life (in years)			0.22				14.76
Prepayment assumption (annual rate)			12.65	%			19.36	%
Impact on fair value of 10% adverse change		$	(37	)		$	(1,838	)
Impact on fair value of 20% adverse change		$	(51	)		$	(3,086	)
Expected Credit losses (annual rate)			9.08	%			5.61	%
Impact on fair value of 10% adverse change		$	(242	)		$	(2,841	)
Impact on fair value of 20% adverse change		$	(439	)		$	(6,095	)
Residual Cash-Flow discount rate			27.50	%			27.50	%
Impact on fair value of 10% adverse change		$	(42	)		$	(1,540	)
Impact on fair value of 20% adverse change		$	(83	)		$	(2,838	)
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		$	(113	)		$	(2,692	)
Impact on fair value of 20% adverse change		$	(214	)		$	(5,067	)

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 at December 31, 2009 and 2008.

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				Actual Losses Through December 31, 2009				Projected Future Credit Losses as of December 31, 2009				Projected Total Credit Losses as of December 31, 2009
HMAC 2004-1	March 4, 2004		$	309,710				0.81	%			0.88	%			1.69	%
HMAC 2004-2	May 10, 2004			388,737				1.27	%			1.63	%			2.90	%
HMAC 2004-3	June 30, 2004			417,055				1.21	%			1.26	%			2.48	%
HMAC 2004-4	August 16, 2004			410,123				1.06	%			1.09	%			2.15	%
HMAC 2004-5	September 28, 2004			413,875				1.43	%			1.97	%			3.40	%
HMAC 2004-6	November 17, 2004			761,027				2.14	%			1.98	%			4.12	%
OMAC 2005-1	January 31, 2005			802,625				2.74	%			2.43	%			5.17	%
OMAC 2005-2	April 5, 2005			883,987				2.93	%			2.86	%			5.79	%
OMAC 2005-3	June 17, 2005			937,117				3.39	%			4.00	%			7.39	%
OMAC 2005-4	August 25, 2005			1,321,739				5.08	%			5.50	%			10.58	%
OMAC 2005-5	November 23, 2005			986,277				7.04	%			6.76	%			13.80	%
OMAC 2006-1	March 23, 2006			934,441				8.02	%			8.91	%			16.93	%
OMAC 2006-2	June 26, 2006			491,572				14.37	%			15.26	%			29.63	%
Total			$	9,058,285				4.43	%			4.66	%			9.08	%

 

 

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The table below summarizes certain cash flows received from and paid to securitization trusts for the years ended December 31, 2009 and 2008:

(in thousands)

	Years Ended December 31,
		2009				2008
Net servicing fees received  (paid)		$	(25	)		$	1,082
Net servicing repayments (advances)			14,254				(6,579	)
Cash flows received on retained interests			9,834				12,701

The following information presents quantitative information about delinquencies and credit losses on securitized financial assets as of December 31, 2009 and 2008:

(in thousands)

As of Date		Total Principal Amount of Loans				Principal Amount of Loans 60 Days or more				Net Credit Losses
December 31, 2009		$	3,250,632			$	797,883			$	400,920
December 31, 2008		$	3,920,433			$	728,884			$	129,715

 

(c) – Receivables, net

 

Receivables consist of the following as of December 31, 2009 and 2008:

 (in thousands)

		December 31,
		2009				2008
Servicing advances, net of allowance for doubtful accounts of $256,000 at December 31, 2009 and $0 at December 31, 2008		$	4,957			$	19,710
Servicing sales			936				3,802
Others			153				280
		$	6,046			$	23,792

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 tax paying 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.  The income tax provisions for the years ended December 31, 2009 and 2008 differ from the amount determined by applying the statutory Federal rate of 35% to the pre-tax losses due primarily to the recording of, and adjustments to, the deferred tax asset valuation allowances.  The net deferred tax assets generated by the net losses incurred during the years ended December 31, 2009 and 2008 are offset in their entirety by deferred tax asset valuation allowances.  The amounts of the gross tax benefits generated by these losses are reduced by offsetting valuation allowances of the same amount. The net deferred tax assets and offsetting valuation allowances at December 31, 2009 and 2008 were approximately $102.2 million and $103.4 million, respectively. The net change in the valuation allowance for the year ended December 31, 2009 was approximately $1.2 million, primarily related to the reversal of certain timing differences of approximately $2.6 million, offset by an increase for loss carryforwards of approximately $1.4 million.

 

 

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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 December 31, 2009 has been accrued in the amount of $0.5 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 uncertainly is resolved.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income within OITRS.  At December 31, 2009 and 2008, management believed that it was more likely than not that the Company will not realize the full benefits of all of the federal and state tax loss carryforwards, which is the primary deferred tax asset of OITRS;  therefore, an allowance for the full amount of the net deferred tax assets has been recorded.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income or losses, and tax planning strategies in making this assessment.  In addition, OITRS has abandoned the tax NOLs in the states where operations have ceased, and those deferred tax assets have been written-off.

As of December 31, 2009, OITRS has an estimated federal tax net operating loss carryforward of approximately $274.0 million, and estimated available state tax NOLs of $69.3 million, which begin to expire in 2025, and are fully available to offset future taxable income.

(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 years ended December 31, 2009 and 2008 are presented below:

 

(in thousands)

		Years Ended December 31,
		2009				2008
Balance—Beginning of year		$	7,303			$	6,960
Provision			468				1,759
Settlements			(2,622	)			(1,416	)
Balance—End of year		$	5,149			$	7,303

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 an 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. 

 
 

 

 

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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.  On February 3, 2009, Coast filed a motion for leave to file an amended complaint which was granted on March 16, 2009.  OITRS answered the amended complaint on May 4, 2009, and filed an amended answer on September 16, 2009.  The amended complaint differs from the original complaint in that it raises new facts and changes the nature of the claims.  A mediation hearing was held on February 23, 2010, however no settlement was reached.  The parties agreed to continue mediation talks for an additional four week period.  In the event a settlement is not reached, Bimini Capital intends to vigorously defend this case because we believe the plaintiff’s claims in this matter are without merit.

On July 2, 2008, an amended complaint was filed in the Superior Court of the State of California for the County of Los Angeles, Central District by IndyMac Bank, F.S.B. against OITRS and others seeking monetary damages and specific performance and alleging, among other allegations, breach of contract for allegedly failing to repurchase thirty-six loans.   On August 18, 2008, the Court entered an order substituting the Federal Deposit Insurance Corporation as conservator for IndyMac Federal Bank, F.S.B., in the place of IndyMac Bank, F.S.B.   On January 16, 2009, the Court entered an order dismissing the amended complaint with prejudice pursuant to a stipulation of dismissal that was entered into among the parties to the case.  As a result of the Court’s order of dismissal, this proceeding is now concluded.  No amounts were paid by OITRS in connection with the execution of the stipulation of dismissal or the Court’s order of dismissal. 

 
 

(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, retained interests, trading and security held for sale. 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 December 31, 2009 Using
		Fair Value Measurements December 31, 2009				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		$	207			$	-			$	-			$	207
Retained interests			5,934				-				-				5,934

A reconciliation of activity for the year ended December 31, 2009 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				Securities Held for Sale
Beginning balance		$	464			$	15,601			$	15
Realized and unrealized gains included in earnings			264				166				485
Collections, losses and settlements			(521	)			(9,833	)			(500	)
Ending Balance		$	207			$	5,934			$	-

Gains included in earnings for the year ended December 31, 2009 are reported in loss on discontinued mortgage banking activities.

 

 

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NOTE 14.  RELATED PARTY TRANSACTIONS

Frank E. Jaumot is a partner in an accounting firm from which we received accounting and tax services during the year. Mr. Jaumot is both a director and a shareholder of the Company. Professional fees incurred with this firm, were $112,000 and $103,000 for the years ended December 31, 2009 and 2008, respectively.

NOTE 15.  SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

The following is a presentation of the quarterly results of operations for the years ended December 31, 2009 and 2008.

(in thousands, except per share data)

		2009 Quarters Ended,
		March 31				June 30				September 30				December 31
Interest income		$	3,674			$	2,683			$	2,882			$	1,785
Interest expense			(254	)			(105	)			(69	)			(60	)
Net interest income, before junior subordinated debt interest			3,420				2,578				2,813				1,725
Interest on junior subordinated debt			(2,090	)			(1,298	)			(1,058	)			(665	)
Net interest income			1,330				1,280				1,755				1,060
Other income			1,694				33,980				1,274				9,840
Total net revenues			3,024				35,260				3,029				10,900
Direct REIT operating expenses			153				149				146				148
General and administrative expenses			948				708				577				1,666
Income taxes			-				-				-				145
Total expenses			1,101				857				723				1,959
Income from continuing operations			1,923				34,403				2,306				8,941
Discontinued operations (net of tax)			234				(2,544	)			200				234
Net income		$	2,157			$	31,859			$	2,506			$	9,175
Basic Net Income (Loss) Per Share:
Class A Common Stock
Continuing operations		$	0.72			$	12.52			$	0.80			$	3.10
Discontinued operations (net of tax)			0.09				(0.93	)			0.07				0.08
Total		$	0.81			$	11.59			$	0.87			$	3.18
Class B Common Stock
Continuing operations		$	0.71			$	12.45			$	0.83			$	3.20
Discontinued operations (net of tax)			0.08				(0.92	)			0.07				0.08
Total		$	0.79			$	11.53			$	0.90			$	3.28
Diluted Net Income (Loss) Per Share:
Class A Common Stock
Continuing operations		$	0.72			$	12.50			$	0.80			$	1.26
Discontinued operations (net of tax)			0.09				(0.93	)			0.07				0.04
Total		$	0.81			$	11.57			$	0.87			$	1.30
Class B Common Stock
Continuing operations		$	0.71			$	12.45			$	0.83			$	3.20
Discontinued operations (net of tax)			0.08				(0.92	)			0.07				0.08
Total		$	0.79			$	11.53			$	0.90			$	3.28

 

 

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(in thousands, except per share data)

		2008 Quarters Ended,
		March 31				June 30				September 30				December 31
Interest income		$	10,110			$	6,787			$	6,149			$	3,094
Interest expense			(7,627	)			(5,459	)			(4,193	)			(1,114	)
Net interest income,  before junior subordinated debt interest			2,483				1,328				1,956				1,980
Interest on junior subordinated debt			(2,090	)			(2,090	)			(2,091	)			(2,091	)
Net interest income (expense)			393				(762	)			(135	)			(111	)
Other income (expense)			926				(352	)			(984	)			790
Total net revenues (deficiency of revenues)			1,319				(1,114	)			(1,119	)			679
Direct REIT operating expenses			185				188				165				162
General and administrative expenses			1,904				1,353				1,053				1,248
Total expenses			2,089				1,541				1,218				1,410
Loss from continuing operations			(770	)			(2,655	)			(2,337	)			(731	)
Discontinued operations (net of tax)			(4,334	)			(31,905	)			(12,054	)			(1,591	)
Net loss		$	(5,104	)		$	(34,560	)		$	(14,391	)		$	(2,322	)
Basic and Diluted Net Loss Per Share:
Class A Common Stock
Continuing operations		$	(0.31	)		$	(1.04	)		$	(0.91	)		$	(0.29	)
Discontinued operations (net of tax)			(1.71	)			(12.55	)			(4.69	)			(0.61	)
Total		$	(2.02	)		$	(13.59	)		$	(5.60	)		$	(0.90	)
Class B Common Stock
Continuing operations		$	(0.30	)		$	(1.03	)		$	(0.90	)		$	(0.28	)
Discontinued operations (net of tax)			(1.71	)			(12.43	)			(4.66	)			(0.60	)
Total		$	(2.01	)		$	(13.46	)		$	(5.56	)		$	(0.88	)

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 8A (T).

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed with or submitted to the Securities and Exchange Commission (the “SEC”) pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

      As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

 

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Changes in Internal Controls over Financial Reporting

 

      There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

      See Management’s Report on Internal Control Over Financial Reporting included in Item 7.  See also the Report of Independent Registered Public Accounting Firm in Item 7. for BDO Seidman, LLP’s attestation report on management’s assessment of internal control over financial reporting.

ITEM 8B. OTHER INFORMATION.

None.

 

 

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PART III

ITEM 9.                      Directors, Executive Officers and Corporate Governance.

The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the Company's definitive Proxy Statement relating to the Company’s 2010 Annual Meeting of Stockholders to be held on June 15, 2010, which the Company expects to file with the U.S. Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after December 31, 2009 (the "Proxy Statement").

The Company's executive officers are appointed by the Company’s Board of Directors.  The Board of Directors has determined that each member of the Audit Committee of the Board of Directors, including the Chair of the Audit Committee, Robert J. Dwyer, is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K.

The Company has adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees of the Company and its subsidiaries.  The Company has also adopted a Code of Ethics for Senior Financial Officers that is applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of our Code of Business Conduct and Ethics and our Code of Ethics for Senior Financial Officers, as well as the Company’s Corporate Governance Guidelines and the committee charters for each of the committees of the Board of Directors, can be obtained from our Internet website at www.biminicapital.com and will be made available to any shareholder upon request. The Company intends to disclose any waivers from, or amendments to, the Code of Ethics for Senior Financial Officers by posting a description of such waiver or amendment on our Internet Web site.

ITEM 10.                      Executive Compensation.

The information required by this Item 10 is incorporated herein by reference to the Proxy Statement.

ITEM 11.                      Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.

The information required by this Item 11 is incorporated herein by reference to the Proxy Statement and to Part II, Item 5 of this Form 10-K.

ITEM 12.                      Certain Relationships And Related Transactions, and director independence.

The information required by this Item 12 is incorporated herein by reference to the Proxy Statement.

ITEM 13.                      Principal Accountant Fees And Services.

The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.

 

 

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PART IV

ITEM 14.                      Exhibits, Financial Statement Schedules.

a.          Financial Statements. The consolidated financial statements of the Company, together with the report of Independent Registered Public Accounting Firm thereon, are set forth in Part II-Item 7 of this Form 10-K and are incorporated herein by reference.

       The following information is filed as part of this Form 10-K:

	Page
Management’s Report on Internal Control over Financial Reporting	60
Reports of Independent Registered Public Accounting Firm	61
Consolidated Balance Sheets at December 31, 2009 and 2008	63
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008	64
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2009 and 2008	66
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008	67
Notes to Consolidated Financial Statements	69

   b.           Financial Statement Schedules.

   Not applicable.

   c.           Exhibits.

Exhibit No.

2.1	Agreement and Plan of Merger, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated September 29, 2005, filed with the SEC on September 30, 2005
3.1	Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
3.2	Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
3.5	Certificate of Notice, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated January 28, 2008, filed with the SEC on February 1, 2008
3.6	Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
†10.1	Employment Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.3 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
†10.2	Employment Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.4 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
†10.3	Bimini Capital Management, Inc. 2003 Long Term Incentive Compensation Plan, as amended September 28, 2007
†10.4	Bimini Capital Management, Inc. 2004 Performance Bonus Plan, as amended September 28, 2007
†10.5	Form of Phantom Share Award Agreement
†10.6	Form of Restricted Stock Award Agreement
†10.7	Separation Agreement and General Release, dated as of June 29, 2007, by and among Opteum Inc., Opteum Financial Services, LLC and Peter R. Norden, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated June 30, 2007, filed with the SEC on July 5, 2007
10.8	Voting Agreement, among certain stockholders of Bimini Mortgage Management, Inc., Jeffrey J. Zimmer, Robert E. Cauley, Amber K. Luedke, George H. Haas, IV, Kevin L. Bespolka, Maureen A. Hendricks, W. Christopher Mortenson, Buford H. Ortale, Peter Norden, certain of Mr. Norden’s affiliates, Jason Kaplan, certain of Mr. Kaplan’s affiliates and other former owners of Opteum Financial Services, LLC, incorporated by reference to Exhibit 99(D) to the Schedule 13D, dated November 3, 2005, filed with the SEC on November 14, 2005
10.9	Membership Interest Purchase, Option and Investor Rights Agreement among Opteum Inc., Opteum Financial Services, LLC and Citigroup Global Markets Realty Corp. dated as of December 21, 2006, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 21, 2006, filed with the SEC on December 21, 2006
10.10	Seventh Amended and Restated Limited Liability Company Agreement of Orchid Island TRS, LLC, dated as of July 20, 2007, made and entered into by Opteum Inc. and Citigroup Global Markets Realty Corp., incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2007, filed with the SEC on August 14, 2007
10.11	Asset Purchase Agreement, dated May 7, 2007, by and among Opteum Financial Services, LLC, Opteum Inc. and Prospect Mortgage Company, LLC, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 7, 2007, filed with the SEC on May 7, 2007
10.12	First Amendment to Purchase Agreement, dated June 30, 2007, by and among Metrocities Mortgage, LLC – Opteum Division, Opteum Financial Services, LLC and Opteum Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated June 30, 2007, filed with the SEC on July 5, 2007
*21.1	Subsidiaries of the Registrant
*23.1	Consent of BDO Seidman, LLP
*24.1	Powers of Attorney
*31.1	Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	* Filed herewith. † Management compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.

 

 

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   

		BIMINI CAPITAL MANAGEMENT, INC.
Date:  March 15, 2010		By:	/s/ Robert E. Cauley
		Robert E. Cauley
		Chairman and Chief Executive Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2010.

Signature		Capacity
/s/ Robert E. Cauley
Robert E. Cauley		Director, Chairman of the Board, Chief Executive Officer
/s/ G. Hunter Haas
G. Hunter Haas		President, Chief Financial Officer, Chief Investment Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
/s/ Robert J. Dwyer
Robert J. Dwyer		Director
/s/ Frank E. Jaumot
Frank E. Jaumot		Director

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EXHIBIT INDEX

Exhibit No.

2.1	Agreement and Plan of Merger, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, dated September 29, 2005, filed with the SEC on September 30, 2005
3.1	Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Company’s Form S-11/A, filed with the SEC on April 29, 2004
3.2	Articles Supplementary, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated November 3, 2005, filed with the SEC on November 8, 2005
3.3	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated February 10, 2006, filed with the SEC on February 15, 2006
3.4	Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
3.5	Certificate of Notice, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated January 28, 2008, filed with the SEC on February 1, 2008
3.6	Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, dated September 24, 2007, filed with the SEC on September 24, 2007
†10.1	Employment Agreement between Bimini Mortgage Management, Inc. and Jeffrey J. Zimmer, incorporated by reference to Exhibit 10.3 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
†10.2	Employment Agreement between Bimini Mortgage Management, Inc. and Robert E. Cauley, incorporated by reference to Exhibit 10.4 to the Company’s Form S-11/A, dated April 12, 2004, filed with the SEC on April 29, 2004
†10.3	Bimini Capital Management, Inc. 2003 Long Term Incentive Compensation Plan, as amended September 28, 2007
†10.4	Bimini Capital Management, Inc. 2004 Performance Bonus Plan, as amended September 28, 2007
†10.5	Form of Phantom Share Award Agreement
†10.6	Form of Restricted Stock Award Agreement
†10.7	Separation Agreement and General Release, dated as of June 29, 2007, by and among Opteum Inc., Opteum Financial Services, LLC and Peter R. Norden, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated June 30, 2007, filed with the SEC on July 5, 2007
10.8	Voting Agreement, among certain stockholders of Bimini Mortgage Management, Inc., Jeffrey J. Zimmer, Robert E. Cauley, Amber K. Luedke, George H. Haas, IV, Kevin L. Bespolka, Maureen A. Hendricks, W. Christopher Mortenson, Buford H. Ortale, Peter Norden, certain of Mr. Norden’s affiliates, Jason Kaplan, certain of Mr. Kaplan’s affiliates and other former owners of Opteum Financial Services, LLC, incorporated by reference to Exhibit 99(D) to the Schedule 13D, dated November 3, 2005, filed with the SEC on November 14, 2005
10.9	Membership Interest Purchase, Option and Investor Rights Agreement among Opteum Inc., Opteum Financial Services, LLC and Citigroup Global Markets Realty Corp. dated as of December 21, 2006, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated December 21, 2006, filed with the SEC on December 21, 2006
10.10	Seventh Amended and Restated Limited Liability Company Agreement of Orchid Island TRS, LLC, dated as of July 20, 2007, made and entered into by Opteum Inc. and Citigroup Global Markets Realty Corp., incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2007, filed with the SEC on August 14, 2007
10.11	Asset Purchase Agreement, dated May 7, 2007, by and among Opteum Financial Services, LLC, Opteum Inc. and Prospect Mortgage Company, LLC, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated May 7, 2007, filed with the SEC on May 7, 2007
10.12	First Amendment to Purchase Agreement, dated June 30, 2007, by and among Metrocities Mortgage, LLC – Opteum Division, Opteum Financial Services, LLC and Opteum Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated June 30, 2007, filed with the SEC on July 5, 2007
*21.1	Subsidiaries of the Registrant
*23.1	Consent of BDO Seidman, LLP
*31.1	Certification of the Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of the Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	* Filed herewith. † Management compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.